The KT&G saga is the first public battle in Asia waged by the activist hedge funds. In the US hedge funds have faced diminishing returns from their traditional arbitrage-focused activities and have begun to flex their financial muscle by taking strategic investment stakes in major corporates.
"The $1.2 trillion hedge fund industry is taking up the corporate raider mantle to boost returns after the average fund gained just 9.2% in 2005," Bloomberg News reported in May, noting that the level of returns was well below the annual average of 16% in the 1990s. Bloomberg quoted Connecticut-based Taylor Cos as saying there were now about 90 activist hedge funds worldwide, up from 40 three years ago.
Activist hedge funds are becoming increasingly visible in Asia, where they are starting to compete aggressively with some of the region's traditional investors, including trade buyers and private equity funds.
In Japan the targets have tended to be companies sitting on a pile of unused cash, with market capitalizations less than the cash breakup value. For example, Warren Lichtenstein's Tokyo affiliate, Steel Partners Japan Strategic Fund, targeted the textile-dyeing firm Sotoh in 2003, which responded by inviting a rival bid from a fund affiliated with Daiwa Securities.