Those of us who are IR practitioners are well-versed in the nuances between Schedule 13D and Schedule 13G filings. We have come to believe that “G” means “good” and that “D” means, well, something other than good.
We know that when an investor acquires more than 5% of a class of publicly traded securities (most often stock), that person has 10 days in which to alert the SEC via a Schedule 13D. The idea behind the filing is to let other investors know that someone has taken a meaningful ownership stake in a security. As part of the paper work when completing the filing, there is a section labeled “Purpose of Transaction” that makes it clear whether or not the investor may wage a proxy contest and in some way look to force change. Such change could include a potential sale of a company, a change in senior management and/or a change in corporate governance practices, among a laundry list of other desired outcomes.
Hedge funds tend to be those who fight for change the most often. Sure, some mutual funds are speaking out against poor corporate governance practices, but it is still the hedge funds who wage proxy contests and are able to fund them. Perhaps a proxy contest will be supported by mutual funds and other large institutional shareholders, but that’s about as far as they will go; they are not cutting any checks.
It is also hedge funds that have a much shorter investment horizon, meaning that the fastest way for them to generate the largest possible returns is through a liquidity even, such as the forced sale of the company or through similar means. This is often in contrast to a company that follows a 3-5 year business plan and other shareholders who may be longer-term holders. (We’ll come back to this in a minute.)