DECEMBER, 2015 HEDGE FUND ACTIVISM · HEDGE FUND ACTIVISM 3 Abstract Shareholder activism generally...

INNOVATIVE. GLOBAL. INDICES.

DECEMBER, 2015

HEDGE FUND ACTIVISMAureliano Gentilini, Head of Research, STOXX Ltd.

STOXX LTD.

TABLE OF CONTENTS

Abstract 3

1 Hedge Fund Activism–An Overview 4

2 Risk-Return Analysis and Benchmarking 10

3 Robust Omega Ratio Measurement 17

4 Performance Contribution Analysis 21

5 Conclusions 25

STOXX LTD.

HEDGE FUND ACTIVISM3

Abstract

Shareholder activism generally refers to practices pursued by individuals, mutual funds, pension fundsand hedge funds to influence a given firm’s policy, with the aim of effecting a number of changes at thecorporate level. Shareholder activism has evolved over time, being influenced by changes in the externalregulatory environment as well as firms’ internal factors.

Generally speaking, hedge fund activism falls at the more aggressive end of the spectrum of shareholderactivism, since it actively seeks to enforce changes to management or boards or to a firm’s strategy.

Activists such as Carl Icahn and Nelson Peltz have long been engaged in activist practices. Since 2000the number of activist hedge funds across the globe has increased significantly, with 383 new activisthedge funds launched by the end of December, 2014, according to Preqin data. In recent years, hedgefund activists have played an increasingly important role in influencing the governance structure oftargeted firms and in value creation. In the last few years, new players have entered the activist spectrum(among others, John Paulson’s Paulson & Co. and Andrew Shapiro’s Lawndale Capital), launchinginvestment vehicles to raise money from investors and leveraging minority board representation toactively influence the corporate strategy of targeted firms.

Shareholder activism and corporate governance have been the focus of an intense debate in recent yearsamong market participants and academics. The findings of studies on the effects of shareholder activismare controversial. Nonetheless, they appear to support the statistical significance of abnormal returnsaround an announcement window. Also, some analyses document the existence of positive changes inprofitability, operating performance and corporate structure of targeted firms as well as positive intra-industry effects.

This research paper broadly reviews the topic of hedge fund activism. It focuses on the specific case ofthe STOXX® Activist Index, analyzing its risk/return profile and performance drivers. The goal is to identifythe most significant performance-contribution factors that may justify investing in an activist indexconcept.

STOXX LTD.


“ALL IS CHANGE; ALL YIELDS ITS PLACE AND GOES.”Euripides (c. 480 BC-406 BC)

1 Hedge Fund Activism–An Overview

The term “shareholder activism” refers to a series of actions and practices put in place by one or moreshareholders of a given firm to actively influence firm policy and practices, with the ultimate goal ofenhancing shareholder value in the long term.

Agency problems between management and shareholders call into question firms’ corporate governance,introducing the need for shareholder monitoring. Activist strategies and their effectiveness are bound bylegislation, which differs across jurisdictions. While the setting is more confrontational in the US, inEurope the process is more consensual and statutory. Within Europe, the UK and The Netherlands add acertain level of complication to corporate rules. In France, the trade unions’ mandatory seat on certainboards adds a layer of protection that works against strategies that seek significant changes to a firm’sboard. .

Recently, some activist investors have voiced doubts about whether the term “activist” truly represents theunderlying strategy pursued. Event-driven hedge fund Amber Capital co-founder Joseph Oughourlianhas formulated the new term of “suggestivist” investor. Knight Vinke CEO Eric Knight, speaking at aconference, recently said he considers himself an “engaged investor.”

Recently, hedge funds have been blamed for not pursuing diversity in their activist strategies. They havebeen cited as one of the sources for the decline of representation by African-Americans within boards ofdirectors of US firms. According to the annual Board Index study by Spencer Stuart, in 2015 African-Americans, who account for about 13% of the US population, represent only 8.6% of the directors on theboards of the largest 200 companies by revenue in the S&P 500. The reading for 2015 declined from9.6% for 2010. The figure was 9% in 2006, the year in which time-series data started.

Shareholder activism has been booming in recent years. The year 2014 recorded more than 250 UScompanies targeted by activists as well as a number of nonpublic engagements. In 2014, icons ofcorporate America were targeted by activist investors. Those included Allergan, Amgen, Apple, Bank ofNew York Mellon, DuPont, PepsiCo, Walgreens, Yahoo! and Hertz Global Holdings.

At the end of October, 2015, the market value of shareholdings held by activist investors stood atUSD253 billion, up from USD237 billion at 2014 year-end. In terms of sector representation, financialfirms publicly subjected to activist demands as a proportion of all activism grew by 6.4 percentage pointsfor 2015 compared to a year earlier. All other sectors posted a decline year on year.

STOXX LTD.


FIGURE 1 CHANGE IN TARGET SECTOR OF FIRMS PUBLICLY SUBJECTED TO ACTIVIST DEMANDS AS A PROPORTION

OF ALL ACTIVISM (2015 VERSUS 2014, PERCENTAGE POINTS)

Source: Activist Insight

According to the most recent data from Activist Insight, the type of activist actions has evolved since2010. Nowadays, it appears to be more focused on business strategy rather than on board-relatedactivism.

FIGURE 2 CHANGE IN TYPE OF ACTIVIST ACTIONS AS A PROPORTION OF ALL ACTIVISM (2015 VERSUS 2010,

PERCENTAGE POINTS)

Source: Activist Insight

Several studies have investigated whether shareholder activism prompts significant changes in targetfirms’ operations, profitability or governance. The key question behind academic studies is whethershareholders’ activism creates value.

-4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Services

Basic Materials

Technology

Financial

Other

-1.5

-0.8

-0.9

6.4

-3.2

-10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0

Business Strategy

Other Governance

M&A Activism

Board-related Activism

5.7

2.8

-3.1

-9.0

STOXX LTD.


Different forms of shareholders activism can be identified. Generally speaking, shareholder activism canbe classified into four different categories: shareholder proposals, negotiations, hedge fund activism andproxy fights. Within the broad category of proxy fights fall those investor activities triggered by Dodd-Frank’s “say on pay” advisory vote.

Hedge fund activism is characterized by an approach that usually differs from other forms of fundactivism. First of all, hedge fund activism is more confrontational than hostile. Generally speaking, hedgefunds do not aim to achieve control in target companies1, and in the first stage of their intervention, theytend to cooperate with a firm’s management. Usually, conflicts with management arise when hedgefunds clash about a CEO’s pay and turnover.

Hedge fund activists tend to target companies that feature “value” characteristics—firms with low marketcapitalization relative to book value, although profitable, with solid operating cash flow and return onassets. Usually, payout at firms before hedge fund intervention is lower than that of peer firms.

According to the February, 2015 edition of Preqin Hedge Fund Spotlight, 37% of activist hedge fundsfocus their activities on North America, and 30% have a focus that spans global regions. The others focuson specific regions, which include Asia-Pacific (15%), Europe (10%), and emerging markets (9%).

FIGURE 3 BREAKDOWN OF ACTIVIST HEDGE FUNDS BY REGIONAL FOCUS (JANUARY, 2015)

Source: Preqin

A number of studies did not find any significant benefits for shareholders when an activist strategy waspursued by institutional investors such as pension funds and mutual funds2.

