Q. There is a hedge fund with a significant position in our stock and my CEO wants to know what we can do about it. In my experience, there is nothing you can do about these funds except try to balance out their positions by targeting long-term holders.My CEO thinks otherwise.
A. If a hedge fund has a large position in your shares, you should have the same concern as you would about any investor with a disproportionately sized position. There is always the risk that the portfolio manager will change his or her attitude and cause the shares to be aggressively sold.
But many people have an outdated view of hedge funds. They comprise a very diverse universe of investors with a myriad of objectives and strategies. There is nothing inherent in their structure that dictates they will not be responsible long-term investors. Like any other investor, they are inclined to hold the shares if they think there is further appreciation potential. On the flip side, most investors are not shy about selling their holdings if the company disappoints or the investment thesis changes, so there is no guarantee that they represent shareholder stability, either.
You should always be looking to market your company to long-term investors who look for companies with business and market characteristics such as yours. You cannot prevent someone from buying your shares, but by maintaining a pipeline of potential purchasers you can mitigate some of the volatility often caused by precipitous portfolio decisions.
Q. Even if the SEC rules that hedge funds must provide more information about how they trade, we’ll never be able to control or predict how they affect the stock. Is there any way for firms to get more insight on hedge funds without relying on regulators?
A. Regulatory authorities are obviously paying a significant amount of attention to hedge funds today, but any resolution will occur too late to answer your questions within a practical time frame.
While many hedge funds like to operate below most radar screens, they are not invisible. You should be able to get information on them from your investment bankers, covering analysts and investor relations counselor. Knowing the investment style, reputation and – if relevant – past history of the funds will enable you to assess whether they will be good long-term shareholders or disruptive agitators.
Q. Hedge funds are already pretty active in our stock and recently more have been calling our department. I have been treating their questions as I would any other investor query but now one wants to set up a meeting with senior management – and I am hesitant to approach my CEO about this.
A. In my view, you have been correct in your handling of the hedge funds that have been calling. Furthermore, I believe you should target those with investment charters that are consistent with the investment profile of your company, and cultivate them as you would any other member of the investment community.
Before raising the subject of a meeting with your CEO, do some research on that particular fund. Use your network of contacts and other resources to find out if it is a responsible investor, what type of companies it typically invests in and what its investment decisions are based on.
Assuming the fund is credible and there are no major challenges facing your company that are not understood by the financial community, I would recommend taking the meeting. It demonstrates that your company has nothing to hide. And, through the line of questioning it pursues, you will be able to get insight into what the hedge fund community might be thinking about your company.
