IR professionals revealed what they think are the main pros and cons of engaging with hedge funds in a recent research report published by IR Magazine.
The 700-plus IROs who took part in the survey behind the research offered comments on their interactions with this growing and now highly diverse segment of the investment world.
Engagement benefits
The main benefit respondents get from engaging with hedge funds is contact with individuals who provide useful commentary on the company or industry. Liquidity is the second-most mentioned benefit, highlighted especially by small and mid-caps.
Top five benefits of engaging with hedge funds, ranked by number of mentions
1. Provide useful insight on company/industry, ask smart questions
2. Liquidity
3. Increase visibility/share our story/positive for market perception
4. Long-term investors
5. Large investors
Benefits of engaging with hedge funds: selected comments
‘They know the story very well and can act as support when the stock is cheap’ – US, financials, mega-cap
‘Hedge funds seem to share a lot of ideas with each other, so if you have a good meeting with one they pass on the word to others’ – US, financials, mid-cap
‘Intelligent perspectives, regardless of position’ – Canada, energy, mid-cap
‘They have the best knowledge of how your story is perceived and what the hurdles are to increasing your valuation’ – US, technology, small cap
‘Large buyers’ – Brazil, industrials, mid-cap
Engagement challenges
In contrast, short-termism and volatility are the main challenges of engaging with hedge funds. In addition, companies continue to experience problematic interactions with some funds: common challenges are that hedge funds are untrustworthy and demanding of company time.
Top five challenges of engaging with hedge funds, ranked by number of mentions
1. Short term
2. Add to stock volatility
3. Untrustworthy, unreliable, dishonest
4. Potential for short-selling
5. Demanding of company/management time
Challenges of engaging with hedge funds: selected comments
‘Very short-term focused and feel obligated to tell us how to run our business. It’s like having an avid player of fantasy football tell an NFL coach how to run his team’ – US, healthcare, mega-cap
‘Volatility of hedge fund performance has contributed to significant selling pressure on stock at times’ – Canada, consumer, small cap
‘No loyalty, short-term view, unpleasant to deal with’ – UK, technology, small cap
‘Very short-term outlook, inefficient use of time as they take up a lot of meetings and calls’ – UK, industrials, mid-cap
‘High IR investment with possibly short investment horizon’ – Norway, financials, large cap
The research report, which appeared in the summer 2017 print issue of IR Magazine, is available to download here.