1Brav, Jiang, Partnoy and Thomas (please refer to note 3 below) found a 9.1% median maximum ownership stake of the sample analyzed. The

ownership stake stood at 31.5% at the 95th percentile in the full sample, well below the threshold for majority control.2

A survey of empirical research on the analysis of the consequences of shareholders activism for targeted firms can be found in Denes, M. R., J.M. Karpoff and V. B. McWilliams (2015), “Thirty Years of Shareholder Activism: A Survey of Empirical Research,” SSRN.

North America; 37%

Global; 30%

Asia-Pacific; 15%

Europe; 10%

Emerging Markets; 9%

STOXX LTD.


Conversely, findings of Brav, Jiang, Partnoy and Thomas3, who worked on a large-scale sample for 2001through 2006, were consistent with the view that informed shareholder monitoring contributes to reduceagency costs at targeted firms. In other words, hedge fund activism proved to be effective in addressingthe cost of shirking. Market response to hedge fund activism was remarkable and was sustained byexpectations that it created value. Large positive abnormal returns in the seven- to eight-percentage-point range were observed during the announcement window (-20 days, +20 days) around a Schedule13D’s filing, revealing an activist fund’s investment in a target firm. It was observed that target firms’ stockmarket prices declined after an unsuccessful exit of a hedge fund, which was consistent withexpectations of the success of activism as reflected in the positive-announcement returns.

The authors’ findings offered support to the view that positive market reaction was consistent with expost facto evidence of improved performance at target firms. They concluded that “on average, from theyear before to the year after an announcement, total payout increases by 0.3 to 0.5 percentage points(as a percentage of the market value of equity, relative to an all-sample mean of 2.2 percentage points),and book value leverage increases by 1.3 to 1.4 percentage points (relative to an all-sample mean of 33.5percentage points). Both changes are consistent with a reduction of agency problems associated withfree cash flow and subject managers to increased market discipline.”

STOXX recently launched an activist index series. The STOXX Activist Indices, in both the equal- and cap-weighted versions, capture the performance of public companies in which the top activist hedge fundshave a significant investment stake. The indices are designed to reflect the activists’ main goals ofincreasing shareholder value and outperforming markets. The indices’ constituents are selected from thepool of publicly traded companies in the FactSet Corporate Activism database. In order to be eligible forinclusion, target firms have to be traded on a STOXX-eligible exchange.

Firms are eligible to enter the index to the extent they meet the following criteria:1. Shareholder activism on target firms has been announced in the past two years, and the related

activism is not of the type “short position/bear raid.”2. Specific liquidity and size screening criteria have to be met: three months’ average daily traded

value equal to or greater than USD1 million and a free-float market capitalization equal to orgreater than USD250 million.

3. Firms that are targeted by shareholder activists should be included in the SharkWatch 50-member top list (top activists as defined by FactSet).

4. Target firms have to be exchange-listed and must not be mutual funds.

Firms in which the related activist investor holds at least 7% of the market capitalization or shareparticipation with an absolute value to the tune of at least USD500 million at the time of theannouncement are selected for inclusion in the index. Index reviews are conducted on a quarterly basis.

The figures below show the ICB industry allocations at Dec. 21, 2015, for both the STOXX Activist Indexand the STOXX® USA 900 Index.

3Brav, A., W. Jiang, F. Partnoy and R. Thomas (2008), “Hedge Fund Activism, Corporate Governance, and Firm Performance,” The Journal of

Finance, 63(4), pp.1729-1775.

STOXX LTD.


FIGURE 4A STOXX ACTIVIST INDEX, ICB INDUSTRY

ALLOCATION WEIGHTINGS (DEC. 21, 2015, USD GROSS

RETURN)

FIGURE 4B STOXX USA 900 INDEX, ICB INDUSTRY

ALLOCATION WEIGHTINGS (DEC. 21, 2015, USD GROSS

RETURN)

Source: STOXX Source: STOXX

As a result of activist strategy targeting, allocation overweightings to basic materials and consumerservices were noticeable for the STOXX Activist Index compared to the STOXX USA 900 Index. TheSTOXX Activist Index significantly underweighted industry allocations to consumer goods, health care,industrials, oil & gas, telecommunications and utilities compared to the STOXX USA 900 Index.

Changes in ICB industry-allocation weightings of the STOXX Activist Index for the period July, 2015through December, 2015 reflected sector composition of targeted firms. Changes in industry allocationweightings of the STOXX Activist Index were almost in line with annual changes for the period 2014-2015in the target sector of firms publicly subjected to activist demands as a proportion of all activism, asrecently published by Activist Insight. It is noteworthy that at Dec. 21, 2015, compared to the July, 2015month-end reading, sector allocation weightings to oil and gas almost halved, with technology,telecommunications, utilities and basic materials declining 38, 17, 38 and 12 percentage points,respectively. At the same time, sector allocations to industrials climbed 176% compared to July’s reading.Industry weightings of consumer goods (+31.65%), health care (+29.72%), consumer services (+20.47%)and financials (+16.08%) also rose for the period from July-December, 2015.

Oil & Gas4.69% Basic

Materials13.11%

Industrials8.30%

ConsumerGoods7.69%

Health Care7.24%

ConsumerServices26.18%

Telecommunications0.35%

Utilities0.46%

Financials17.02%

Technology14.96%

0.00%

Oil & Gas6.13%

BasicMaterials2.22%

Industrials12.22%

ConsumerGoods10.86%

Health Care14.10%

ConsumerServices14.40%

Telecommunications2.31%

Utilities3.08%

Financials18.57%

Technology16.12%

STOXX LTD.


FIGURE 5A STOXX ACTIVIST INDEX, ICB INDUSTRY

HISTORICAL ALLOCATION WEIGHTINGS (JULY-

DECEMBER, 2015, USD GROSS RETURN)

FIGURE 5B STOXX USA 900 INDEX, ICB INDUSTRY

HISTORICAL ALLOCATION WEIGHTINGS (JULY-

DECEMBER, 2015, USD GROSS RETURN)

Source: STOXX Source: STOXX

0

10

20

30

40

50

60

70

80

90

100

31.07.2015 31.08.2015 30.09.2015 31.10.2015 30.11.2015

Oil & Gas Basic Materials Industrials

Consumer Goods Health Care Consumer Services

Telecommunications Utilities Financials

Technology

0

10

20

30

40

50

60

70

80

90

100

31.07.2015 31.08.2015 30.09.2015 31.10.2015 30.11.2015

Oil & Gas Basic Materials Industrials

Consumer Goods Health Care Consumer Services

Telecommunications Utilities Financials

Technology

STOXX LTD.


2 Risk-Return Analysis and Benchmarking

An analysis of the performance of the STOXX Activist Index confirmed that the index outperformed boththe key equity market-cap benchmarks for the US market and the peer hedge fund strategy indices inboth absolute and risk-adjusted terms over longer measurement periods. The STOXX Activist Index alsoposted superior performance against the hedge fund peer indices for the one-year period ended Dec. 7,2015.

