Compared to the long/short strategy, there are few hedge funds using the activist strategy. This involves building a large position in the company and then, using that ownership weight, to improve corporate governance of the company. This will make the company more attractive and raise the share price. These funds will hold only 5 to 15 companies at one time. The portfolio is very concentrated and may experience high volatility - although you could say that about any investment.
Activist managers may try to change corporate officers through a proxy battle, change the amount of equity or debt assumed by the company, cut costs, initiate a share buyback plan or special dividend to shareholders. They can liquidate assets (such as real estate), spin-off non-performing divisions, sell divisions unrelated to the company's core business, etc. Unlike other hedge fund strategies that are secretive in nature, the plans of activist managers are in the public domain. This information is available in the Schedule 13D filing with the SEC. There are seven sections in the 13D. The most important are the Purpose of the Transaction and Materials to Be Filed as Exhibits. The first section states why the fund is buying the position. The materials section adds the details behind the goal of the fund and has any communications to the senior management of the company. 13D's must be filed when the hedge fund has taken a 5% position (called a beneficial ownership). This must be done within ten days.
The methods are quite similar to private equity or Warren Buffett except they do not buy the whole company. An example of an activist hedge fund manager is Bill Ackman of Pershing Square Capital Management.
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