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Newcomers jump into activist investing, eying returns and capital

William Ackman, founder and CEO of hedge fund Pershing Square Capital Management, speaks to the audience about Herbalife company in New York, July 22, 2014. REUTERS/Eduardo Munoz

By Svea Herbst-Bayliss

BOSTON (Reuters) - The largest new field of activist investors in years is shaking up corporate America, seeking to tap into billions of dollars in available capital and inspired by the outsized returns of brand-name agitators like William Ackman and Carl Icahn.

The surge could force more companies into costly battles with shareholders over leadership, spin-offs, and buybacks, though some of the new entrants risk being brushed off if corporate boards find they lack good ideas or firepower.

"Everyone wants to be an activist these days. Everyone wants that capital," said Damien Park, head of consulting group Hedge Fund Solutions.        

In the last five months, some 45 hedge funds launched their first ever activist campaigns, according to data from research firm Activist Insight, up from 26 new entrants the same period the previous year, and 15 the year before. The October through March period is traditionally the most active season, coming in the runup to companies' annual meetings, usually held in the spring and early summer when boards are elected.

Among the newcomers are firms like H Partners, Chieftain Capital, Isaac Capital, Vertex Capital, Jet Capital and Heng Ren Investments, some of which are taking on big names in the corporate sphere. H Partners and Chieftain, for example, are pressuring bedding-maker Tempur Sealy to change its leadership, while Jet Capital is complaining about "poor capital allocation" at SunCoke Energy.

They join more established hedge funds that are also promoting activist campaigns, including Kyle Bass' Hayman Capital and David Tepper's Appaloosa Management, which are pushing for former Goldman Sachs banker Harry Wilson, who had been a part of the Obama administration's auto task force, to join General Motors' board.

Activism has picked up dramatically since the 2008 financial crisis, but it has been popular before including in the 1970s to late 1980s when financiers including Carl Icahn and Nelson Peltz were called corporate raiders for their strong-arm tactics used to replace top management and improve value for shareholders.

The surge comes as activist funds outpace traditional long-short-equity rivals' returns, and draw inflows:  Activist funds gained an average 6.3 percent in 2014 -- with Ackman returning 40 percent -- crushing the average fund's 3.5 percent increase, Hedge Fund Research data show. To be sure, an investor who simply tracked the Standard & Poor's 500 index in 2014 would have gained 12 percent.

Last year, 71 dedicated activist funds that oversee $119.2 billion in assets took in a record $14.2 billion in new money, nearly three times the $5.3 billion they pulled in 2013, HFR said. Meanwhile, about $135 billion in money is sitting on the sidelines earmarked for activist strategies, according to advisory firm Kingsdale Shareholder Services.

Still, with less expertise, fewer connections and less cash, some of the newcomers risk falling flat.

"This is like playing sports where you can't simply copy your rival's playbook and hope to replicate success if your team can't execute well," said Kingsdale CEO Wesley Hall.

The world's 14 top activists have on average $16 billion to deploy in full throttle fights, while the newcomers often have less than $100 million in assets, Activist Insight said.

"There will inevitably be opportunists who are trying to ride a momentum moment," said Richard McGuire who runs $3 billion Marcato Capital Management. "But maybe some of them have a good nose for good ideas and I wouldn't be as quick to dismiss them."

(Reporting by Svea Herbst-Bayliss; Editing by Richard Valdmanis and John Pickering)