TABLE 1 STOXX ACTIVIST INDEX, S&P500 COMPOSITE INDEX AND STOXX USA 900 INDEX, SUMMARY OF

RISK/RETURN MEASURES (DEC. 15, 2006-DEC. 7, 2015, DAILY US-DOLLAR GROSS-RETURN INDICES)4

Source: STOXX

TABLE 2 STOXX ACTIVIST INDEX, HFRX EQUITY HEDGE INDEX AND HFRX EVENT-DRIVEN INDEX, SUMMARY OF

RISK/RETURN MEASURES (DEC. 15, 2006-DEC. 7, 2015, DAILY US-DOLLAR GROSS-RETURN INDICES)

Source: STOXX

4The STOXX Activist Index was launched on Jul. 16, 2015 (hereinafter, launch date). Index values calculated for any date or period prior to the

index’s launch date are considered backtested. βeta in Tables 1, 2 and 3 is computed taking into account the S&P 500 Total Return Index as themarket benchmark and a risk-free rate given by the three-month US T-bill total return index; returns for the one-month and year-to-date periodsare period returns and are not annualized. In the same tables, rather than the traditional standard deviation of active returns, a more robustmeasure of tracking error has been computed to take into account both the drift component and the stochastic term of the active returns’distribution. Tracking error has been computed as the root mean square of the active returns against the S&P 500 Composite Total ReturnIndex.

Annualized

Return (%)

Annualized

Volati lity (%)

Return/Risk

Annualized

Annualized

Return (%)

Annualized

Volati lity (%)

Return/Risk

Annualized

Track ing Error

Annualized

Annualized

Return (%)

Annualized

Volati lity (%)

Return/Risk

Annualized

Tracking Error

Annualized

1-Month -0.8 4 15.27 -0 .66 -1.04 15.04 -0 .83 0 .63 -3.36 14 .62 -2.81 5.08

Year to date 2.8 9 15.17 0 .20 2. 18 15.02 0.15 0.77 -0.21 16.28 -0.01 4 .4 5

1-Year 2.94 15.22 0. 14 2.32 15.08 0.10 0.8 2 0.4 7 16.36 -0 .07 4 .50

3-Year 15.97 12.4 9 1.15 15.75 12.4 9 1.13 0.8 5 18 .10 13.60 1. 18 4 .65

5-Year 13.54 15.10 0.81 12 .54 15. 17 0.75 1.53 14 .76 16.4 0 0.81 5.15

Since 15/12/2006 6.52 21.25 0 .29 6.29 21.38 0 .28 1.97 10.55 23.12 0 .4 2 7.93

ßeta

Since

15/12/2006 1.00

Max Drawdown (%) Max Drawdown (%)

S&P 500 Composite - Total Return STOXX USA 900 - Gross Return STOXX Activist - Gross Return

-55.25 -54 .80 1.00 -60 .28 1.02

ßeta Max Drawdown (%) ßeta

Annualized

Return (%)

Annualized

Volatility (% )

Return/Risk

Annualized

Tracking Error

Annualized

Annualized

Return (%)

Annualized

Volatility (% )

Return/Risk

Annualized

Tracking Error

Annualized

Annualized

Return (%)

Annualized

Volatil ity (%)

Return/Risk

Annualized

Tracking Error

Annualized

1-Month -3.36 14 .62 -2.8 1 5.08 -0.78 4 .06 -1.57 11.56 -2.07 4 .32 -5.8 1 11.58

Year to date -0.21 16.28 -0.01 4 .4 5 -1.80 6.32 -0.30 10.56 -6.4 4 4 .86 -1 .4 3 11.99

1-Year 0.4 7 16.36 -0.07 4 .50 -1.61 6.26 -0.32 10.66 -5.58 5.16 -1 .24 11.85

3-Year 18 .10 13.60 1.18 4 .65 3.51 5.31 0 .63 8 .82 1.15 4 .59 0.24 9.62

5-Year 14 .76 16.4 0 0.8 1 5.15 -0.77 5.58 -0.14 11.25 0.81 4 .28 0.18 12.37

Since 15/12/2006 10.55 23.12 0.4 2 7.93 -1 .25 6.82 -0.18 16.88 -0.02 5.08 0.00 18 .49

Since

15/12/2006 0.15

STOXX Activist - Gross Return HFRX Equity Hedge - Total Return HFRX Event Driven - Total Return

Max Drawdown (%) ßeta Max Drawdown (%) ßeta Max Drawdown (%) ßeta

-60.28 1.02 -31.47 0.24 -27.33

STOXX LTD.


In particular, Tables 1 and 2 above show that the daily US dollar gross-return version of the STOXXActivist Index generated superior returns—in both absolute and risk-adjusted terms. That was against theSTOXX USA 900 market-cap benchmark, the S&P 500 Composite, the HFRX Equity Hedge and theHFRX Event-Driven for various measurement periods. The outperformance of the STOXX Activist Indexcame at higher risk levels (as proxied by the annualized volatility measure) relative to the underlyingmarket-cap benchmarks and the hedge fund strategy indices.

For the three-year period at Dec. 7, 2015’s close in terms of US-dollar annualized daily returns, the STOXXActivist Index outperformed the S&P 500 Composite Total Return Index by 213 basis points, the STOXXUSA 900 Gross Return Index by 235 basis points, the HFRX Equity Hedge Index by 1,459 basis pointsand the HFRX Event-Driven Index by 1,695 basis points.

Despite higher volatility readings, outperformance was also evident for risk-adjusted measures; thosemeasures can be particularly appealing for institutional investors, who are traditionally risk-averse. Thetraditional risk/return annualized measure of 1.18 for the STOXX Activist Gross Return Index over thethree-year period ended Dec. 7, 2015, compared favorably to 1.13 for the STOXX USA 900 Gross ReturnIndex, 1.15 for the S&P 500 Total Return Index, 0.63 for the HFRX Equity Hedge Index and 0.24 for theHFRX Event-Driven Index.

Similarly, for the period Dec. 7, 2010, to Dec. 7, 2015, the risk/return annualized reading of 0.81 for theSTOXX Activist Gross Return Index compared favorably to 0.75 for the STOXX USA 900 Gross ReturnIndex, 0.81 for the S&P 500 Total Return Index, minus 0.14 for the HFRX Equity Hedge Index and 0.18for the HFRX Event-Driven Index.

Finally, for the period since inception of time-series data on Dec. 15, 2006, until Dec. 7, 2015, therisk/return annualized reading of 0.42 for the STOXX Activist Gross Return Index compared favorably to0.28 for the STOXX USA 900 Gross Return Index, 0.29 for the S&P 500 Total Return Index, minus 0.18for the HFRX Equity Hedge Index and minus 0.003 for the HFRX Event-Driven Index.

The charts below plot indexed performance, 20-day annualized rolling window log-return volatility, 20-day rolling window correlation and trailing maximum drawdown of the STOXX Activist USD Gross ReturnIndex, the S&P 500 Composite Total Return Index, the STOXX USA 900 USD Gross Return Index, theHFRX Equity Hedge Index and the HFRX Event-Driven Index for the period Dec. 15, 2006-Dec. 7, 2015.

The remarkable 146.21% indexed performance (10.55% annualized) in US-dollar gross-return terms (withan annualized log-return volatility of 23.12%) of the STOXX Activist Gross Return Index stood against the72.93% of the STOXX USA 900 USD Gross Return Index (with an annualized log-return volatility of21.38%), the 76.44% of the S&P 500 Composite Total Return Index (with an annualized log-returnvolatility of 21.25%), the negative 10.65% (with an annualized log-return volatility of 6.82%) of the HFRXEquity Hedge Index and the negative 0.14% (with an annualized log-return volatility of 5.08%) of theHFRX Event-Driven Index.

