In the global investing and trading market, there are three categories that are used to classify investors: Macro-investors; Value investors and Activist investors. While value investors put a greater emphasis on an individual firm and consider the economic climate later, global macro investors take a more top down approach, by examining economic trends such as interest rates negative correlation with DJIA; noticing covariances between asset classes, such as oil and the US dollar, and ultimately trading based off of this analysis. Global macro-investor funds can differ quite a bit from a vanilla market neutral, long/short term, equity fund that buys and sells stocks with equal amounts of money. Global macro funds can contain various asset classes, like currencies, equities, REITs, energy, commodities and utilize derivatives such as forwards, futures, options, swaptions, Contract for Difference etc.
Derivatives are not well understood by the general public, with even fewer people outside the realm of finance having heard of a Contract For Difference (CFD). CFDs work by exchanging cash flows associated with an underlying asset. They differ from equity swaps ,in that you are betting against the provider of a CFD, rather than betting that an equity will outperform a bench mark. If you were to buy a 2-week CFD on oil, you would be betting that the price of oil would increase over those 2 weeks. The advantage of CFDs over buying the underlying asset is the investment is highly leveraged. Typically, an investor only needs to pay for 2% of the underlying asset. Thus, a college student with $5,000 could, in theory, place a $100,000 bet on the price of oil. If the price of oil were to go up by 1%, the college student would come away with an extra $1,000, or to put it better, a 20% return on their money. Similarly, if at any point during the two weeks the underlying asset were to fall 5%, the college student would lose all their money.
Some of the best market returns were produced by global macro traders, notably Paul Tudor Jones correctly predicted Black Monday (the largest percentage drop of the stock markets in one day), tripling his money because of his huge short positions.
George Soros famously broke the Bank of England by shorting the Pound Sterling, now known as Black Wednesday, where he made $1billion in a single day.. Essentially, because of Britain’s commitment to peg their currency to the German Mark, the pound sterling was vulnerable to speculative attacks similar to the one that caused Thailand to float the Baht in 1997. Like the Baht when the speculative attack hit, the currency dropped rapidly and Soros profited immensely.
Indeed, Soros’ Quantum Fund is arguably the world’s most successful hedge fund. Under the stewardship of George Soros, Jim Rogers, and later Stanley Druckenmiller, the fund produced some of the best returns on Wall Street. A $1,000 investment with Soros in 1969 would have grown to $4 million by the year 2000, an annual growth rate of 30%. The fund even managed to have a 100% annual return (doubled its money) on two separate occasions during the 90s. The largest amount of money ever made in one day, however, was John Paulson with 1.25 billion in a single day profiting from credit default swaps during the 2008 financial crisis.
Activist investors are not political activists. Bill Ackman is not a vocal supporter of the ‘Free the Nipple’ campaign, although you could argue Ackman’s famous 1 billion dollar short of HerbaLife was a form of ethical investing against multi-level marketing corporations. Activist Investors are simply investors who buy shares in a company, so that they can direct change which they believe the firm will benefit from and ultimately will positively affect the investors initial investment.
Naturally some corporations are sceptical of activist investors as they know the activist investor does not necessarily share the same vision and goals for the company as its current Board of Directors. The Board of Directors of the target firm will fight a hostile takeover in several ways. Poison pills such as a rights issue, where the company issues existing shareholders with the option to buy more shares at a steep discount, creates more shares which may increase the cost to acquire the target company.
In fact, some activist investors have been labelled ‘corporate raiders’. Carl Icahn, the namesake of the “Icahn Lift”, where companies stock increases when he invests, developed a reputation as a ruthless “corporate raider” after his hostile takeover of TWA in 1985. After the takeover, Icahn began selling TWA’s assets to repay the debt he used to purchase the company, this is known as “asset stripping.”
Issuing more preferred shares is another defence against takeovers. These new shares usually have clauses allowing them to be converted into a large number of common shares if a takeover occurs. This immediately dilutes the percentage of the target company owned by the acquirer, making it far costlier to buy a controlling stake of 50%.
There is another side to hostile takeovers. Carl Icahn is famous for bluffing a takeover. A process known as “greenmailing”,where an investor builds up a substantial stake in a target company as though they were trying to acquire the target, the directors of the company offer to buy out the investor at a premium, in order to avoid a more expensive hostile takeover defence. Greenmailing gets its name from blackmailing a company to hand over large amounts of (green) dollars in order to avoid being taken over.