Money Stuff

What Do Investors and Companies Talk About?

Also different kinds of activism, bitcoin futures and ETFs, crypto self-parody and meal-kit startups.


One thing that we talk about a lot around here, but that no one in the wider world seems quite to believe, is that public companies frequently meet in private with their big shareholders to discuss their business. This, people think, is not how it's done: The stock market is meant to be a level playing field, no one is supposed to trade based on inside information, and it's obviously not fair for investors to meet privately with corporate managers and ask them questions and trade based on the answers. And so everyone assumes that they must not. "There's regulations that stop that, talking to analysts," Justice Sonia Sotomayor confidently told a lawyer during a Supreme Court argument over insider trading. 

She is not exactly wrong: Regulation FD (for "fair disclosure") is a Securities and Exchange Commission rule that prohibits companies from giving material nonpublic information to some shareholders privately without disclosing it to all shareholders publicly. And yet shareholders are constantly meeting one-on-one with companies, and trading after those meetings, and rewarding Wall Street analysts for setting up the meetings. So ... what do they talk about?

Here (via Broc Romanek) is a recent paper, by Jihwon Park and Eugene Soltes of Harvard Business School, called "What Do Investors Ask Managers Privately?" They embedded a researcher in a bunch of one-on-one meetings between two public companies -- a biotechnology company and a defense contractor -- and their investors, and wrote down the questions that were asked. (The researcher "sat in attendance in all meetings immediately behind the firm executives" so as not to throw anyone off.) It is a pleasing read:

Working with investor relations officers (IROs), we devised a classification system for the questions posed by investors and found that they can be categorized into five distinct groups. The first type seeks more detailed insight and clarity of information that is already publicly available. For example, for the biotechnology firm in our sample, one investor asked if the final product would be manufactured in the same facility as the product used in regulatory trials. Other types include questions inquiring about management philosophy (e.g. “What keeps you up at night?”), questions seeking public information more efficiently (e.g. “Can you tell me about the level of share ownership by senior management?”), and questions seeking managers’ feedback on proprietary ideas and investment theses (e.g. “What looks more attractive right now: M&A activity or share buybacks?”).

Finally, the fifth type of questions are those seeking more timely information from managers. These are questions where the investor seeks data or information that is more recent than that available from public sources. For instance, one question that we observe investors frequently asking is around current cash holdings. Notably, the investor is not seeking the figure publicly disclosed in the 10-Q a month prior to the meeting. Rather, they are seeking to acquire an update of the financial statement information as of the date of the meeting.

Obviously my favorite of the five question types is what the researchers call "efficiency questions," which are just laziness questions:

Investors that ask questions regarding information that is readily publicly accessible we describe as investor efficiency questions. These questions do not require the expertise of senior management (e.g. CEO) to answer. The information could have been easily acquired by the investor in advance of the meeting had they taken the time to seek it. In most instances, these questions focus on financial market information about the firm (e.g. stock price, managerial ownership). Investors that ask these questions are able to rapidly acquire information from management which is efficient for investors, but an ineffective use of senior executive time.

Much of business consists of trying to use your time efficiently by inefficiently using someone else's time.

But the other four question types have the obvious potential to be material and nonpublic. They don't have to be; if you ask a biotechnology chief executive officer "what keeps you up at night" and she replies "my neighbor's apartment renovation," then you probably don't have much to trade on. But the most plausible reason you would ask any of these questions is because the answer might be material to you, because it might "significantly alter the 'total mix' of information available" to you in making your investment decisions. 

We talk a lot about insider trading, so it is worth emphasizing this. Investors can ask companies for material nonpublic information, whenever they want, though they won't necessarily get an answer:

An investor can legitimately seek any piece of information they want (e.g. quarterly EPS number). However, under Reg FD, it is the managers' responsibility to not provide material information selectively to an investor even when asked. In particular, it is the failure of management – not the investor – under Reg FD if material information is conveyed during a private meeting.

If you go to a one-on-one meeting and ask a CEO "what is your cash balance," and she tells you, and you trade on it, that's not insider trading. (Unless you are friends with her, or helping her get a new job, maybe! Not legal advice!) At most -- if the answer is material -- it is a Regulation FD violation, but that is the company's problem, not yours; you are free to trade. The background assumption of insider trading law is that this never happens, that companies are careful to comply with Regulation FD and would never answer a material question like that. But then why do the investors keep asking?

Park and Soltes don't exactly tell you how material any of the information was, though they do analyze investors' propensity to trade after asking different question types. Mostly though the paper is full of charming data about how investors actually do their jobs. For instance, good investors ask good questions:

Investors who are more experienced and meet with managers of the firm more often are more likely to ask timely questions. Moreover, investors who hold a position in the firm, work for larger funds, and meet more often are less likely to ask efficiency questions that are readily answered by referring to public data sources.