For the same period, the STOXX Activist Gross Return Index recorded a maximum drawdown of 60.28%in US-dollar terms, while the STOXX USA 900 Gross Return Index and the S&P 500 Composite TotalReturn Index posted drawdowns of 55.25% and 54.80%, respectively. The two hedge fund indices, theHFRX Equity Hedge and the HFRX Event-Driven, recorded for the same period maximum drawdowns of31.47% and 27.33%.

The STOXX Activist Gross Return Index showed a mixed correlation pattern for the overall period withboth the S&P 500 Composite Total Return Index and the HFRX Event-Driven Index. Generally speaking,periods of higher volatility were associated with higher correlations between the STOXX Activist Gross

STOXX LTD.


Return Index and either the S&P 500 Composite Total Return Index or the HFRX Event-Driven Index.Other than a few noticeable exceptions, such as during the period of volatility clustering for summer2015, since the end of 2012 the correlation of the STOXX Activist Gross Return Index with the S&P 500Total Return Index appeared to oscillate within a 75%-95% range. Similarly, although with a lower degreeof co-occurrence in the pattern of changes between the two indices, the correlation of the STOXX ActivistGross Return Index with the HFRX index appeared to move within a 45%-82% range since the end of2010, with spikes below the lower bound of the range.

The STOXX Activist Gross Return Index underperformed in US-dollar gross-return terms year to date atthe Dec. 7, 2015 close against both the S&P 500 Composite Total Return Index (-309 basis points) andthe STOXX USA 900 Gross Return Index (-238 basis points). Conversely, for the same period, itoutperformed the HFRX Equity Hedge Index and the HFRX Event-Driven Index by 159 basis points and623 basis points, respectively.

FIGURE 6 STOXX ACTIVIST INDEX, S&P 500 COMPOSITE INDEX, STOXX USA 900 INDEX, HFRX EQUITY HEDGE INDEX

AND HFRX EVENT-DRIVEN INDEX, INDEXED PERFORMANCE (DEC. 15, 2006-DEC. 7, 2015, DAILY US-DOLLAR GROSS

RETURN)

Source: STOXX

40

60

80

100

120

140

160

180

200

220

240

260

280


HFRX Equity Hedge - Total Return HFRX Event Driven - Total Return

246.21

176.44

172.93

99.8689.35

STOXX LTD.


FIGURE 7 STOXX ACTIVIST INDEX AND S&P 500 COMPOSITE INDEX, ROLLING WINDOW LOG-RETURN VOLATILITY

VERSUS ROLLING WINDOW LOG-RETURN CORRELATION (JAN. 12, 2007-DEC. 7, 2015, DAILY US-DOLLAR GROSS

RETURN)

Source: STOXX

FIGURE 8 STOXX ACTIVIST INDEX AND HFRX EVENT-DRIVEN INDEX, ROLLING WINDOW LOG-RETURN VOLATILITY

VERSUS ROLLING WINDOW LOG-RETURN CORRELATION (JAN. 12, 2007-DEC. 7, 2015, DAILY US-DOLLAR GROSS

RETURN)

Source: STOXX

36.00%

43.11%

50.22%

57.33%

64.44%

71.56%

78.67%

85.78%

92.89%

100.00%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

20-day Rolling Window Annualized Volatility S&P 500 Composite Total Return (left scale)20-day Rolling Window Annualized Volatility STOXX Activist Gross Return (left scale)20-day Rolling Window Log Return Correlation STOXX Activist - S&P 500 Composite (right scale)

-60.00%

-42.22%

-24.44%

-6.67%

11.11%

28.89%

46.67%

64.44%

82.22%

100.00%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

20-day Rolling Window Annualized Volatility STOXX Activist Gross Return (left scale)20-day Rolling Window Annualized Volatility HFRX Event Driven - Total Return (left scale)20-day Rolling Window Log Return Correlation STOXX Activist - HFRX Event Driven (right scale)

STOXX LTD.


FIGURE 9 STOXX ACTIVIST INDEX, STOXX USA 900 INDEX, S&P 500 COMPOSITE INDEX, HFRX EVENT-DRIVEN INDEX

AND HFRX EQUITY HEDGE INDEX,TRAILING MAXIMUM DRAWDOWN (DEC. 18, 2006-OCT. 13, 2015, DAILY US-DOLLAR

GROSS RETURN)

Source: STOXX

In order to compare the STOXX Activist Gross Return Index with its peer strategy in the hedge fundspace, the HFRX ED: Activist Index was considered in the analysis. Given the lower frequency ofcalculation of the peer hedge fund index, the risk-return analysis focused on monthly data for the periodDec. 31, 2006, through Nov. 30, 2015.

In this case also, the analysis confirmed that the STOXX Activist Gross Return Index outperformed thepeer hedge fund strategy index in both absolute and risk-adjusted terms over longer measurementperiods.

In particular, Table 3 below shows that the monthly US-dollar gross-return version of the STOXX ActivistIndex generated superior returns—in both absolute and risk-adjusted terms—against the HFRX ED:Activist Index over various measurement periods. The outperformance of the STOXX Activist Index cameat higher risk levels (as proxied by the annualized volatility measure) relative to the underlying hedge fundstrategy index.

For the three-year period at Nov. 30, 2015’s close in US-dollar annualized monthly return terms, theSTOXX Activist Index outperformed the HFRX ED: Activist Index by 925 basis points. Similarly, for thefive-year period and the period since inception of the time-series data, the STOXX Activist Indexoutperformed the HFRX ED: Activist Index by 1,106 basis points and 672 basis points, respectively.

Conversely, for the one-month, year-to-date and one-year periods at the end of November, 2015, theSTOXX Activist Index underperformed the HFRX ED: Activist Index by 196 basis points, 24 basis pointsand 622 basis points, respectively.

-0.70

-0.60

-0.50

-0.40

-0.30

-0.20

-0.10

0.00

Max Drawdown S&P 500 Composite - Total Return Max Drawdown STOXX USA 900 - Gross Return

Max Drawdown STOXX Activist - Gross Return Max Drawdown HFRX Equity Hedge - Total Return

Max Drawdown HFRX Event Driven - Total Return

STOXX LTD.


TABLE 3 STOXX ACTIVIST INDEX AND HFRX ED: ACTIVIST INDEX, SUMMARY OF RISK/RETURN MEASURES (DEC. 31,

2006-NOV. 30, 2015, MONTHLY US-DOLLAR GROSS-RETURN INDICES)

Source: STOXX

The charts below plot indexed performance, six-month annualized rolling window log-return volatility, six-month rolling window correlation and trailing maximum drawdown of the STOXX Activist USD GrossReturn Index, the S&P 500 Composite Total Return Index, the STOXX USA 900 USD Gross Return Index,the HFRX Equity Hedge Index, the HFRX Event-Driven Index and the HFRX ED: Activist Index for theperiod Dec. 31, 2006-Nov. 30, 2015.

