This practice was referred to as “greenmail,” and some corporate raiders found greenmail easier, and more profitable, than the hostile takeover itself.
The fund charges far less than the industry standard with a management fee of just 1 percent of assets topped by a 15 percent cut of profits.
Most hedge fundscharge 2 percent of assets and 20 percent of profits.
There is often an implicit or explicit threat of a proxy contest to remove some or all of the target board members and management if their demands are not met.
Ultimately, the activist may receive one or more seats on the target company board, either through a settlement with the target, or success at a stockholder meeting.
In July, Meriwether closed down his JWM Partners, the fund he opened after LTCM collapsed that also focused on fixed-income arbitrage.
Parkcentral Capital Management, which manages money for Ross Perot, also liquidated its fixed-income hedge fund following big losses in late 2008.Treue says that unlike the typical hedge fund, which makes money on 20 percent fees, he and his staff make far more money from the fund’s returns, thus aligning their interests with investors.“Hedge fund incentives are very messed up,” he said. What we care about is our own investments in the fund.” Treue is true to his word when it comes to fees.It was the year of the infamous implosion of Long-Term Capital Management, a hedge fund that lost .6 billion in a matter of months, triggering fears of a wider financial damage and requiring a bailout orchestrated by the Federal Reserve.Back then, Treue had just started managing money, employing the same strategy as LTCM.After a period of time pressing its case, the activist may desire to exit the investment.