And one-on-one meetings at conferences are especially to-the-point:

The number of questions asked during roadshows and private calls tended to be higher than conferences. One reason for the statistically greater number of questions asked during roadshow events, however, was the fact that the events were longer in duration. ... In this case, investors actually utilized their time more efficiently in conferences than roadshows by asking more questions per hour. Thus, investors ask more during roadshow events, but investors’ use of questioning is more rapidly paced during conferences.

And investors are meaner in private meetings than analysts are in public earnings calls:

In this spirit, we find that both the mean and median tone in public remarks is considerably more positive than that during private interaction. This difference in tone suggests that individuals may be more willing to critically question executive during private interactions when it is less likely to embarrass management.

The researchers do not seem to have recorded whether the companies answered the questions.

Activism vs. activism.

There's a frustrating terminological imprecision in the phrases "shareholder activist" and "activist shareholder." There are two quite separate kinds of activist:

  1. One kind wants companies to make more money by being meaner: They call for efficiencies, stock buybacks, mergers, less spending on perks, etc. This stuff is often stereotyped as enriching shareholders at the expense of workers and other stakeholders, and as harming long-term value by focusing on short-term stock-price results. 
  2. The other kind wants companies to make less money but be nicer: They call for more social responsibility or environmental studies or other things that might reduce returns on investment (at least in the short term) but achieve broader social goals.

The two kinds tend to agree on some corporate-governance issues (nobody likes staggered boards), but otherwise they are not so much opposed as they are unrelated. They focus on different issues and do different things. Activists of the first type tend to be big hedge funds who take concentrated positions in order to effect big changes; they do their activism via proxy fights and takeover contests and excoriating public letters and private lobbying of other big shareholders. Activists of the second type were traditionally small and sort of crankish -- retired retail shareholders, religious orders -- and did their activism across many companies via 14a-18 proxy proposals and rambling speeches at shareholder meetings. But that is changing as enormous pension funds have become more interested in environmental and social issues. There is an opening for type-2 activism as a business, for activist funds focused not on economic efficiency but on long-term environmental and social stewardship.

So here you go:

Jana Partners LLC plans to launch a new fund this year dubbed Jana Impact Capital to invest in companies the hedge fund believes are good bets but could do better for the world. The fund’s board of advisers includes Sting and others who have a track record of pressuring companies on environmental, social and governance issues.

Socially responsible investing, long the territory of smaller gadflies, has grown in popularity in recent years. The presence of Jana—one of the most well-known activists on Wall Street—boosted by Sting is expected to lend even more legitimacy to the idea.

Jana's first project in this vein is to join with the California State Teachers' Retirement System to badger Apple Inc. "to develop new software tools that would help parents control and limit phone use more easily and to study the impact of overuse on mental health."

It's a good niche! For one thing, socially responsible investing is hot these days, but there aren't too many social-responsibility activists with actual activism skills, so it makes sense for Jana to step in to meet the demand. (Though the fund "won’t seek to charge the kind of high fees the hedge-fund industry is known for.") Also there seems to be a synergy with Jana's other, type-1 activism. Calstrs and other big influential public pension funds tend to be fond of type-2 social-and-environmental activism without necessarily having much love for type-1 breakups-and-buybacks activists. This fund could bridge the gap: If you work closely with people like Calstrs to keep iPhones out of the hands of children, they might be more inclined to vote with you on your next proxy fight demanding that a company break itself up.

Bitcoin futures.

One obvious fact about bitcoin futures is that for everyone who is long a bitcoin future someone has to be short a bitcoin future. So who is long, and who is short, bitcoin futures?

For traders who hold fewer than 25 of Cboe’s bitcoin futures contracts—a category that likely encompasses many retail investors—bullish bets are 3.6 times more common than bearish ones, according to the latest Commodity Futures Trading Commission data that cover trading through Tuesday.

At Cboe, the big players in bitcoin futures tend to be short, betting the future price will be lower. For instance, among “other reportables”—large trading firms that don’t necessarily manage money for outside investors—short bets outweighed bullish “long” bets by a factor of 2.6 last week.

This makes sense, but not necessarily in the most-obvious-possible ("Small investors are betting that bitcoin’s price will rise, while hedge funds and other large traders are betting it will fall") way. An alternative interpretation is:

  1. Small investors want to get long bitcoin.
  2. It is administratively annoying.
  3. Professional investors will help them get long bitcoin synthetically via futures.

That is, the proprietary trading firms that are short lots of bitcoin futures might not be doing it because they are betting on its decline. Rather, they might be shorting bitcoin futures to accommodate investors who want bitcoin exposure without buying bitcoins, and buying bitcoins themselves to hedge their futures shorts. As of about 6 a.m. today, you could buy a bitcoin for about $15,350 and sell a Cboe bitcoin future for about $15,450, making a risk-free-ish $100 for your trouble. Not quite risk-free -- you have to deal with the hassle of bitcoin security yourself, plus there is basis risk with how Cboe settles its contract -- but that's what the hundred bucks is for. And that premium is dramatically less than it was when bitcoin futures started trading, suggesting that that there has been competition for the role of arbitraging between bitcoins and futures and capturing that premium.

