How Hedge Funds Coordinate Without Talking

Activist campaigns in public companies are expensive. Buying enough shares to push for managerial changes and profit from the increase in stock value requires substantial time and capital.

Gathering allies would help activist investors—usually, hedge funds—but securities laws force disclosure when activists formally coordinate and jointly cross key ownership thresholds, which could ultimately undermine the campaign.

So how do activist funds find one another without directly coordinating?

According to new research by Vish Viswanathan, the F.M. Kirby Professor of investment banking at Duke University's Fuqua School of Business, they may be communicating through their trades.

In the paper, Leader-Follower Dynamics in Shareholder Activism, published in The Journal of Finance, Viswanathan and co-authors* examine the “wolf-pack” phenomenon, in which multiple hedge funds build positions in the same company at the same time after a leader’s trades begin moving the stock price.

The process doesn’t require any explicit agreement. If an activist leader can affect the stock price with its trade, potential followers may interpret the market signal as an opportunity for a successful activist campaign. Over time, each of the unofficial group members accumulates a sufficiently large stake to induce changes that will (often) make the company more valuable.

Large companies were once thought to be too big for activist investors to challenge, Viswanathan said. But as campaigns increasingly target firms such as Salesforce, Disney, and PepsiCo, the mechanism of coordination without formal agreements may help explain some of the trend. 

The high cost of changing a company

Activism is expensive, especially if you target a large company, Viswanathan said.

“Think about a company with a market capitalization of $400 billion. Even 5% of stock would be $20 billion. No fund can accumulate $20 billion. They may still want to make changes in the way the company is run, but they need other activists to also come in,” he said. 

Those costs create a classic free-rider problem: all shareholders benefit if a campaign succeeds, but only a few investors bear the expense. Multiple activists can make campaigns more viable by sharing those costs.

The challenge is figuring out how to assemble an activist group without formally assembling it.

“We want to induce others to jump in without formal coordination,’’ Viswanathan said. “With formal coordination, if the group’s cumulative ownership is above 5%, you have to disclose within 5 days.”

When signals are effective messages

Viswanathan's research suggests that activist investors can solve this problem through the market itself.

The paper models a situation in which an activist hedge fund acts first, and another hedge fund follows, observing the stock price. The first investor's trades are signals.

A follower who observes the resulting price movement can infer information about the firm's prospects and the likelihood that an activist campaign will succeed. 

“There are dozens of activist hedge funds out there, and they all follow the markets,” Viswanathan said. “When they notice some unusual movements, they don't know who it is, but they start thinking, 'Okay, maybe I should also buy.’”

That market movement signals it might be worthwhile to build a position and eventually participate in a campaign.

“Of course, the leader cannot move the price too much,” he said, “otherwise some smaller followers won't come in. The first hedge fund cannot move the price so much that the second hedge fund thinks it's too costly to enter.”

The result is a sequential process in which activists accumulate ownership over time rather than simultaneously. To allow for this process to play out, activists typically hold stakes below 5% of the disclosure threshold, to avoid alerting the market.

The evidence

Previous studies have consistently found that campaigns involving multiple activists tend to outperform campaigns led by a single investor. The new research offers a mechanism: early trading activity may help coordinate group actions.

The theory also aligns with findings that on the day an activist crosses the important 5% ownership threshold that triggers public disclosure, the activist's own trades account for only about one-quarter of total trading volume. The remaining volume appears to come from other investors trading at the same time.

That pattern is difficult to explain if activists act entirely independently. It becomes easier to understand if followers are responding to information embedded in the leader's trading activity.

Large firms are now a target

Activism used to focus on firms small enough for one hedge fund to attack alone. As activists increasingly target giant companies, coordination without explicit agreements becomes essential, Viswanathan said.

“Twenty years ago, the view was that you can’t attack big companies,” Viswanathan said. “But over time activists started targeting bigger firms. PepsiCo has been attacked. Disney has been attacked. Salesforce has been attacked. 2025 for example was a record year.”

Today, roughly one-quarter of activist interventions involve more than one fund, the researchers note.

With campaigns increasingly targeting larger firms, investors have incentives to build "under-the-threshold" positions—below the 5% ownership—while still exerting influence on likely followers.

For company’s CEOs, this research shows that the 5% stake is no longer the only alarm signal to look at. “Now there are other ways for activists to attack simultaneously, each with their own different views,” Viswanathan said. 

In a world of rising passive investments, where big asset managers don’t have the resources to deeply look at the performance of each of the large group of stocks they manage, perhaps activism can be helpful at disclosing inefficiencies, Viswanathan said.

“These activists hold very undiversified portfolios. They hold 10 to 15 firms at a time, and they are very concerned about how they perform.”

“Perhaps there is some social value coming from the activist business,” he said.

*

Doruk Cetemen, LUISS Guido Carli, Rome and University of London 

Gonzalo Cisternas, Federal Reserve Bank of New York

Aaron Kolb, Indiana University