It took less than three weeks for Time Warner's share price to fall back to where it was before rumours of a stake in the media conglomerate by famous corporate raider Carl Icahn sent it up about 7.0 per cent to six-month highs.
However, Mr Icahn and the three hedge funds that have publicly sided with him in a battle for strategic change at Time Warner are not worried. Unlike the short-term strategies that are most common among hedge funds, this time they are in it for the long haul.
"This is not expected to play out for at least six months," said one person familiar with Mr Icahn's plans. Indeed, the hedge funds have agreed to hang on to their stakes in Time Warner -- they had accumulated a 2.6 per cent stake in the world's biggest media company when they announced it last month until February 2007.
Such patience is not unique to the Time Warner investment. Indeed, it is part of a worldwide trend for hedge funds to cast themselves in increasingly activist roles as shareholders. Many are taking large and long-term stakes in companies whose shares have underperformed, often with a view to ousting management or forcing through changes to lift the share price.
SAC Capital, one of the world's biggest and best performing hedge fund groups with more than $7.0bn under management which has joined forces with Mr Icahn alongside Franklin Mutual Advisors and Jana Partners, may be shifting its strategy from short-term trading to more strategic stakes.
SAC, which has been closed to new investors for some time, plans to open to new money and raise several billion dollars, leading to much speculation about what the secretive group might be planning to do with the money. Some industry observers believe the Time Warner investment could be the first of several such strategic moves by the group. The shift to taking larger stakes reflects the growing size of hedge funds as well as a push to find a competitive edge in an environment of waning returns.
Virginia Parker, who runs hedge fund adviser Parker Global Strategies, says: "Hedge funds have such large pools of money now, they can go in as investors with very large stakes. For those managers who have demonstrated skill, it's a very good strategy. But it's not an easy area to pursue. You have to get a lot of things right."
Edward Lampert, a big hedge fund, manager, this year took control of Kmart before merging it with Sears, in the first of a wave of hedge funds taking big stakes or outright control of struggling companies.
In Germany, hedge funds led the revolt against Deutsche Börse's bid for the London Stock Exchange and eventually ousted the top management.
Ms Parker points out there are parallels with the late 1980s, when leveraged buyout funds and corporate raiders such as Mr Icahn had similar strategies. "It also parallels what private equity funds are doing, but the hedge funds are in publicly traded companies rather than private ones," she says.
Patrick Sheppard, chief operating officer for institutional asset management at Meilon, says the group's funds -- it has about $10bn in hedge fund assets -- are taking larger stakes, but often in smaller companies where there is more leverage.
"Are we activist? Yes, but we're not necessarily hostile. We might be on a company audit committee, on a finance committee. We are surprised at how inviting management has been about our becoming involved. It's very rare that it becomes hostile," he says.
So far, exchanges between Mr Icahn and Dick Parsons, Time Warner's chairman and chief executive who has seen the group through tumultuous times following its merger with AOL, have also been civil.
He has stressed that he is as concerned about his company's ailing share price as Mr Icahn. The corporate raider is calling for a quadrupling of Time Warner's share buy-back programme to $201m, and a complete spin-off of the group's cable and publishing businesses.
Although some of these options are under consideration by Mr Parsons -- already he plans to spin off 16 per cent of cable early next year -- whether Mr Icahn gets the cold shoulder or a continued warm welcome will in large part depend on whether he can persuade other Time Warner investors to join his band.
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