Telling IROs what they need to know to sleep better at night
Q. A number of hedge funds have recently started to appear in our shareholder base. My CFO won't meet with these investors despite the sizeable positions some of them have taken, and has explicitly told me not to waste company time answering their inquiries. Is this wise?
A.While I would never encourage companies to actively seek hedge funds as investors, it does seem a little harsh of your CFO to refuse to have anything at all to do with them. On the other hand, they are likely to be short-term investors and their entry and exit can be swift and harsh, and presumably your CFO takes the view that most hedge funds have strategies driven by computer models, so their investment decisions won't be affected by any information the company gives.
I suggest you point out the benefits of engaging hedge funds in a dialogue. First, some of them hold long positions for some time, as a counterbalance to their more risky stock picks, and therefore will likely be around for a lot longer than you bargained for. Also, a meeting would reveal the fund's strategy and its investment horizon, allowing you to predict when any exit might take place. Finally, when that exit does occur, you may be able to enlist their cooperation to avoid a precipitous decline in stock price.
Remember that hedge funds only use computer models to suggest strategies; after all, they are stock pickers and will seek out additional information to confirm their initial indications. Finally, refusing to meet hedge fund managers won't stop them speaking to the sell side and getting the information anyway. Who would your CFO rather have present the company story? Some opportunist sell-side analyst who hardly knows the company, or you?
Q. From a UK company - Our corporate broker heard from his sales trader that our stock was being sold last week by a hedge fund that doesn't even appear on our register. How should I deal with this?
A.It would appear that the hedge fund is selling your stock 'short', that is, it has sold borrowed stock in the anticipation of underperformance. Best IR practice would suggest two courses of action.
First, contact the selling institution to confirm the story. If it proves correct, then ask them for feedback regarding their decision, just as you would with any other institutional shareholder that decided to exit. This will allow you to give valuable information to your board and may also provide an opportunity for you to present the company message in a way that invites the hedge fund to reappraise its position.
Secondly, a wise IRO will know which of the company's institutional shareholders engages in stock lending. This is a common practice by both the buy and sell side in order to generate additional income. However, some institutions refuse to do it, and it is worth knowing which they are. Add the question to the end of your one-on-one meetings whenever possible. This way you will be able to estimate more closely the amount of stock that is potentially available to hedge funds for short selling.
To get a better sense of what hedge funds are all about, I suggest Roger Lowenstein's story of LTCM, When Genius Failed, as part of your reading list.
E-mail questions to Heather McGregor - advice@irmag.com. McGregor is a former IRO and investment analyst who currently works on IR assignments for Taylor:Bennett, an executive search firm specializing in communications jobs across Europe.