Meanwhile, if you are a retail investor, buying a bitcoin futures contract for $15,450 might be a much easier way to get bitcoin exposure than actually figuring out how to work a bitcoin wallet. The futures market provides a useful convenience for you. But that convenience doesn't come from the mere existence of the futures contract: You need to find someone to take the other side of your bet. Perhaps that is someone who wants the opposite bet, but there's no reason to assume that exactly as many people want to be against bitcoin as want to bet on it. Just as likely, the firm taking the other side of the bet is doing it as a convenience for you, and hedging its trading elsewhere.

Double bitcoin ETFs.

Meanwhile, for small investors who do not have the money to buy a whole bitcoin futures contract, or who love excitement too much to just buy unleveraged bitcoins, soon there might be a double-bitcoin ETF:

The new leveraged and inverse exchange-traded funds, planned by ETF-maker Direxion Asset Management, are designed to track trading in bitcoin futures markets, not bitcoin itself. The leveraged ETFs, according to the filing, seek to provide investors returns that multiply returns in the underlying market.

"The 1.25X Bull Fund, 1.5X Bull Fund, and 2X Bull Fund ... seeks daily leveraged investment results (before fees and expenses) that correlate positively to either 125%, 150%, or 200% the daily return of the target benchmark," the filing said.

Here is the filing. It is easy to make fun of the leverage -- bitcoin is pretty volatile as it is! -- but really all it does is replicate the leverage available in the futures market. If you buy a bitcoin futures contract, you have to put down almost half of the notional amount of the contract; for $8,000 you can buy all the excitement that $16,000 worth of bitcoin provides. But you need $8,000. (Or $40,000 for CME Group's five-bitcoin futures contract.) I suspect the real fun of a double bitcoin ETF is not that it will allow leverage, but that it will allow leveraged bitcoin investing in even smaller size than you can get in the futures contract. 

Elsewhere in crypto.

We have talked a few times about Dentacoin, which is one of my favorite cryptocurrencies because (1) their public relations people email me about it all the time and (2) it is a cryptocurrency for dentistry, come on. Dentacoin's price is now surging, and it has a "market capitalization" of over $2 billion. I cannot tell you why it's up, but asking "why" about cryptocurrency price moves seems increasingly like a category mistake. One version of Dentacoin's pitch to the press mentioned that it would "reward people for simple activities, such as providing feedback, giving opinion on different topics, and even doing regular things like brushing and flossing twice a day," and if you are now a Dentacoin millionaire from flossing your teeth please do let me know.

Elsewhere, "A parody cryptocurrency just broke $2 billion for its market cap," and it's not even Dentacoin! It's Dogecoin. And we talked last month about Long Island Ice Tea Corp., the iced tea company that became Long Blockchain Corp. because the world is absurd. Here is another possible reason for that pivot:

Long Island Iced Tea Corp., now called Long Blockchain Corp., received an ultimatum from Nasdaq in October, when the exchange threatened to delist it unless the market value rose above $35 million for 10 business days in a row. It achieved that on Friday, flaunting one of the hottest buzzwords of the year to get there.

People are worried about unicorns.

The strange boom in the sort of technology companies whose technology consists of putting groceries in boxes and delivering them to your door has come to an end:

A shakeout was perhaps inevitable, say investors and analysts. In roughly the last five years, 150 new meal-kit companies were founded, some of which catered to increasingly narrow niches, such as Southern-cooking enthusiasts, according to Packaged Foods, a consultancy.

Early investor enthusiasm helped pave the way for the initial public offerings of Blue Apron and HelloFresh last year. But investors have become more cautious. Last year, around $274 million was invested in 18 meal-kit companies, down from a peak of 25 deals worth $308 million in 2015, according to data provider PitchBook Data, Inc.

To be fair the next wave of tech startups seems to be putting the food in a box in a fixed location and making you come to that location to buy it. Is there anything that modern technology can't do?

Things happen.

Intel CEO’s Stock Sale Called Unusual by Private Securities Specialists. Celgene to Buy Cancer-Drug Maker Impact for $1.1 Billion. Big German banks muscle in on retail. French corporate deals reach highest value for a decade. The Mystery of the Risk-Free Greek Bond. SEC Looks Into Kushner Cos. Over Use of EB-5 Program for Immigrant Investors. Kansas City Businessman Gets Nearly 17 Years for Payday Lending SchemeSimon Potter: "I personally am not compelled by the notion that the public sector can calibrate its supply of money-like assets at the short-end of the curve to exactly remove any remaining externalities from the private creation of money-like assets." Why Uber Can Find You but 911 Can’t. Brexit Prompts Bank Scramble to Secure Private School Seats. 11 Saudi Princes Sent to Maximum-Security Prison After Protesting Utility Bills. "When they went back into the vehicle, the vehicle warmed up, and those iguanas started coming back to life." Stolen Vodka Bottle, Said to Be Worth $1.3 Million, Is Found Drained and Dented. Where does Gwyneth Paltrow want you to put your coffee

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