By Michael Flaherty
NEW YORK (Reuters) - Activist hedge funds recovered from a slow start last year, ending 2016 with sharp gains, spurred by a stock rally that followed the U.S. presidential election.
Hedge fund managers who exclusively or partially manage an activist portfolio of stocks cited the election of President Donald Trump as a year-end boost and a likely tailwind for 2017, though several expressed concern that the policy direction coming from the White House remains uncertain.
"Like it or not, Donald Trump's presidency changes everything," activist Raging Capital said in its fourth-quarter letter. The fund, which manages around $900 million, was up 27 percent last year.
Unlike most of the hedge fund industry, activist managers directly engage with chief executives and corporate boards to push changes, sometimes publicly calling out the companies and pursuing proxy fights.
The HFRI Event-Driven activist index showed a 10.4 percent gain for the year, compared with a 1.15 percent bump in 2015. In 2016, the S&P 500 index ended the year up 9.5 percent.
New activist targets in 2016 included restaurant chain Buffalo Wild Wings, refiner Marathon Petroleum and industrial retailer HD Supply.
J.P. Morgan's David Hunker, head of shareholder activism defense, said activists showed more discipline toward the end of the year in targeting companies where a broader set of investors were unhappy.
"There's a lot more going on among activists to really understand what shareholder frustrations are and where they can drive a wedge between management teams, the board and their investors," Hunker said.
Raging Capital's founder and chief investment officer, William Martin, said Trump's election and the anticipation of low-tax, pro-business policies have handed the economic baton over to Congress from the U.S. Federal Reserve, which had kept interest rates at near-zero levels for nearly a decade.
"Many of the Republican proposals have potentially far- reaching impacts on certain industries, though sufficient detail does not exist to properly quantify these impacts or their timing," according to hedge fund PSAM, which manages around $2 billion and was up 14 percent last year.
The hedge fund, which occasionally takes activist positions, said Trump's expected deregulation push could further accelerate merger deals in 2017, with media companies expected to lead the pack.
Dan Loeb, a veteran activist and founder of multi-strategy hedge fund Third Point, also said that the U.S. monetary policy pendulum was swinging away from low rates, while fiscal policy was moving away from austerity.
Click here for graphics "Activist funds end 2016 up" http://graphics.thomsonreuters.com/testfiles/activist-returns/index.html
(Reporting by Michael Flaherty; Editing by Alan Crosby and Leslie Adler)