Scared of Hedge Funds? Here’s Why You Shouldn’t Be
Sometimes, corporate leaders tell us that they are reluctant to meet with hedge funds. Such apprehension is fueled in many cases by concern that hedge funds may be looking into their company for the sole purpose of shorting their stock.
While we understand a preference to meet with long-only funds, we recommend that companies maintain a consistent dialogue with hedge funds.
There are many reasons to do so. Here are some of the most important:
- Hedge funds don’t need a face-to-face meeting in order to short your stock. A one-on-one meeting no more ensures a short position than avoidance guarantees a long position. In fact, if hedge funds suspect that you’re ducking them, they may perceive your silence as evidence that you are trying to hide something. This, in turn, may support their existing short thesis or even prompt them to investigate with the purpose of formulating one. Conversely, you may actually decrease their confidence in shorting you by being visible and telling a credible story.
- Hedge funds can amplify your story. Hedge funds tend to be well-connected to many players in the investing community. Telling your story to them, and hopefully convincing them that your company is a good investment, may lead them to pitch your stock to others. “Idea dinners” are common among hedge funds and could lead to investment and inbound interest from others.
- Many hedge funds enjoy a good reputation for solid analysis. Some hedge funds are well-known for their ability to conduct high-quality due diligence on a company. The first thing some investors/sell-side analysts do when hearing of a company is look to see if any of these hedge funds own the stock. If so, this can increase the probability of those individuals doing further analysis. The opposite is also true.
- Hedge funds can help you better understand your competition. Hedge funds tend to be incredibly active in the healthcare sector. As a result, management teams can often learn vital information about other companies and the sector in general by taking these meetings. The information flow can be a two-way opportunity.
- Hedge funds can aid smaller cap companies with liquidity. If you are a small cap company, meeting with hedge funds (especially ones with limited assets under management) may be a great way to increase liquidity in your stock. These funds can trade in your stock, whereas larger funds would have trouble being able to build a sufficient position by buying exclusively in the open market.
- Hedge funds can be particularly helpful with continuing capital raises. Healthcare companies routinely need to raise multiple rounds of capital. In many cases, hedge funds will be responsible for a significant amount of the allocation. Why not keep these funds up to date? That way, when it is time to raise capital, the hedge fund manager is positioned to make a quick decision.
One other thing to consider. As my colleague Mike Piccinino discussed in this article, hedge funds’ reputation for shorting stocks is a little overblown. Some hedge funds don’t do much, if any, shorting. We strongly believe in the importance of establishing and maintaining a broad pool of investor targets as a means of generating and even expanding a well-diversified shareholder base. Don’t assume that all hedge funds are alike, and don’t limit your efforts by avoiding them.
If you’d like to learn more about how to conduct successful meetings with hedge funds, just get in touch.
John Woolford is a Managing Director on Westwicke's life sciences team. He has extensive experience in investor relations, as well as IPOs, capital raises, M&A, and other business development activities. He has a BS in microbiology from the University of Maryland at College Park and an MBA from the R.H. Smith School of Business.
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