Passive hedge funds are increasingly considering active roles when they are dissatisfied with the management of specific portfolio companies. After describing such a scenario, the author discusses the steps a dissatisfied fund can take short of a full-scale proxy fight. He then closes with some important decisions a fund must make in that full-scale option.

Passive hedge funds increasingly are taking on activist roles at one or more portfolio companies. While this is an expected part of a broader trend toward increasing shareholder activism, such funds are not typically interested in becoming activist funds generally, but rather in using all the tools available to rectify perceived deficiencies at an under-performing portfolio company. Hedge funds are the most active proxy contest dissidents, representing more than half of campaigns brought against Russell 3000 companies in 2018. Many, if not most, of these insurgent hedge funds are “activist” funds, although passive hedge funds have increasingly considered activist roles with respect to specific portfolio companies.