More investor activism expected, but returns likely lower - survey

By Svea Herbst-Bayliss

BOSTON (Reuters) - Activist investment campaigns such as the ones conducted by Carl Icahn, William Ackman and Daniel Loeb are expected to pick up in the next one to two years but returns at activist funds

are expected to be less robust than before, new data show.

A survey by law firm Schulte Roth & Zabel and corporate financial news and analysis company Mergermarket released to clients this week shows that 98 percent of all respondents expect increased activism, with more than half saying the uptick will be "substantial."

Activist investing is a rarefied field with only 71 of the world's roughly 10,000 hedge funds pursuing strategies in which managers push corporations to boost financial performance, spin off divisions, or improve corporate governance.

Respondents said they expect hedge funds to continue taking the lead in running activist campaigns, and more than half said they expect the funds will make operational issues a key element of upcoming campaigns.

The hedge funds are likely to target financial services corporations as well as industrial and chemical companies with their activist campaigns, the survey found.

Successful campaigners include Jeffrey Smith's Starboard Value, which earlier this month scored an unprecedented victory by replacing all nine board members at Darden Restaurants , owner of Olive Garden.

Carl Icahn has pushed iPhone maker Apple Inc to return more cash to shareholders, and William Ackman has been pushing Botox maker Allergan Inc to sell itself to rival Valeant Pharmaceuticals in what could be the year's biggest mergers and acquisitions deal. Daniel Loeb has this year urged Dow Chemical Co and Amgen Inc to each split into two companies.

Past strong returns have made these funds very popular.

In the first three quarters of 2014, investors added $10.8 billion to activist hedge funds, more than double the amount they added in all of 2013, data from Hedge Fund Research show.

In total, hedge funds oversee roughly $3 trillion in assets.

But the outlook for returns at activist oriented funds was cut back after years of out-size returns.

Eighty percent of the respondents estimated returns of 10 to 20 percent, while the rest are targeting 20 to 30 percent.

Last year 48 percent expected returns of 20 percent to 30 percent and 52 percent expected returns between 10 percent and 20 percent.

Returns are already lower this year with HFR data showing the average activist fund returning 3.6 percent in the first nine months, compared with 16.05 percent last year. In 2012 they returned 20.9 percent. Still activist funds are performing better than the average hedge fund which gained 2 percent through September.

Even one of the industry's most successful activists, Ackman's Pershing Square Capital Management, took a hit during the first two weeks of October, losing 4 percent, which cut his year-to-date returns to a still very strong 26.56 percent.

(Reporting by Svea Herbst-Bayliss; Editing by Richard Chang)