We provide a theoretical model to explain the procyclicality of hedge fund activism. In our model, hedge funds which compete to retain investor flows excessively increase the net leverage of target forms in order to deliver high short-term payouts and signal their ability. Such excessive leverage leads to debt overhang in economic downturns, thereby destroying incentives for activism and engendering procyclicality. Our model thus provides a theoretical explanation that links the procyclicality of hedge fund activism with increases in the leverage or payouts ratios of target forms. In addition, the model generates several new testable implications and reconciles seemingly contradictory evidence on the wealth e¤ects of activism for shareholders and bondholders. Joint with Amil Dasgupta.