How to Talk to a Hedge Fund

Even shortsighted short sellers are too powerful to ignore.

Like the day traders of the late 1990s, hedge funds are plaguing investor-relations (IR) departments. Notorious for short selling — and holding stocks for days or even hours, rather than years — most funds are not the type of buy-and-hold investors that companies relish. Hedge funds often swoop in and play the arbitrage after mergers are disclosed, sell shares after an earnings release, or move in and out of stocks on a daily basis to exploit slight discrepancies between share prices and convertible bonds. Such short-term trading can cause volatility and, worse, push share prices down.

For all these reasons, many companies fear communicating with the funds. But unlike pajama-clad day traders, hedge funds have massive amounts of capital at their disposal. While companies were advised to give day traders the cold shoulder in hopes that they would go away, today’s experts warn that shunning fund managers is a bad idea.

Clearly, hedge funds aren’t going away any time soon. In fact, more than 8,000 of them now hold nearly $1 trillion in assets, according to an estimate by the Hennessee Group LLC, a New York-based hedge-fund adviser. Catering largely to wealthy individuals and institutional investors, the funds represent one of the fastest-growing investment segments. An estimated $75 billion poured into them last year alone. Add the $64 billion in investment gains, and overall industry assets swelled by roughly 17 percent during 2004. But exact numbers are hard to come by in a hedge-fund world that’s often shadowy and secretive. Unlike their mutual-fund cousins, hedge funds draw very little scrutiny, and few disclose much information about their holdings or investment strategies. Their secrecy, in fact, is yet another reason companies may be reluctant to talk to them.

Model Investors?

Yet to some IR professionals, hedge funds present more opportunity than danger. “One trillion [dollars] in assets can’t be ignored,” says Louis Thompson, president and CEO of the National Investor Relations Institute, in Vienna, Virginia. He advises sorting through the funds and targeting those that may be a good fit with the shareholder base. And while he admits that some hedge funds have earned their reputation as fearsome short sellers, “they’re not all bad,” he insists. “Some are longer-term shareholders than many mutual funds.” Randi Paikoff Feigin, IR vice president at Juniper Networks Inc., a Sunnyvale, California-based computer networking company, speaks with hedge-fund representatives regularly. “They have money,” she says, “and they go long plenty of the time.”

Indeed, at certain times and in certain industries, hedge funds are considered model investors. That’s true these days in biotech and aerospace, for example, where funds are often seen as bringing unusual depth and intelligence to their research. “Their analysts are some of the best I talk to,” says Paul Gifford, IR vice president at Goodrich Corp., a global aviation and defense supplier based in Charlotte, North Carolina. “We have many holders that are hedge funds, and since the aerospace cycle is improving, most are long.” Pam Murphy, who heads IR and corporate communications at Wilmington, Delaware-based biotech firm Incyte Corp., says hedge-fund analysts are “important in the space because they tend to be very bright and educated on the science.” Analysts at the hedge funds, which account for close to a third of Incyte’s outstanding shares, “are often right out of med school.”

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