Hedge Funds…Friend or Foe?

24 July 2007

Hedge_fund_2When a hedge fund owns your company’s stock is that a good thing or a bad thing?

I talk to many investor relations officers (IROs) who don’t like hedge funds owning their company’s stock.  In many cases those IROs do everything in their power not to meet with hedge fund managers.

Here are some important points to remember that are too often forgotten:  1) Not every hedge fund that looks at your company is interested in shorting your stock.  2) Not every hedge fund is an activist shareholder that is looking to counter every bit of your management team’s strategy.

The fact is that hedge funds are very powerful in today’s market and they simply cannot be ignored.  Bloomberg reported yesterday that hedge funds attracted $58.7 billion in investment in the second quarter of this year (the second best quarter ever for hedge funds).  That statistic alone is enough to drive companies to develop a strategy for dealing with hedge funds.

A CFO recently asked me for one good reason for him to meet with a hedge fund manager, so I gave him three reasons:

1) If you demonstrate that you are a solid manager with good experience, are confident in your strategy, and are absolutely determined to execute then the hedge fund manager is quite unlikely to short your stock.  In other words, playing defense is important in the equity markets game.
2) If you do a really good job in the meeting and the hedge fund manager really likes you and the company, maybe he’ll actually take a long position in your stock with the hopes that you will succeed and deliver outstanding results.
3) Hedge funds tend to have higher turnover within their portfolios and therefore can add some liquidity to your stock.  This is important given that many institutional shareholders will not invest in stocks that have low liquidity (i.e. average daily trading volume of less than 50,000 shares).

Hedge fund managers are undoubtedly an important stakeholder in IR land today.  I’ll be the first to admit that they are not always the easiest shareholders to deal with, but I would rather have them as a friend then a foe.

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