Christer Gardell, who co-founded Europe's biggest activist investor Cevian Capital, expects a burst of activity in mergers and acquisitions next year as corporate confidence returns.

With about 9 billion euros ($12 billion) in assets under management and backing from the likes of U.S. billionaire Carl Icahn, Cevian has large stakes in some of Europe's biggest firms - truckmaker Volvo, British security firm G4S and Germany's ThyssenKrupp.

Gardell, who founded Cevian in 2002 with Lars Forberg and shares with him the title of managing partner, complained that the hedge fund industry has grown increasingly short-sighted and said Cevian wants to stay a long-term investor.

"Our experience when it comes to implementing changes in a larger company in a meaningful way is that it takes around three to five years, and that is the timeframe we have," Gardell told Reuters in an interview in the company's Stockholm headquarters.

Buoyed by a string of successes in ousting boards or forcing corporate break-ups in recent years in the U.S. and Europe, at companies such as Yahoo, Canadian Pacific Railway and Britain's F&C Asset Management, activist investors are in a confident mood.

The average activist has made triple the gains of the average hedge fund this year, and Gardell believes 2014 will bring a flurry of M&A, with many activist-related deals.

The overall amount of assets controlled by activist funds is $89 billion, out of the hedge fund industry's $2.5 trillion.

"Corporate confidence will start to come up to a level that makes me think we will see a much stronger M&A market next year, and even that companies will dare to invest a little bit," said Gardell. Cevian is raising its holdings in companies in which it already holds stakes but Gardell would not say which ones.

German publication Manager Magazin reported last month, citing financial sources, that Cevian, which owns a little more than 5 percent in ThyssenKrupp, is keen to raise its stake to 10 percent by the end of the year. 

MISUNDERSTOOD

Cevian's recipe is to track down firms "overlooked" or "misunderstood" by markets, in countries with strong corporate governance, mainly in Britain, the Nordics and Germany.

Gardell said Cevian, whose investor base is 75 percent from North America, is not interested in expanding its portfolio to southern Europe and will stay focused on its current markets.

Gardell believes global equity markets can still go higher, especially in Europe, given a lack of alternative investment opportunities in an exceptionally low interest rate environment.

"I have difficulty seeing any other scenario than the stock market continuing to be strong," said 52-year-old Gardell, who has worked in the private equity industry and once served as CEO of Custos, a Swedish investment company.

Gardell said Cevian would probably exit some of its holdings next year but declined to say which ones might go.

The oldest holdings in Cevian's portfolio include truckmaker Volvo, which it has owned since 2006. It has also owned shares in Finnish engineering firm Metso, an investment it made with Icahn, since 2005 and earlier this year pushed through the spin-off of the firm's pulp, paper and power business.

Cevian tends to take large positions so it can secure seats on boards or nomination committees and push through change, shaking up management and or divesting non-core businesses.

Cevian sits on the boards of roughly half of its holdings, a level which Gardell says he is comfortable with.

Gardell would not say what kind of returns Cevian has had.

"We have beaten the index with a big margin on average over actually all time periods," he said.

Hedge Fund Research data shows the average activist hedge fund has returned 17.1 percent so far this year, in line with the MSCI World Index and more than the average hedge fund's 5.5 percent return. Last year, activists made 9.3 percent. ($1 = 0.7353 euros)