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Activist investors have been outperforming their peers and the broader market this year by pushing for board-room changes rather than dramatic business overhauls, breakups or mergers, according to performance data and industry sources.

The average activist hedge fund returned 8.76 per cent in the first quarter, ahead of the broader hedge-fund industry’s 6-per-cent gain and a 5.8-per-cent rise in the S&P 500 stock market index, Hedge Fund Research data show.

Brand-name firms such as Third Point LLC and Engaged Capital, as well as smaller players, including Ancora Alternatives and newcomers such as Honest Capital LLC, did even better, posting double-digit gains, investors familiar with the numbers said.

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A year-long rally in asset prices has made it harder to find hidden gems, said Engaged Capital chief investment officer Glenn Welling. Even so, the firm, which has US$1.5-billion under management, is still hunting for companies whose management teams can do more to boost sales or cut costs, he said.

“We continue to see opportunities in the small-mid cap universe in undermanaged businesses that need a catalyst for change,” said Mr. Welling, whose firm posted a 22-per-cent gain during the first quarter.

Activists try to generate supreme returns by agitating for change with a capital “C.” Sometimes they work quietly with boards and management teams to install new leaders or orchestrate new business plans, as they have been doing lately, but they are better known for splashy presentations that accuse companies of missteps or show how they can generate more profits for shareholders by cutting costs, merging with a rival or spinning off businesses.

In 2020, activists largely laid low to let companies navigate the coronavirus pandemic. In the first few months of 2021, though, prominent investors targeted Kohl’s Corp., FirstEnergy Corp. and Elanco Animal Health.

Retailer Kohl’s, which was publicly targeted in March and then settled for two board seats earlier this month, has seen its shares climb 27 per cent in the past three months.

Two of the Kohl’s activists are among those with above-average returns: James Chadwick’s Ancora climbed 11 per cent, while Legion Partners, run by Chris Kiper and Ted White, gained 15.6 per cent, according to investors in their funds. Kurt Wolf, whose Hestia Capital Partners, pushed for a board seat at GameStop Corp a year ago, scored a 223.7-per-cent gain in the first quarter.

First-quarter performance was also notable at Shawn Badlani’s Honest Capital, which posted an 11.2-per-cent rise; Daniel Loeb’s Third Point, which gained 11 per cent; and William Ackman’s Pershing Square Capital Management, which rose 7.2 per cent.

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All told, activist investors have demanded change at 169 U.S.-based companies in the first quarter, compared with 178 companies in the first three months of 2020 early in the pandemic, according to Insightia data.

Roughly 41 per cent of their 2021 campaigns focused on boards, up from 37 per cent a year ago. Only 7 per cent of them pushed for mergers or breakups, down from 12 per cent a year ago.

It is still early, but activist hedge funds are on track to do better than last year, when they lagged hedge fund peers and astounding stock-market gains.

If the economy recovers from the pandemic as predicted, management teams will have fewer excuses for subpar performance, said Lawrence Elbaum, co-head of law firm Vinson & Elkins’ Shareholder Activism Practice.

“2021 shouldn’t give boards a false sense of security going forward,” he said.

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