How to Talk to a Hedge Fund

Some fund managers also try to pry out information that company officers are barred from revealing by Regulation Fair Disclosure, which prohibits the selective release of information. Orlando-based Darden Restaurants Inc., which owns and operates such chains as Red Lobster and Olive Garden, often gets calls from hedge-fund managers seeking early indicators as its monthly sales release approaches, for example. "You've got to be on your toes," says Matthew Stroud, Darden's vice president of IR. "Some are very persistent." Like most companies, Darden has a prerelease blackout period covering such investor conversations.

The blackouts don't always deter the hedge funds. "They're aggressive in terms of research," says Stroud. Fund analysts have been known to contact customers, suppliers, and lower-level employees in pursuit of a trading edge. Darden store managers sometimes get calls from individuals asking about restaurant sales trends, says Stroud. He suspects the callers are being paid by funds to gather store-based data. All Darden can do is stress that company policy prohibits release of the data outside proper channels, and violating the policy is grounds for dismissal.

Such fishing for information hasn't soured Stroud on hedge funds, though. "Most of them play by the rules," he says. A few have held Darden shares for more than two years, and some are on lists of funds that the company wants to target as shareholders.

Hedged In
IR executives who find hedge-fund managers sharp and knowledgeable about their industries suggest that other investors often are influenced by the trading activity of the funds — or at least what they can see of it. (A fund must file quarterly reports only if it has assets of more than $100 million.)

At Incyte, Pam Murphy believes that many problems associated with the short-term trading by hedge funds are offset by the liquidity this provides for other investors. She tries to promote a long-term vision of the company among hedge funds, and increasingly meets with those funds that come closest to fitting the company's investor profile. About 60 percent of all her investor meetings involve hedge funds, she says.

When companies do meet with the funds, the reason may reflect the funds' financial clout as much as their place in the investor profile. Hedge funds, which tend to be high-volume traders, create more commissions on Wall Street than traditional investors do. It's no surprise, then, that funds today are targeted more often to attend road shows and other events planned by investment banks. Thus, companies using those bankers to help raise capital may have no choice but to talk to hedge funds.

"Salespeople want to point you in the direction of hedge funds because they are the ones paying the bills," says Darden's Stroud, who adds that companies should also insist on seeing mutual funds that fit investor profiles. "If you lie down and roll over," he says, "you are just going to be visiting hedge funds all day."

While it is important to communicate with hedge funds, Thomson's Ternowchek suggests saving top management for traditional investors, and working with hedge funds at the IR level. To be sure, hedge funds will crave access to the CFO and CEO. "These people are very secretive about their own processes, yet they want the world to be an open book," she says. "It creates some tension."

Even if that drives an IR person crazy, the best way to cut the tension may be to take a page from Darden's book in dealing with hedge funds. Says Stroud, "We don't treat them any differently than we treat other investors."

Joseph McCafferty is news editor of CFO.

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