FIGURE 10 STOXX ACTIVIST INDEX AND HFRX ED: ACTIVIST INDEX, INDEXED PERFORMANCE (DEC. 31, 2006-NOV. 30,

MONTHLY US-DOLLAR GROSS RETURN)

Source: STOXX

40

60

80

100

120

140

160

180

200

220

240

260

280


HFRX Equity Hedge - Total Return HFRX Event Driven - Total Return HFRX ED: Activist - Total Return

Annualized

Return (%)

Annualized

Volatility (%)

Return/Risk

Annualized

Track ing Error

Annualized

Annualized

Return (%)

Annualized

Volatility (%)

Return/Risk

Annualized

Track ing Error

Annualized

1-Month -0 .53 n .a. n .a. n .a. 1.4 3 n .a. n .a. n .a.

Year to date 1.99 17.89 0.12 4 .76 2.23 10.8 6 0.22 5.4 0

1-Year 0.97 17.10 0.06 4 .75 7. 19 11.30 0.61 7.32

3-Year 19.53 13.54 1.32 5.31 10.29 8 .11 1.2 1 6.62

5-Year 16.01 14 .99 0 .99 5.76 4 .95 11.71 0.4 1 7.54

Since 31/12/2006 10 .92 20 .62 0.51 8 .98 4 .20 14 .69 0.28 8 .91

Since

31/12/2006

STOXX Activist - Gross Return

Max Drawdown (%) ßeta

-53.4 0 1.17

HFRX ED: Activist - Total Return

Max Drawdown (%) ßeta

-37.37 0.77

STOXX LTD.


FIGURE 11 STOXX ACTIVIST INDEX, S&P 500 COMPOSITE INDEX, AND HFRX ED: ACTIVIST INDEX, ROLLING WINDOW

LOG-RETURN VOLATILITY VERSUS ROLLING WINDOW LOG-RETURN CORRELATION (JUNE, 2007-NOVEMBER, 2015,

MONTHLY US-DOLLAR GROSS RETURN)

Source: STOXX

FIGURE 12 STOXX ACTIVIST INDEX, STOXX USA 900 INDEX, S&P 500 COMPOSITE INDEX, HFRX EVENT-DRIVEN INDEX,

HFRX EQUITY HEDGE INDEX AND HFRX ED: ACTIVIST INDEX,TRAILING MAXIMUM DRAWDOWN (DEC. 18, 2006-OCT. 13,

2015, DAILY US-DOLLAR GROSS RETURN)

Source: STOXX

-68.00%

-51.20%

-34.40%

-17.60%

-0.80%

16.00%

32.80%

49.60%

66.40%

83.20%

100.00%

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

6-month Rolling Window Annualized Volatility S&P 500 Composite Total Return (left scale)6-month Rolling Window Annualized Volatility STOXX Activist - Gross Return (left scale)6-month Rolling Window Annualized Volatility HFRX ED: Activist - Total Return (left scale)6-month Rolling Window Log Return Correlation - STOXX Activist - S&P500 (right scale)

-0.60

-0.50

-0.40

-0.30

-0.20

-0.10

0.00

Max Drawdown S&P 500 Composite - Total Return Max Drawdown STOXX USA 900 - Gross ReturnMax Drawdown STOXX Activist - Gross Return Max Drawdown HFRX Equity Hedge - Total ReturnMax Drawdown HFRX Event Driven - Total Return Max Drawdown HFRX ED Activist - Total Return

STOXX LTD.


3 Robust Omega Ratio Measurement

A specific investigation of the return time series of the STOXX Activist Index and the selected marketbenchmarks and hedge fund strategy indices considered in the analysis was performed to considerhigher moments of the distribution of returns. Usually, the analysis of financial instrument series returnsfocuses on mean and variance, under the hypothesis of “compactness” of the distribution of returns(Samuelson, P. A. [1970], “The Fundamental Approximation Theorem of Portfolio Analysis in Terms ofMeans, Variances, and Higher Moments,” Review of Economic Studies, Vol. 37).

Compactness represents a continuity or inertia of stock prices. In the absence of particular shocks to theseries, the uncertainty of stock returns over increasingly shorter periods decreases. Under thesecircumstances, investors who can rebalance their portfolios frequently will seek to make higher momentsof the stock-return distribution so small as to be negligible. In this way, the action of investors infrequently revising their portfolios limits higher moments (even moments representing bad moments inthe utility function for the investor) to negligible levels. However, in the presence of shocks or highvolatility, the usual mean/variance analysis is inadequate, and higher moments of the utility function ofthe investment need to be considered. In particular, odd moments (third moment, i.e., skewness)represent good moments, since they define the measure of asymmetry. Positive numbers are associatedwith positive skewness and hence are desirable.

Positively skewed return distributions are characterized by more likely but smaller losses and less likelybut extreme gains. In other words, “bad surprises” are more likely but are limited in magnitude. In anegatively skewed distribution, on the other hand, bad surprises are more likely to be extreme, even ifthey occur less frequently. Skewness is important because of its impact on portfolio choices and alsobecause kurtosis (fourth-moment skewness, i.e., bad news) is not independent of skewness—the lattermay induce the former.

In a normal market situation based on a portfolio analysis of three moments, investors should have apreference for positive skewness, since they prefer portfolios with a higher probability of greater returns.On the contrary, in episodic market crashes, it is expected the asymmetry would be characterized bynegative skewness, with a higher probability of large falls in prices.

The distribution of log returns of the STOXX Activist Index, the selected market benchmarks and thehedge fund strategy indices considered in the analysis exhibited negative skewness with excess kurtosis.The shape of the distribution of the return series was leptokurtic, indicating that a larger portion of thevariance of the distribution of the returns was attributable to infrequent extreme deviations as opposed tomore frequent modest deviations. The magnitude of the peakedness of the log-return time seriesconsidered in the analysis was similar.

As highlighted in Table 4 below, under the null hypothesis of a normal distribution, the Jarque-Bera

statistic (distributed as χ2 with two degrees of freedom) led to the rejection of the null hypothesis of anormal distribution at both the 5% and the 1% significance levels for the whole measurement period.

STOXX LTD.


TABLE 4 STOXX ACTIVIST INDEX VERSUS SELECTED MARKET BENCHMARKS AND HFRX HEDGE FUND STRATEGY

INDICES–MONTHLY LOG-RETURN DESCRIPTIVE STATISTICS (JANUARY, 2007-NOVEMBER, 2015)

Source: STOXX calculations

Interestingly, when restricting the analysis to the post-credit-crisis period (Mar. 31, 2009-Nov. 30, 2015),the Jarque-Bera statistic led to rejection of the null hypothesis of a normal distribution at both the 5%and the 1% significance levels only for the HFRX Event-Driven Index. Conversely, for the HFRX EquityHedge Index, the probability to accept the null hypothesis for the Jarque-Bera statistic was just above the5% significance level.

TABLE 5 STOXX ACTIVIST INDEX VERSUS SELECTED MARKET BENCHMARKS AND HFRX HEDGE FUND STRATEGY

INDICES–MONTHLY LOG-RETURN DESCRIPTIVE STATISTICS (MARCH, 2009-NOVEMBER, 2015)


The traditional mean-variance approach to performance measurement and portfolio optimization isbased on an approximation of normality in returns. Financial asset returns are at times better representedby hyperbolic distributions. The hyperbolic distribution decreases exponentially—more slowly than thenormal distribution—being suitable to model financial patterns where numerically large values are moreprobable than is the case for the normal distribution. Thus, the hyperbolic distribution provides thepossibility of modelling heavier tails.

