Some management teams are reluctant to meet with hedge fund managers. While planning a road show or conference appearance, they try to meet with “long only” fund managers. While I can understand that management teams are reluctant to meet with hedge fund managers out of fear of a tense line of questioning or some form of brow beating during the meeting, the reality is that you can’t (and shouldn’t) avoid these meetings. The sheer number of hedge funds is staggering and almost $2 trillion dollars are under management within these funds.
Following are the top ten positive reasons management teams and IR professionals should keep hedge funds on the schedule:
- Don’t judge the book by its cover. Hedge funds come in a variety of flavors. Funds can differentiate themselves by investment style, sector focus, geography, market cap, market neutral, long/short, etc. You may even be surprised to learn that some hedge funds are long-only or exclusively long-term oriented.
- Despite their depiction by the popular press, not all hedge fund managers are “bad guys.” Many hedge fund managers are smart, considerate, thoughtful, long-term investors. Don’t let the structure of their fund dictate if you meet with them.
- Quality discussion. Some of the best investors today are hedge fund managers and analysts. They ask great detailed questions that might provide you with a different perspective or, at the very least, give you insight into the Street’s view of your company.
- A powerful force. With over 8,000 hedge funds in the U.S., hedge funds have become “mainstream.” They have grown significantly over the past 10 years to represent 15% to 20% of all assets under management. Simply stated, they have become too large to ignore and have established themselves as another investment vehicle for institutional investors.
- An opportunity to learn the (short) story. If investors are short your stock, here’s your chance to hear the short story and understand exactly why they are short. This dialogue will also allow you to provide a direct rebuttal.
- Remember, they also buy stocks. Too often, hedge funds are only thought of as guys who short stocks. Remember, they also buy stocks and can move quickly to build a meaningful position. Keeping them current on your story can allow them to build a position in your stock on any trading weakness, if they believe in your long-term fundamentals.
- Gain perspective on the competitive landscape. Hedge funds that are in the flow of information are likely very up to date on your competitors’ strengths and weaknesses. Use the meeting as an opportunity to pick their brains on the industry and your competitors.
- For small cap stocks, hedge funds can provide liquidity. Not including hedge funds on the marketing schedule or trying to limit them as shareholders could result in over representation from index, quantitative, insiders and mutual funds in your shareholder base. This could hurt your stock’s trading volume and, in turn, increase your stock’s volatility.
- Size of the fund really doesn’t matter. Most small- to medium-sized hedge funds (less than $500 million in assets) will have between 10 and 20 core holdings. Assuming that each position is approximately 2% to 3% of the portfolio, even a small hedge fund could become a sizeable $10 to $15 million shareholder.
- Incremental introductions. As a result of hedge fund managers being really wired into your industry, they are often in a position to introduce you to other industry executives that have experienced similar issues or could benefit from the strategic partnership with your company.
Our recommendation is not to limit your potential pool of investors by being solely focused on long-only mutual funds. Hedge funds can be great shareholders and positive advocates for the company. In our experience, hedge funds can account for 10% to 20% of a company’s well-diversified shareholder base. So next time you are on the road, keep in mind that the hedge fund with which you just met could be your next great shareholder.
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