For much of this year,
stock couldn’t find a floor. Not only did the payments company lose its pandemic luster, but it also lost credibility on Wall Street after cutting ambitious growth targets in February. Amid the selloff, PayPal’s chief financial officer took a job at Walmart. Investors took off, too, sending the stock down 60% through mid-July.
But one investor, in particular, saw value and came equipped to orchestrate a turnaround in the stock: Elliott Management.
Led by its longtime chief, Paul Singer, the $56 billion hedge fund amassed a nearly 2% stake in PayPal (ticker: PYPL) over the summer. As reports of Singer’s involvement trickled out, PayPal shares popped 9% and then rose another 12% when the company said it was engaged in “constructive and collaborative” talks with the hedge fund.
Singer, 78, isn’t known for playing nice if he’s rebuffed. A Harvard University–trained lawyer, he has led Elliott for more than four decades, developing a reputation for tenacious activism, tackling companies worldwide and even taking on an entire country over its debt. Worth $5.5 billion, according to Forbes, Singer is still highly involved in the fund, with co-CEO Jonathan Pollock. Managing partner Jesse Cohn oversees much of the firm’s private equity and activism.
Few other hedge funds are targeting as many large and global companies. Fewer still are willing to fight for years if a company resists Singer’s demands—from winning board seats to a wholesale firing of the management team or corporate breakup.
Yet investors who follow Elliott into a stock may be disappointed. Strip out the one-day pop in a stock when Elliott’s involvement is disclosed, and, in aggregate, its activist picks haven’t beaten the market, according to an analysis by Barron’s.
For Elliott, that may not be a problem because the fund lives up to its name: It hedges risks in activist holdings both widely and narrowly, down to the business unit within a company that it is targeting. Those strategies aren’t accessible to most investors.
Activist positions, moreover, only account for about 20% of the hedge fund; the rest consists of derivatives, debt securities, and other positions that aren’t publicly disclosed. All of it together gives Elliot a leg up in activism. Investors who try to piggyback off its strategy should be wary.
As for Elliott’s overall returns, they’re a mixed bag. The hedge fund has gained an average 13.5% annualized since Singer founded the firm in 1977, according to people familiar with the fund. That beats the
index’s 11.6% return. Elliott has had only two losing years: 1998, when it lost 7% while the S&P 500 gained 28%, and 2008, when the fund lost 3% against a 37% market decline.
Elliott has done quite well this year. Through June 30, the hedge fund was up 5%, net of fees, against a 20% decline in the S&P 500.
But Elliott’s performance hasn’t been great over the past five years. The fund returned an annualized 9.7%, through June 30, compared with 11.3% for the S&P 500. In 2019, the fund returned 6.5%, trailing the market’s 31.5% gain. Elliott also trailed the market in 2020 and 2021.
Advisors familiar with the fund, which has a $5 million minimum, say that investors aren’t necessarily looking to knock the lights out with Elliott. Rather, they’re seeking a true multi-strategy fund that can deliver returns noncorrelated to the broader market.
Cohn says avoiding losses is the first objective. “Elliott’s core value is to preserve capital with no excuses and be skeptical,” he said in an interview with Barron’s.
Singer declined an interview.
Elliott’s Activist Playbook
Led by Singer, Elliott is leaning into activism while many of his peers pull back. Bill Ackman, known for his short campaign against
(HLF), said in March that his Pershing Square is officially out of activist short selling and will be taking a “quieter” approach to investing. Earlier this month, Third Point’s Dan Loeb did an about-face on
(DIS) after CEO Bob Chapek shot down Loeb’s quasi-friendly nudge to split off ESPN.
In contrast, Elliott isn’t backing down. The hedge fund, in the past year, has taken activist stakes in PayPal,
(SWCH). Globally, the hedge fund’s targets include
Willis Towers Watson
Canadian National Railway
Elliott is also using activism—gaining board seats and internal company knowledge—for buyouts. The hedge fund took the transport company Cubic private last year and has a buyout deal for
(CTXS). It took Athenahealth private with Veritas Capital for $5.7 billion in 2018 and sold it to Bain Capital and Hellman & Friedman for $17 billion in February.
“The more effective we are in activism, the better that we can deploy those skills into acquiring companies,” said Cohn. “The more we do in the private equity space, the more operational knowledge we build, and the more effective we can be as public-market players.”
Overall, Elliott has launched 131 activist campaigns since 2015, according to data from investment advisory firm Lazard. That eclipses the sum of campaigns launched by the next three most active hedge funds: Starboard Value, Land & Buildings, and ValueAct Capital. Elliott has gained 95 board seats since 2015, lagging behind only Starboard with 125 seats over the same period, according to Lazard.
Elliott often starts out friendly but can quickly turn hostile; it has a reputation for latching on to companies or even entire countries like a pit bull. Singer tangled with giants like Athenahealth and steel company
(ARNC). His hedge fund feuded with Argentina over its bonds for 15 years, even detaining an Argentine naval vessel at a port in Ghana as a pressure tactic. Elliott eventually settled with Buenos Aires, turning a $2.4 billion profit on a $115 million investment.