HFRX EVE NT DRIVEN ACTIVIST HFRX EQUITY HEDGE HFRX EVENT DRIVEN S&P 500 COMPOSITE STOXX ACTIVIST STOXX USA 900

Mean 0.003461 -0.001035 4.11E-05 0.005369 0.008715 0.005187

Median 0.007712 0.000435 0.004487 0.01287 0.01398 0.013335

Maximum 0.092413 0.050564 0.033215 0.103722 0.153341 0.104951

Minimum -0.177944 -0.105206 -0.07824 -0.183863 -0.273033 -0.194091

Std. Dev. 0.042408 0.023562 0.020161 0.046293 0.059515 0.046742

Skewness -1.01646 -1.356925 -1.323445 -0.907837 -1.006089 -0.995352

Kurtosi s 5.838074 7.03851 5.687569 4.876018 6.726711 5.347445

Jarque-Bera 54.33563 105.549 63.43787 30.38852 79.97019 42.23557

Probabi l i t y 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000

Sum 0.370364 -0.110714 0.004399 0.574434 0.932537 0.555045

Sum Sq. Dev. 0.190631 0.05885 0.043086 0.227167 0.375461 0.231586

Observat ions 107 107 107 107 107 107

HFRX EVE NT DRIVEN ACTIVIST HFRX EQUITY HEDGE HFRX EVENT DRIVEN S&P 500 COMPOSITE STOXX ACTIVIST STOXX USA 900

Mean 0.009746 0.002045 2.37E-03 0.014612 0.019783 0.014134

Median 0.011284 0.004321 0.005153 0.019132 0.019093 0.018111

Maximum 0.092413 0.050564 0.033215 0.103722 0.153341 0.104951

Minimum -0.096894 -0.05802 -0.051375 -0.083219 -0.099949 -0.080214

Std. Dev. 0.037581 0.019063 0.016627 0.038762 0.050431 0.03917

Skewness -0.349654 -0.466375 -0.821737 -0.219569 -0.016596 -0.218154

Kurtosi s 3.506499 3.911667 3.720594 2.947995 3.003808 2.903604

Jarque-Bera 2.51631 5.741416 10.86839 0.659972 0.003767 0.673842

Probabi l i t y 0.28418 0.05666 0.00437 0.71893 0.99812 0.71397

Sum 0.789404 0.165679 0.19215 1.183589 1.602428 1.144834

Sum Sq. Dev. 0.112984 0.029072 0.022116 0.120201 0.203462 0.122744

Observat ions 81 81 81 81 81 81

STOXX LTD.


Since in the traditional Sharpe ratio measurement not all asymmetries of the distribution of returns andrisk-averse investors’ preferences are taken into account, some investments may mistakenly appearbetter or worse than they are. In light of the non-normal distribution of the return time series of theindices considered in the analysis for the full period, in this section we present an alternative and morepowerful performance measure—the Omega (Ω) measure (originally presented in a research paper by Keating, C. and F. Shadwick [2002], A Universal Performance Measure, The Journal of PerformanceMeasurement, 6 [3]).

The Omega measure incorporates all the moments of the distribution, since it is a direct transformationof it. The Omega measure splits the distribution of returns into two subparts, according to a returnthreshold. Thus, returns are divided into losses and gains above and below a return threshold, and thenthe probability-weighted ratio of returns above and below the partitioning is considered. The relativeranking of the various assets depends on the threshold value. The evaluation of an investment in financialassets with the Omega function should be considered for thresholds between 0% and the risk-free rate.Intuitively, this type of threshold corresponds to the notion of capital protection.

In addition to incorporating all the moments of the distribution of returns, the Omega function has twointeresting properties: Firstly, when the threshold return is set to the mean of the distribution, the Omegameasure is equal to 1.0. Secondly, whatever the threshold return, all financial assets may be ranked.Conversely, in the context of the Sharpe measure, the ranking leads to cumbersome interpretation fornegative ratios.

The figure below shows the log Omega values corresponding to a series of monthly return thresholds forthe STOXX Activist Index, compared to the STOXX USA 900 Index, the S&P 500 Index and the HFRXhedge fund strategy indices.

FIGURE 13 STOXX ACTIVIST INDEX VERSUS MARKET BENCHMARKS AND HFRX INDICES–OMEGA FUNCTION VERSUS

SHARPE RATIOS (US-DOLLAR GROSS RETURNS, JANUARY, 2007-NOVEMBER, 2015)


-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

-0.30 -0.25 -0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20

Om

ega

(log

arit

hm

icsc

ale)

Monthly returns

STOXX Activist Index S&P 500 STOXX USA 900 HFRX Event Driven HFRX Equity Hedge HFRX ED: Activist

Sharpe ratio 0.31

Sharpe ratio -0.20

Sharpe ratio 0.42

Sharpe ratio 0.58

Sharpe ratio -0.56

Sharpe ratio 0.44

STOXX LTD.


For the period considered in the Omega analysis above, the STOXX Activist Index provided the bestinvestment choice, since it factored in the positive performance momentum for the activist strategy overthe measurement period. At the return threshold of 0.004% monthly or 0.5% annually, the S&P 500Total Return Index and the STOXX USA 900 Gross Return Index posted 0.8222 and 0.8677 Omegavalues, respectively. The STOXX Activist Gross Return Index recorded a 0.9822 Omega reading.

Differently from an analysis based merely on the Sharpe ratio, which makes reference to a single readingfor the overall period of the analysis, it is interesting to note how the relative ranking depended on thethreshold value. For instance, the STOXX Activist Index versus the HFRX hedge fund strategy indices wasa typical case where, whatever the threshold return, the financial assets could be graded as benefitingfrom the use of the Omega function. In fact, the Sharpe ratios for the measurement period were negativefor both the HFRX Event-Driven (-0.56) and the HFRX Equity Hedge (-0.20).

Conversely, in the context of the Sharpe measure, any ranking based on the reading for the overall periodmight have been ambiguous. The HFRX ED: Activist posted a 0.7448 Omega value for the overall periodfrom Jan. 31, 2007-Nov. 30, 2015. Also, the Omega reading of the peer hedge fund strategy was belowthe value recorded by the STOXX Activist Index (0.9822).

Expanding the Omega function analysis to take into account a higher return threshold (at 1% annually orabove), the “best investment choice gap” between the STOXX Activist Index and the remainingbenchmarks was maintained. . At the 1.5% annual return threshold, the Omega value for the STOXXActivist Index stood at 0.9665 for the overall measurement period. For the same period, the S&P 500Total Return Index, the STOXX USA 900 Gross Return Index and the HFRX ED: Activist Index posted0.8082, 0.8483 and 0.7165 Omega readings, respectively.

STOXX LTD.


4 Performance Contribution Analysis

Figure 14 below details the characteristics of a holdings-based performance analysis in US-dollar termsusing the Style Research performance-attribution module on the STOXX Activist Index compared to thewider USA benchmark for the period from Jul. 16, 2015-Dec. 11, 2015.

