1. Discussion of He-Li: The Benefits of Friendship in Hedge Fund Activism Cambridge, February 2017 Moqi Groen-Xu, LSE

2. A Thought Experiment: The Value of Hostility in Hedge Fund Activism

3. A thought experiment
Use social networks to study information dissemination during activist campaigns
Are funds whose managers are enemies of the lead activists more likely to increase their ownership in the target firm?
Do enemy funds earn significantly higher returns?
Do enemy funds contribute to the failure of activist campaigns?

4. Measurement: who are the enemies?
Public battles (e.g., Icahn vs. Ackman)...
... private battles...
That rival from the same school who married my girlfriend
That guy from the same internship who got hired
That annoying person who is also on the board and always cuts me off
... competitors: the entire asset management industry?
Taste-based discrimination?

5. Friends vs. enemies Friends Enemies
May have private information from the lead activist
May give information to the activist
May have private information from the same source as the activist
May want to vote for the activist
If friendship known: can be used to increase activist’s ex-ante negotiation power
May trust the activist’s skills
Has no private information from the lead activist
Will not give information to the activist
May have private information from the same source as the activist
May want to vote against the activist
May want to discourage the activist
May believe in benefit of activism in general
May want to use the news buzz around the announcement/the fight

6. Tests Friends Enemies Tests May have information from the activist
May give information to the activist
May have private information from the same source as the activist
May want to vote for the activist
May trust the activist’s skills
Has no information from the activist
Will not give information to the activist
May have private information from the same source as the activist
May want to vote against the activist
May believe in benefit of activism in general
May want to use the news buzz
Connections predict purchase
Up/downstream connections
Evidence from dates of insider trades/trading dates
Reciprocity?
Connections predict success and returns
Channels of success: voting, negotiating
Timeline of buying/becoming target
Returns conditional on success/failure

7. Questions about interpretation
The friends story
Activists offer information to friends in return for support
Friendship helps the activist succeed
Some missing links
Success rates. Do the ties indeed help the activist in success? What are success rates for campaigns with no connected trades / for activists with no ties in the industry?
Selection into investing. Why do activists not enlist their friends in all campaigns? Are some campaigns riskier? Less in need of support? Or do the friends only invest in campaigns they deem worthwhile (higher success rates and returns)? Why then does the activist not listen to the friends and not invest in some of them? Perhaps they first approach friends that already have a large investment?
Channel. Evidence for voting or negotiation power?
Exclusivity. Can non-friends replicate the returns by observing the connected investments?

8. Implications
Activist connections are related to investment, return, and campaign success:
Key benefits from friendship and education in the activists sphere
Connections = one of the value-enhancing characteristics of a good activist?
Very interesting paper, highly recommended reading
Let’s be friends