Some funds want to improve their reputation with issuers
Hedge funds are bringing corporate access in-house, and one reason may be that they’re looking for a little love – from IROs. When Lori Arndt joined the Surveyor Capital arm of hedge fund giant Citadel Investments last fall as head of corporate and broker relations, the move signaled an important milestone in the corporate access landscape.
Arndt has been credited with launching the first sell-side corporate access program at Goldman Sachs in the late 1990s and most recently served as head of corporate access at Nomura. She is the senior – and most experienced – corporate access veteran at Citadel, which already boasts three others with corporate access responsibilities: Ilaria Fleischer, Schuyler Sweeney and Johnna Perko.
But Citadel is not the only hedge fund building up an internal corporate access capability. At the end of last year another corporate access veteran, Mark Pellegrino, joined Balyasny Asset Management as head of broker and corporate relations after nearly nine years split between UBS and Deutsche Bank (as well as an earlier stint at Thomson Financial). And just recently, Andrew Tudor is reported to have joined Millennium Partners in a corporate access role, having earned his stripes at Goldman Sachs and most recently coming off a multi-year stint at Point72 Asset Management, SAC Capital founder Steve Cohen’s family office.
So what’s going on? Given their understanding of how sell-side corporate access works, these veterans obviously bring valuable experience to their new roles. And hedge funds are not the first buy-side companies to bring corporate access talent in-house: Fidelity Worldwide’s London office and Schroders both made the move previously.
But given hedge funds’ large presence, both in the markets and in the minds of IROs, it hardly seems likely that veterans with the experience of Arndt and Pellegrino will just co-ordinate meeting requests, roadshow pitches and portfolio manager needs, like busy air traffic controllers. Will they also be reaching out directly to underfollowed companies not on the sell side corporate access roster? Is the tightening regulatory environment in the UK over how corporate access gets paid for bringing sharper focus to the function at more forward-looking funds? And – more worrisome for IROs – are hedge funds gearing up for a more aggressive outreach and attempts to reach corporate insiders?
Secretive society
Hedge funds, with a reputation for being notoriously secretive, are often perceived by IROs as some sort of tough cop in a hard-boiled mystery: ‘I’ll ask the questions here!’ That’s essentially the brush-off IR Magazine got when it reached out to the funds for answers to the above. Non-answers, however, can be as revealing as answers.
Sandy Bragg, president and CEO of Integrity Research, is as well placed as any outside observer to put these developments into context. While he hasn’t spoken to the funds about their corporate access hires, he surmises that a part of their motivation might be to get additional access outside what the banks are offering. ‘It may not just be small caps because [the hedge funds] probably have the clout to get the attention of many large caps,’ he says. ‘It’s possible they want access at times other than when the banks offer roadshows.’
Another source, an independent corporate access provider that doesn’t wish to be identified, speculates that a part of the motivation may be reluctance to reveal to the sell side the companies the hedge funds are interested in, preferring to keep their cards close to their chest. But yet another well-placed observer who was present at a private conversation with a hedge fund insider finally offered some insight: according to him, at least part of the rationale for the funds’ move into corporate access is that hedge funds just want to be loved.
In need of attention
Apparently, the bad rap many hedge funds have among IROs, CEOs and CFOs has finally got the funds’ attention. As funds have grown larger, their near-congenital secrecy has become a barrier to being better known and better understood by corporate issuers.
For example, their overall turnover ratios, understandably off-putting to many IROs, can mask the long-term postures they take with core positions. Funds have been elbowed out of one-on-one or group meetings – even funds that hold a core position in the company – and that cold shoulder the corporate community has given hedge funds is a large part of the motivation for their move into corporate access, according to the above source.
Then there is the touchy topic of shorting stocks. A fund may be bullish on an entire sector, and take a long position in the stock it believes to be in the best position to lead the sector. But to remain market-neutral, the fund’s risk-management policy requires that it take an off-setting short position, even if the shorted stock is also expected to rise, just not as much as the core position. These are hedge funds, after all. Of course, that still leaves the fundamental short bet hedge funds can – and do – take when they perceive overly rich valuations and find stocks they believe are poised to fall.
Social skills
Interestingly, there is also the issue of bedside manner. Hedge funds hire notoriously smart people who can calculate a discounted cash flow model with their eyes closed, but have a hard time holding a normal conversation. Everyone is familiar with the young analyst who delights in asking six clever questions to triangulate the gross margins on that new widget. While he or she is enjoying the hunt, however, your CEO has moved from being annoyed at the analyst to being annoyed at you for allowing the meeting in the first place. Apparently, at least some funds recognize they’ve got to teach their analysts better manners at the dance, learning to be more respectful of corporate management.
Though they wouldn’t commit themselves to print for this article, new corporate access folks at hedge funds are already building bridges to the IR community, with sightings at IR Magazine Think Tanks, awards events and at NIRI’s upcoming annual conference.
Hedge funds are full of smart, busy people. But if some hedge funds want to break out of the penalty box they feel the IR community has unfairly placed them in, they may do well to take a lead from IROs’ time-tested playbook. It’s all about relationships.
This article appeared in the summer 2016 issue of IR Magazine