The results of the performance-contribution analysis appeared to be consistent with hedge fundactivism’s target strategy. The STOXX Activist Index featured a value strategy. The latest readings at Dec.11, 2015, showed—among others—a portfolio tilt toward the dividend yield (+0.76%), price-to-book(+0.42%), earnings yield (+0.85%), cash-flow yield (+0.73%) and price-to-EBITDA (+0.56%) factors. Thefact that the value portfolio tilt appeared not to be confirmed against two forward-looking measures—theThomson Reuters I/B/E/S consensus year one forecast annual earnings per share divided by the shareprice (-0.39%) and the Thomson Reuters I/B/E/S consensus year one forecast annual dividend per sharedivided by the share price (-0.35%)—was consistent with some findings in the academic literature5. Infact, analyst expectations generally reflected improved prospects at target firms only after hedge fundintervention. Conversely, it was more common that, during the months prior to Schedule 13D filings,analysts downgraded future activist targets more than they upgraded them.

Among the growth factors—with the exception of earnings growth (+0.23%), return on equity (-0.11%),income to sales (-1.62%), sales growth (-0.95%) and the forward-looking Thomson Reuters I/B/E/Sconsensus forecast growth of earnings over the next twelve-month period (-1.17%) all detracted fromperformance for the period.

FIGURE 14 PERFORMANCE ATTRIBUTION, STOXX ACTIVIST INDEX VERSUS USA BENCHMARK (US-DOLLAR GROSS

RETURN, JUL. 16, 2015-DEC. 11, 2015)

Source: Style Research on STOXX data

5Please refer to Brav, A., W. Jiang, F. Partnoy and R. Thomas (2008) under note 3.

0.42 0.76

-0.35

0.85

-0.39

0.73

0.70

0.56

-0.11

0.23

-1.62

-0.95

-1.17

-1.53

-0.10

-1.31

1.11

-0.49

-0.84

0.04

1.13

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

Max

Min

Latest

STOXX LTD.


A value style orientation was also confirmed when the analysis on a sector-adjusted basis was run toverify whether there were genuine style orientations or whether factor tilts were mostly due to sectorcharacteristics. Despite lowering from the unadjusted style-exposure analysis, the earnings yield(+0.80%), sales-to-price (+0.30%) and price-to-EBITDA (+0.51%) factors still posted a significantcontribution for the period. In other cases—such as for the dividend yield (+0.99%), price-to-book(+0.61%) and cash-flow yield (+0.74%) factors—the value tilt was confirmed by higher style exposurereadings.

FIGURE 15 PERFORMANCE ATTRIBUTION, STOXX ACTIVIST INDEX VERSUS USA BENCHMARK, SECTOR-ADJUSTED

(US-DOLLAR GROSS RETURN, JUL. 16, 2015-DEC. 11, 2015)


0.61 0.99

-0.10

0.80

-0.41

0.74

0.30 0.51

-0.15

0.32

-1.39

-0.83

-1.30 -1.24

-0.30

-1.26

0.52

-0.64

-1.01

0.26 0.62

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

Max

Min

Latest

STOXX LTD.


FIGURE 16 PERFORMANCE ATTRIBUTION HEAT MAP, STOXX ACTIVIST INDEX VERSUS USA BENCHMARK (SECTOR-

ADJUSTED, US-DOLLAR GROSS RETURN, JUL. 16, 2015-DEC. 11, 2015)


As highlighted above, the STOXX Activist Index showed significant exposure—with the expected sign—tosome pure factors. In some cases, an index may also have had significant exposure to factors other thanthe intended factors. For instance, the STOXX Activist Index had a significant exposure to a mid-capportfolio (76.49% in its latest reading, ranging between 63.95% and 76.49%) as seen by its positiveexposure to the size factor in the same percentage. (Institutional investors should be aware of thesepotential secondary exposures and manage them appropriately.) The wider USA benchmark exposure tothe mid-cap factor stood at 40.40% in its latest reading. At the same time, the STOXX Activist Index hadan exposure to a large-cap portfolio to the tune of 9.68% in its latest reading, ranging between 9.49%and 21.42%, against a benchmark tilt of 40.40%.

In terms of style segment, the STOXX Activist Index holdings portfolio confirmed a large value biascompared to the wider USA benchmark, with an allocation of 54.75% in its latest reading, rangingbetween 45.94% and 54.78%. The reading stood against a benchmark exposure of 40.29% for the samestyle segment.

In risk-attribution terms, the largest contributions to tracking error, standing at 4.1% for the periodanalysed, came mainly from specific equity allocation (68.55%) and sector tilt (15.82%). The maincontributions to sector risk came from basic materials (+0.53%, with an active weighting of 13.07%),utilities (+0.09%, with an active weighting of -2.21%), and healthcare (+0.08%, with an active weightingof -4.69%).

2015 2015 2015 2015 2015 2015

Dec Nov Oct Sep Aug Jul

Book to Pr ice 0.61 0.68 0.78 0.55 0.17 0.16

Dividend Yield 0.99 1.06 1.23 0.90 0.04 -0.08

IBES Div Yld -0.10 -0.05 -0.09 -0.21 -0.12 -0.14

Earnings Yld 0.80 0.85 0.71 0.38 0.03 -0.65

IBES FY1 Engs Yld -0.41 -0.44 -0.26 -0.30 -0.59 -1.21

C'Flow Yield 0.74 0.80 1.00 0.63 -0.51 -0.57

Sales to Pr ice 0.30 0.30 0.42 0.19 -0.45 -0.50

EBITDA to Pr ice 0.51 0.58 0.77 0.57 0.01 -0.25

Rtn on Equi ty -0.15 -0.11 -0.20 -0.14 -0.26 -0.18

Earnings Growth 0.32 0.43 -0.01 0.01 0.31 -0.21

Income/Sales -1.39 -1.40 -1.57 -1.61 -1.22 -1.26

Sales Growth -0.83 -0.87 -1.12 -1.13 -1.12 -1.31

IBES 12Mth Gr -1.30 -1.13 -0.97 -1.05 -0.30 0.13

IBES 1Yr Rev -1.24 -1.30 -1.05 -0.55 0.35 -0.17

Sustainable Growth -0.30 -0.25 -0.34 -0.36 -0.59 -0.48

Market Cap -1.26 -1.38 -1.29 -1.24 -0.87 -0.91

Market Beta 0.52 0.58 0.30 0.02 0.57 0.33

Momentum ST -0.64 -0.85 -1.52 -0.39 -0.33 0.71

Momentum MT -1.01 -1.09 -1.23 -0.77 -0.15 -0.19

Debt/Equi ty 0.26 0.35 0.40 0.51 0.11 0.00

Foreign Sales 0.62 0.58 0.38 0.30 0.45 0.62

VA

LU

EG

RO

WTH

RIS

K

MO

M

EN

T

UM

OTH

ER

STOXX LTD.


FIGURE 17A STOXX ACTIVIST INDEX, CONTRIBUTION

TO SECTOR RISK (US-DOLLAR GROSS RETURN, JUL.

16, 2015-DEC. 11, 2015)

FIGURE 17B STOXX ACTIVIST INDEX, SECTOR ACTIVE

WEIGHTINGS (US-DOLLAR GROSS RETURN, JUL. 16, 2015-

DEC. 11, 2015)

Source: Style Research on STOXX data Source: Style Research on STOXX data

-0.20 0.00 0.20 0.40 0.60

Basic Materials

Utilities

Health Care

Telecommunications

Consumer Goods

Technology

Financials

Oil & Gas

Consumer Services

Industrials

-12.0 -8.0 -4.0 0.0 4.0 8.0 12.0 16.0

Basic Materials

Utilities

Health Care

Telecommunications

Consumer Goods

Technology

Financials

Oil & Gas

Consumer Services

Industrials

STOXX LTD.


