Hedge Funds Altering the Nature of Corporate IR

Date: Tuesday, January 22, 2008
Author: Ryan Utsumi, Riskcenter.com

New research from Greenwich Associates suggests that U.S. companies should be adjusting their investor relations strategies to respond to fundamental shifts in the composition and expectations of the U.S. equity buy side - namely the growing influence of hedge funds.

"Demands for face time with company management teams are coming from all types of institutional investors, but the trend is being driven by hedge funds," says Greenwich Associates consultant Bill Bruno. "Not only do companies have to figure out how to accommodate a tremendous volume of requests by investors for private meetings, they also have to devise new strategies for servicing and managing the hedge funds that are becoming bigger and more active shareholders."

Hedge funds differ from other types of institutional investors in investment style, approach to due diligence, interactions with Wall Street, and expectations of portfolio companies. But hedge funds also can differ just as much from each other - a fact that increases the complexity of monitoring and managing the corporate shareholder base. "It's no longer enough for corporate IR professionals to know who their shareholders are," says Greenwich Associates consultant Jay Bennett. "They now have to know enough about the nature of each investor to understand what the shareholder wants - and what its ultimate intentions might be."

Hedge funds already account for close to half of NYSE trading volume by some estimates and research from Greenwich Associates suggests they will continue to expand their presence in global financial markets. Hedge funds in 2006 captured less than three percent of U.S. institutional assets, leaving plenty of room for future growth. Of the 578 corporate defined benefit pension plans interviewed by Greenwich Associates for its 2006 U.S. Investment Management Study, nearly 40 percent expect to make a significant increase in their hedge fund investments over the next three years.

Not only have hedge funds become a ubiquitous presence in world equity markets, they have also become the darling clients of global investment banks, meaning that bankers and analysts increasingly cater to the whims of their biggest fee generators. It is this relationship that is at least partially responsible for the increased pressure companies are feeling to make their executives available for investor sit-downs.

Greenwich Associates research reveals one important finding that might come as a surprise to corporate investor relations professionals: U.S. institutional investors paid Wall Street nearly $1.75 billion last year in equity brokerage commissions specifically designated to compensate brokers for coordinating and facilitating face-to-face meetings between the institutions and corporate management teams at private gatherings or industry conferences. While that figure represents about 35 percent of total U.S. institutional commission payments, hedge funds use about 42 percent of their commissions to compensate brokers for delivering meetings with company management teams.

"Corporate IR professionals should be intimately familiar with the booming business brokers have built selling access to company management teams," says Bill Bruno. "More specifically, IR professionals should be aware that the time of their top executives is a valuable asset that companies should be managing strategically and for their own benefit."

The consultants at Greenwich Associates advise all companies and investor relations departments that have not already done so to begin tracking investor meetings that have been arranged by individual brokers, either directly or as part of broker-sponsored conferences and seminars. "In light of the considerable value these meetings represent to brokers, IR departments should use their participation to leverage any and all value they can from the brokers that cover the company," says Jay Bennett. "And of course, if a broker is not covering the company or is otherwise proving unhelpful, executive time should be budgeted accordingly."

As companies adjust their IR efforts to accommodate the growing presence of hedge funds in their shareholder base, it is important that they understand the ways in which hedge fund analysts differ in temperament and practice from those employed by other kinds of institutions. For starters, the typical hedge fund analyst covers fewer industry groups (4.2 in 2007) than the average among buy-side analysts as a whole (5.1) - understandable given their often more-focused strategies. However, hedge fund analysts cover 60 percent more companies than their peers across the buy side, a whopping 87 companies on average in 2007 - up from 75 the prior year - versus 54 for the buy side as whole.