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If Hedge Funds Are Interested in Arena Pharma, It's On The Short Side

Tickers in this article: ARNA VVUS

BOSTON ( TheStreet) -- Over at Motley Fool , Michael Meyer says hedge funds are interested in Arena Pharmaceuticals (ARNA) . True, but not in the way he means.

Meyer:

Arena has seen hedge funds acquire roughly 29 million shares during the most recent quarter. The largest holder of Arena shares is Wellington Capital. Since the company has roughly 215 million outstanding shares, institutions acquired roughly 13% of the company's float. This is a pretty strong indicator that the company may have a promising 2013.

Meyer's reasoning is off track. Hedge funds aren't interested in Arena, at least not on the long side, according to third-quarter ownership data. Wellington Capital is a long-only mutual fund investment adviser, not a hedge fund.

There were 136 institutional investors who filed 13Fs listing Arena among their stock holdings at the end of the third quarter, according to Whalewisdom.com. The aggregate number of Arena shares in these 13Fs totaled 95.6 million shares at Sept. 30, 2012, an increase of 29 million shares, or 42%, over the June 30, 2012 filings.

Twenty-seven institutional investors opened new positions in Arena in the third quarter, and another 69 funds added to existing positions. But remember, when an investors buys a share of Arena, another investor is selling. So, in the third quarter, 51 funds closed out their Arena positions with another 48 funds reducing their positions, according to Whalewisdom.com.

Hedge funds are under-represented among Arena shareholders, owning just 6% of the company -- defined as owning less than 5% stakes in the company. No hedge fund owned more than 5% of Arena. Traditional investment managers (think mutual funds) own 37% of Arena, according to CapitalIQ.

Arena's overall institutional investor ownership is 47%, which includes mutual funds (37%) and hedge funds owning stakes smaller than 5% (6%). Public ownership of the company (think retail investors) stands at 52%, according to CapitalIQ.

Arena is often referred to a retail investor-driven stock, so now you know why. Institutional investor ownership in the company is increasing but "Wall Street" still owns less than half of the outstanding shares.

Fourth-quarter ownership data won't be available until the middle of February.

How does Arena stack up against its weight-loss competitor Vivus (VVUS) ?

Total institutional investor ownership of Vivus was 62% of Vivus at the end of the third quarter, which included 42% ownership by mutual funds and 12% from hedge funds with less than a 5% stake, according to CapitalIQ.

Hedge funds with more than a 5% stake in the company represented 17% of Vivus' outstanding shares, according to CapitalIQ.

Meyer is right about hedge funds being interested in Arena, but I'm pretty sure it's on the short side. Arena's short interest stood at 52 million shares at the end of 2012 -- or approximately 22% of the company's 234 million fully diluted outstanding shares. Exact figures aren't available but assume safely that the lion's share of those 52 million short shares held by hedge funds.