Partly in response to activists like Elliott, many companies have adopted defenses like share dilution provisions and other “poison pills” to thwart hostile actions. “It’s no longer the early innings of activism,” says Chris Couvelier, managing director at Lazard. “Even if your company hasn’t been targeted, odds are you’ve got a director or member of management that has been affected by activism.” Investors, meanwhile, are getting tired of headline-making proxy brawls. “Shareholders don’t mind alternative ideas, but they want to evaluate them on their own merits,” he adds.
Elliott’s Activist Record
Whether Elliott enhances returns for shareholders—other than itself—is debatable.
Since 2018, the 76 activist stock positions publicly disclosed by Elliott have returned an average of 4.9% in the hedge fund’s holding period, according to Bloomberg reports and data. That trails the S&P 500 by an average of 6.6 percentage points. Investors would have fared even worse if they’d missed the initial one-day gain, averaging 5.6%. Without it, Elliott’s picks would have trailed the S&P 500 by 11.9%.
Elliott’s stock returns are based on public filings and company disclosures. Some of its positions—particularly some foreign holdings—may not have been activist but rather arbitrage trades and hedges. Filtering out foreign holdings, the firm’s U.S. activist holdings beat the S&P 500 by six percentage points. Investors who missed the first-day gain would have trailed by two points. Elliott declined to comment on Barron’s findings.
A few recent examples exemplify the uneven performance. Western Digital surged 14.5% on the day that Elliott’s stake was revealed in May. The company reached a settlement with Elliott a month later and agreed to explore a breakup—work it is still undertaking. Shares have since slid and trailed the S&P 500 by 27% since the disclosure of Elliott’s stake.
Following Elliott into shares of
(9984.Japan) would also have been costly. Elliott amassed a $3 billion stake in the Japanese tech conglomerate, revealed in early 2020, and then lobbied management for more disclosures about its positions, among other demands. Initially, investors cheered, pushing up SoftBank stock by 7.3%. But Elliott abandoned efforts to exert pressure on SoftBank CEO Masayoshi Son and sold most of its stake in the company. SoftBank stock has trailed the S&P 500 by 10% since Elliott’s stake was revealed.
Some companies targeted by Elliott say they don’t view the hedge fund as an adversary. Elliott approached the data center Switch cordially, alerting management via a phone call that it acquired a stake and would like to talk. Switch President Thomas Morton was wary, but said in an interview that Elliott had “done its homework.” Elliott and Switch were aligned in some goals, he added, including converting the company into a real estate investment trust. “We didn’t think of them as an activist but as an additive investor,” said Morton.
Other companies, perhaps wary of tangling with Elliott, appear willing to appease the firm. Elliott sought five seats on Cardinal’s 11-person board in mid-August. Three weeks later, Cardinal agreed to add four directors backed by the hedge fund to its board. Cardinal also formed a committee to explore the company’s strategy and improve financial performance, meeting some of Elliott’s demands.
As for Pinterest, Elliott now has a 9% stake in the social-media and e-commerce site. The hedge fund wants to see the company accelerate efforts to monetize its base of 433 million monthly users—or put itself up for sale, according to a person familiar with Singer’s demands. Both Elliott and Pinterest have said they’re engaged in a “collaborative” dialogue. The fact that Elliott owns stakes in both PayPal and Pinterest has raised prospects of the hedge fund brokering a merger, though people close to both companies say a deal isn’t on the table. A spokesman for Elliott denied it was pushing for a sale of Pinterest but declined to comment further.
Inside a $56 Billion War Chest
Fans of Elliott say it is misunderstood and unfairly maligned. Yes, it gets a lot of attention for hardball tactics in activist campaigns. But as a multi-asset fund, Elliott uses a range of instruments to achieve returns, including equity, debt, and derivatives. It also has the resources to fight for years in court, tackling bankrupt companies like Caesars Entertainment, and countries like Peru.
It’s quite likely that the hedge fund scores profits on its stakes that aren’t available to piggybacking investors. The initial pop certainly helps Elliott. But Elliott mitigates its risks, partly by isolating a business unit within a company and hedging its exposure to the rest of the business or industry. While it looks as if Elliott is targeting a conglomerate like
(T), for instance, it may be seeking a spinoff of the satellite business and would hedge its exposure to the telecom side.
“Elliott is probably the best hedging firm out there,” says a person familiar with the fund. “They hedge down to the business line, as deep as they can, using any instrument they can find to take out the risks that don’t relate to what they’re trying to accomplish. They can do things that other activists can’t, because they’re not taking the same kind of risk.”
With more than $50 billion in assets and 500 employees, Elliott towers over rivals like Third Point and Pershing Square. The fund’s size enables it to borrow stock, for shorting positions, at ultra-low fees. Elliott can also hedge its exposures with custom-made instruments, such as credit-default swaps, at very low costs.
“Their size allows them to hedge more effectively so they can take riskier positions,” said the person familiar with the fund. Moreover, Elliott relies on in-house industry experts who can push back against financial models, providing more insight into a company or sector that the numbers might suggest. “They are not resource constrained,” said one advisor who regularly works with the firm.
At 78, Singer won’t always lead the activist fights, though he seems to have built a firm with the resources to prevail. “We find value where we believe others have missed it,” said Cohn. “I would say this is our type of market for finding opportunities.” B
Write to Carleton English at [email protected]