FIGURE 18 TEN TOP STOCK CONTRIBUTORS TO RISK (TRACKING ERROR), STOXX ACTIVIST INDEX VERSUS USA

BENCHMARK (US-DOLLAR GROSS RETURN, JUL. 16, 2015-DEC. 11, 2015)


5 Conclusions

An analysis of the performance of the STOXX Activist Index confirmed that the index outperformed boththe key equity market-cap benchmarks for the US market and the peer hedge fund strategy indices inboth absolute and risk-adjusted terms over longer measurement periods.

Despite higher volatility readings, the outperformance of the STOXX Activist Index was also evident forrisk-adjusted measures; those measures can be particularly appealing for institutional investors, who aretraditionally risk-averse. The traditional risk/return annualized measure of 1.18 for the STOXX ActivistGross Return Index over the three-year period ended Dec. 7, 2015, compared favorably to 1.13 for theSTOXX USA 900 Gross Return Index, 1.15 for the S&P 500 Total Return Index, 0.63 for the HFRX EquityHedge Index and 0.24 for the HFRX Event-Driven Index.

A specific investigation of the return time series of the STOXX Activist Index and the selected marketbenchmarks and hedge fund strategy indices considered in the analysis was performed to evaluatehigher moments of the distribution of returns. A robust Omega ratio analysis for the period January,2007 through November, 2015 confirmed that the STOXX Activist Index provided the best investmentchoice, since it factored in the positive performance momentum for the activist strategy over themeasurement period. At the return threshold of 0.004% monthly or 0.5% annually, the S&P 500 TotalReturn Index and the STOXX USA 900 Gross Return Index posted 0.8222 and 0.8677 Omega values,respectively. The STOXX Activist Gross Return Index recorded a 0.9822 Omega reading. The HFRX ED:Activist posted a 0.7448 Omega value for the same measurement period.

23.47

17.39

12.43

8.98

8.26

8.08

7.53

7.26

6.83

6.66

7.07

5.91

5.27

5.08

5.04

4.72

2.96

4.27

4.24

4.33

0 5 10 15 20 25

E I DU PONT DE NEMOURS AND CO

DOW CHEMICAL CO

EMC CORPORATION

TWENTY-FIRST CENTURY FOX INC

BANK OF NEW YORK MELLON CORP.

EBAY INCORPORATED

BAKER HUGHES INCORPORATED

CROWN CASTLE INTERNATIONAL CORP.

WALGREENS BOOTS ALLIANCE INC

AMERICAN EXPRESS COMPANY

Active Weight % Contribution to Total Risk %

Overall Tracking Error: +4.1%

STOXX LTD.


Results of a performance-contribution analysis appeared to be consistent with the hedge fund activism’starget strategy in that the STOXX Activist Index featured a value strategy (reflected in its portfolio tilttoward a number of fundamental measures). The latest readings at Dec. 11, 2015, showed—amongothers—a portfolio tilt toward the dividend yield (+0.76%), price-to-book (+0.42%), earnings yield(+0.85%), cash-flow yield (+0.73%) and price-to-EBITDA (+0.56%) factors. The fact that the valueportfolio tilt appeared not to be confirmed against two forward-looking measures—the Thomson ReutersI/B/E/S consensus year one forecast annual earnings per share divided by the share price (-0.39%) andthe Thomson Reuters I/B/E/S consensus year one forecast annual dividend per share divided by theshare price (-0.35%)—was consistent with some findings in the academic literature.

A value style orientation was also confirmed when the analysis on a sector-adjusted basis was run toverify whether there were genuine style orientations or whether the factor tilts were mostly due to sectorcharacteristics.

STOXX LTD.


About STOXX

STOXX Ltd. is a global index provider, currently calculating a global, comprehensive index family of over 7,000 strictly rules-based and transparent indices. Best known for the leading European equity indices EURO STOXX 50®, STOXX® Europe 50 andSTOXX® Europe 600, STOXX Ltd. maintains and calculates the STOXX Global Index family, which consists of total market, broadand blue-chip indices for the regions Americas, Europe, Asia and Pacific; the subregions Latin America and BRIC (Brazil, Russia,India and China) as well as global markets.

To provide market participants optimal transparency, STOXX indices are classified into three different categories: The regular“STOXX” indices include all standard, theme and strategy indices that are part of STOXX’s integrated index family and follow astrict rules-based methodology. The “iSTOXX” brand typically comprises less standardized index concepts that are not integratedinto the STOXX Global Index Family but are nevertheless strictly rules-based. While indices that are branded “STOXX” and“iSTOXX” are developed by STOXX for a broad range of market participants, the “STOXX Customized” brand covers indices thatare specifically developed for clients and do not carry the STOXX brand in the index name.

The STOXX indices are licensed to over 400 companies around the world as underlyings for exchange-traded funds (ETFs),futures & options, structured products and passively managed investment funds. Three of the top ETFs in Europe and 30% of allassets under management are based on STOXX indices. STOXX Ltd. holds Europe’s number-one and the world’s number-threepositions in the derivatives segment.

STOXX Ltd. is part of Deutsche Börse Group and markets the DAX Indices.

www.stoxx.com

CONTACTS

Selnaustrasse 30CH-8021 ZurichP +41 (0)58 399 [email protected]

Frankfurt: +49 (0)69 211 13243Hong Kong: +852 6307 9316London: +44 (0)20 7862 7680New York: +1 212 669 6426Sydney: +61 2 9089 8844Tokyo: +81 (0) 3 5847 824

INNOVATIVE. GLOBAL. INDICES.

STOXX Ltd. is part of Deutsche Börse Group.

©STOXX 2015. All Rights Reserved.STOXX research reports are for informational purposes only and do not constitute investment advice or an offer to sell or the solicitation of anoffer to buy any security of any entity in any jurisdiction.Although the information herein is believed to be reliable and has been obtained from sources believed to be reliable, we make norepresentation or warranty, expressed or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of suchinformation.No guarantee is made that the information in this report is accurate or complete, and no warranties are made with regard to the results to beobtained from its use. STOXX Ltd. will not be liable for any loss or damage resulting from information obtained from this report. Furthermore,past performance is not necessarily indicative of future results.Exposure to an asset class, a sector, a geography or a strategy represented by an index can be achieved either through a replication of the list ofconstituents and their respective weightings or through investable instruments based on that index. STOXX Ltd. does not sponsor, endorse, sell,promote or manage any investment product that seeks to provide an investment return based on the performance of any index. STOXX Ltd.makes no assurance that investment products based on any STOXX index will accurately track the performance of the index itself or returnpositive performance.The views and opinions expressed in this research report are those of the author and do not necessarily represent the views of STOXX Ltd.This report is for individual and internal use only. It may not be reproduced or transmitted in whole or in part by any means—electronic,mechanical, photocopying or otherwise—without STOXX's prior written approval.

Date post:	12-Oct-2020
Category:	Documents
Upload:	others
View:	0 times
Download:	0 times

DECEMBER, 2015 HEDGE FUND ACTIVISM · HEDGE FUND ACTIVISM 3 Abstract Shareholder activism generally...

Documents