Third Point has a reputation for aggressively pushing for change at target firms, including Sony and Yahoo!, and gave a stinging assessment of Nestle's performance in recent years as it announced its acquisition on Sunday.
Third Point said it had acquired one percent in Nestle, worth $3.5 billion (3.1 billion euros), in a letter to investors on Sunday that lamented the Swiss conglomerate's company's recent underperformance in comparison with its rivals.
The letter said that despite having "arguably the best positioned portfolio in the consumer packaged goods industry", shares in Nestle - whose brands include Nescafe coffee and Perrier water - had significantly lagged most of their US and European competitors.
READ ALSO: Nestle creates low-sugar chocolate that still tastes as sweet
"It is rare to find a business of Nestle's quality with so many avenues for improvement," Third Point said.
The conglomerate's longstanding target of growing sales by five to six percent a year, the so-called "Nestle model", has struggled over the last four years in the face of a slowdown in emerging markets and weak consumption in Europe.
"While its peers have adapted to this lower growth world, Nestle has remained stuck in its old ways," Third Point said.
News of Third Point's intervention brought a boost for Nestle shares, which were up up 4.32 percent at 1232 GMT.
Sell, because it's worth it
Third Point hailed the appointment of Ulf Mark Schneider at the head of Nestle in January and urged him to take bold steps to tackle the "staid culture and tendency towards incrementalism that has typified the company's prior leadership".
One of four main demands from the hedge fund was for Nestle to sell its 23 percent stake in L'Oreal, valued at more than $25 billion - around ten percent of Nestle's market capitalisation.
"Having L'Oreal in the portfolio is not strategic and shareholders should be free to choose whether they want to invest in Nestle or some combination of Nestle and L'Oreal," Third Point said.
Contacted by AFP, the French cosmetics company declined to comment on the matter.
Third Point also said Nestle should set a formal margin target of 18 to 20 percent by 2020, up from around 15 percent now and build up funds to buy back stock.
It also urged Nestle to rationalise its stable of brands - currently around 2,000 in food and beverage and health science - to focus on growth.
A Nestle spokesman told AFP that "as always, we are maintaining an open dialogue with all our shareholders".
While Third Point's approach may appear hostile, the fund could prove to be a useful ally who could help Schneider implement his strategic plan, analyst Jean-Philippe Bertschy of Vontobel said.
Nestle has made a series of announcements recently, notably saying it planned to sell its US confectionery business - interpreted by investors as a sign that more changes could be afoot.
By Nathalie Olof-Ors