When sailors of yore saw the Jolly Roger -- the black pirate flag emblazoned with a skull and crossbones motif -- they filled with terror and dread over what was to befall them at the hands of the dreaded likes of Blackbeard, Calico Jack, and Captain Kidd. Vicious and treacherous, pirates would show their victims no mercy or quarter.
Shiver me timbers, but the people who run children's pizza-and-party company CEC Entertainment (NYSE:CEC) must be wondering what will befall them now that the black flag has been hoisted against them. Connecticut-based hedge fund Pirate Capital filed a Schedule 13D with the Securities and Exchange Commission announcing that it has acquired more than 6% of the company's shares in recent weeks. Arrr!
The hedge fund indicated that although it has no specific plans currently for pursuing activism at CEC, best known for the Chuck E. Cheese "entertainment zones" it runs, it says it will consider actions related to "strategic direction and corporate governance" if the pizza and games purveyor -- itself a Motley Fool Hidden Gems recommendation -- doesn't right the listing ship soon. Its share price has lagged the market significantly since it was first picked by the small-cap newsletter service last year, down 13% compared with an 11% gain for the S&P 500 index.
Hedge funds, as we've writtenaboutbefore at the Fool, are investment pools of the super-rich intended to make big bets -- i.e., assume lots of risk -- in hopes of making big returns for their investors. While that risk-taking has led to some spectacular blowups (remember Long Term Capital Management?), it has often resulted in tremendous returns that have elevated hedge funds to mystical status. Even so, the average hedge fund has not beaten the stock market since 2002, when they posted gains of 3% compared with losses of 20% for the index of world markets.
Avast, me hearties! But hedge funds have taken on a greater role lately as they pursue those greater returns. They have become corporate activists, taking on causes to improve shareholder value, which oftentimes means ousting current management.
Fools have seen it before. Hidden Gems recommendation Flamel Technologies (NASDAQ:FLML) was the target of shareholder ire and some muscle from hedge-fund OSS Capital Management to make founder and CEO Gerard Soula walk the plank. Another Gems pick, Fairmont Hotels & Resorts (NYSE:FHR), was under a cannon broadside from corporate raider Carl Icahn, who wanted to sell off the lucrative properties the chain owns. (Fairmont has since been acquired by another bidder.)
Pirate Capital is also not exactly known for niceties in the wars for corporate control. As Fool contributor Tim Beyers noted, Pirate's manager flatly told the CEO of prison operator Cornell (NYSE:CRN), "Next year, we're going to be here, and you won't." It has picked a rather nasty fight with the management and directors of GenCorp (NYSE:GY), a manufacturer of aerospace and defense products, and it's locked in a battle with casino operator Intrawest (NYSE:IDR) to sell itself off.
Hedge funds, mateys, aren't always interested in what's best for individual shareholders like you and me. Indeed, they are focused solely on maximizing returns for their investors. If that happens to coincide with our goals, great -- they'll share with us the booty of higher prices. However, should we be at odds -- such as in the Fairmont deal -- then sit back to be spun a fine tale o' larceny and lootin' that will tremble your bones. Arrr!
Toss yourself a Dark and Stormy with these related Foolish yarns:
- Hedge Funds, Explained
- The Perfect Business
- Will the SEC Trim the Hedges?
- It's Time For a Change at Flamel
- Fairmont's Fair Game for Icahn
- Who's Buying Now?
CEC Entertainment, Flamel Technologies, and Fairmont Hotel & Resorts are all selections of Motley Fool Hidden Gems . By finding undervalued buried treasure before the hedge funds and other institutional investors do, our Hidden Gems picks are whomping the market by 28 percentage points. A 30-day guest pass gives you access to all the selections.
Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
