Ethical Performance
inside intelligence for responsible business


hedge fund homes in on boycott casualties

April 2005

Activists have set up a hedge fund betting on the possibility that the market value of a company will fall due to reputational damage related to corporate responsibility issues.

The London-based Karmabanque fund has initially attracted £15million($28.7m) from private individuals who support its aim of pressuring companies whose share price is thought vulnerable to boycotts.

The fund is an attempt by campaigners to exploit perceived market inefficiencies arising when conventional investment analysts do not adequately account for reputational and other non-financial concerns, and so underprice the risk in a stock.

It will do this by purchasing options that allow the fund to sell in the future at a price fixed at the time of purchase. In this way, the fund will ‘short’ companies facing medium or short-term reputational challenges, in the hope that the share price will drop and they will therefore make a profit.

One of the early targets for the ‘activist hedge fund’ will be Coca-Cola, whose stock it intends to short. According to Karmabanque projections, civil society campaigns on issues such as alleged human rights abuses in Colombia could depress the beverage company’s stock price over the next year or so. Other corporate targets will be McDonalds, Microsoft, the
low-cost airline Ryanair and Starbucks, all of whose share prices, Karmabanque research indicates, have fallen especially heavily when challenged by civil society groups in the past.

The fund will short companies with what it calls a high ‘Boycott Vulnerability Ratio’ – those whose share prices are historically most sensitive to falls in product sales – and are also a target for activists.

The key factor in deciding which stocks to short will be the relationship between share price and product sales. The fund will target those with a high ratio, such as Coca-Cola. It will disregard ones that are the focus of protest by civil society groups, but have a low ratio.

Max Keiser, founder of the fund, said that Karmabanque would therefore not necessarily pick the ‘obvious’ candidates. ‘ExxonMobil is a popular boycott target, but its price over sales ratio is way down our list, whereas Ryanair, which is not a main boycott target, is in our top five in terms of price over sales. Both are carbon abusers but ExxonMobil can take the hits and there is more leverage on Ryanair’s share price, so that’s why we will target them.’

‘We are a broker of dissent and we don’t really concentrate on the detailed issues, because that's not our strength,’ Keiser told EP.

Karmabanque was formed in 2002 by Keiser, who styles himself as an investment activist. The fund has been jointly set up with Zac Goldsmith, who runs the Ecologist magazine, which will act as an adviser and publish results of its activities.

Any profits will be given to good causes to ‘mend the social wounds inflicted by target companies’. Keiser says the fund’s mission is to bring home to companies that they need to manage their non-financial performance to protect their share price.

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