5 Companies With Poor Governance That May Attract Hedge Fund Shorts

by: Research Recap

Companies that want to avoid being targeted by short-sellers may want to make sure their corporate governance is in order.

The Financial Times quotes a leading hedge fund investor as saying that companies that do not comply with high standards of good governance are ripe for short-selling. Bill Hwang, chief executive and founder of Tiger Asia Asset Management, which has about $12bn invested in short-selling positions in Korean, Japanese and Chinese equities, said a bet that these companies’ stocks would fall was a good one.

Hwang, one of the “Tiger Seeds” whose business was seeded by legendary hedge fund investor Julian Robertson in 2001, said: “Companies with serious corporate governance problems are [like] a big red flag for short-selling for us.” He was speaking at an audience of more than 400 investors at the annual meeting of the International Corporate Governance Network on Friday.

Audit Integrity recently published a list of companies that performed poorly in its rankings of corporate governance.

Audit Integrity identified University of Phoenix owner Apollo Group, Inc. (NASDAQ: APOL), footwear manufacturer Crocs, Inc.,(NASDAQ: CROX), digital theater company DTS Inc. (NASDAQ: DTSI), physician services provider Pediatrix Medical Group, Inc.(NYSE: PDX), and digital media company Sigma Designs, Inc., (NASDAQ: SIGM), as firms with “serious questions regarding management’s integrity vis-a-vis their shareholders.”

All five companies are tagged as “Very Aggressive” under Audit Integrity’s Accounting and Governance Risk rating. “These ratings are cause for concern that the companies may be intentionally deceiving their shareholders to mask serious problems,” according to Audit Integrity Chairman Jim Kaplan. The ratings take into account such factors as share repurchases, insider sales and a high ratio of incentive compensation.