CorpComms Magazine

Hedge funds can be a public relations nightmare. Usually privately owned, they can be incredibly secretive - they seldom want much publicity, and some will really go out of their way to avoid media coverage.

In addition, their use of tricky derivatives instruments can end up causing huge problems for PR professionals at the companies in which they invest. Bobby Morse, director of financial PR agency Buchanan Communications, has come up against the problem. 'We have had situations where hedge funds owned a lot of contracts for difference (CFDs) in the companies we represented, and it had a huge effect on the share price,' he says. 'A company makes an announcement that is relatively neutral or slightly disappointing, the share price falls and that triggers a margin call on the CFDs, which sends the shares into a further steep decline.'

Morse's experience may need a little translating. CFDs are derivative instrumentsthat hedge funds can use to gain exposure to companies' shares. A CFD can convert into equity but until relatively recently did not have to be disclosed to the City in the same way as a holding in conventional shares.

Anything to declare?

Hedge funds have to declare if they hold more than 1 percent of a company through derivatives during takeovers, though hedge fund managers still don't have to disclose their holdings of CFDs in the same way that they have to with conventional shares, where a holding of more than 3 percent of the stock triggers automatic disclosure.

Morse had a particularly damaging experience with Equator Exploration, an Aim-listed company involved in oil exploration in the Gulf of Guinea.

'The company had a neutral result from some well drilling,' he recalls. 'It was not bad news or good news but was strictly factual. However, the share price got knocked until it hit a particular price, which triggered margin calls on CFD holders, who were forced to sell. The share price plummeted. At one stage, it was down about 50 percent.'

The question for corporate communications professionals is how they should manage this precarious situation. Morse advises keeping close to stockbrokers and marketmakers dealing in your company's shares in order to identify where the selling is coming from, and communicating with long-term shareholders in the business through the investor relations function.

'Once you have identified that what's going on is a bear squeeze on the share price because of margin calls on CFDs,' he says, 'you have to get across the message that the share price reaction doesn't reflect what's going on at your company. You've got to be fairly robust about it and reinforce the fact that there's not anything actually wrong with the business in the context of how much the share price has fallen.

'It can happen the other way around as well - you can sometimes see your share price ramped up in excess of where it probably should be. It all requires proactive communication.'

Neil Bennett, managing partner of financial communications agency Maitland, agrees that short-selling and use of CFDs by hedge funds is on the increase.

'It's hugely frustrating for a company and its advisers when they suspect that a significant proportion of the shares are being held or are being short-sold through CFDs,' he says. 'However, there are things you can do.'

Bennett says hedge funds that have taken positions in companies through CFDs will identify themselves at some stage.

'The important thing is to be ready when they do get in touch,' he explains. 'They will have taken a big bet on the company one way or another and will want to monitor that with as much information as they can gather.

'Sooner or later they will approach the company asking for a presentation or something, and it's extremely important to make sure that call is properly caught. 'Contact can then be made; you can ask them to identify themselves and take their number, and then begin to have an open dialogue.'

Movers and shakers

Michael Sandler, chairman of financial PR agency Hudson Sandler, says it is mainly during takeovers that hedge funds and CFDs come to the fore. 'In every corporate activity in which I have been involved, hedge funds have played a part,' he says. 'They come in for a small turn. They are not interested in strategy; what they're interested in is market movement.'

Sandler advises being absolutely straight with hedge fund managers and dealing with them like any other investor. 'I find they call PR people a lot more than long-only fund managers, who tend to go through the brokers,' he says. 'You've got to be very careful with what you say to them,' he continues. 'Hedge fund managers can be very aggressive. They tend to put stories around the market. However, you can also ask them as many questions as they ask you. You can ask them how much stock they've got, because sometimes they will tell you and it can be very hard to find that out in the market.' William McBride, managing director in the New York office of financial communications agency Gavin Anderson, says campaigns against public companies by activist investors, most frequently hedge funds, are becoming much more frequent and all too often expose a company's lack of preparation for a pitched media battle. 'Activist investors rely on negative media to keep the pressure on boards of directors,' McBride says. 'These antagonists rarely stop at criticising the company's business strategy. Boards routinely come in for public drubbings in the media over governance issues like cronyism, executive compensation and accounting practices.

'These attacks can drive away more traditional long-term investors, demoralise employees, distract management from operational responsibilities, invite regulatory scrutiny, increase litigation risk and even raise questions among customers and business partners about the company's future.'

McBride believes companies are often taken by surprise when their discreet private discussions with such shareholders explode into acrimony in the press.

Telling it straight

Public relations professionals must ensure management actively and consistently communicates its strategy, including the reasons the plan has been chosen over any alternatives. They should also find out what shareholders are thinking and take a cold-eyed look at whether their communications team and external advisers are up to a full-fledged media battle lasting several months. Finally, PRs need to understand how the hedge fund community works, what its relationships and connections are and where its networks operate. McBride refers to this process as educating public relations people about their 'potential adversaries'. In the end, of course, one sure way to get rid of people trying to profit from driving down your share price is to send it the opposite way.

Bennett recalls acting for internet travel agency Lastminute.com when it was being short sold heavily at the very point that highly confidential talks about a takeover were going on.

A leak of the talks led the company to acknowledge them in a brief stock exchange announcement. The shares subsequently rose, prompting the shortsellers to lose money on their bets, but the short-selling continued.

'Some of them increased their positions because they didn't think there would be a bid,' Bennett says, 'so when the takeover was announced the shares went up even further and those people who were shorting the stock lost a substantial amount of money.

'What you tend to find is that if you give short-sellers good news, they will go away,' he continues. 'It's worth doing it properly and getting a positive share price reaction rather than trying to condition the market.'

It's also important not to panic when you discover that CFDs or other derivatives are being used to gain exposure to your company's shares.

'Most people use CFDs not because they want to remain anonymous but as a way of evading stamp duty,' says Bennett. 'There may be a completely normal purpose for it.

share me: del.icio.us | digg | reddit | Tweet