New York – The expert network industry has been considered by many to be one of the fastest growing types of alternative investment research in existence today. In order to study the current state of the expert network market, Integrity Research has conducted an extensive research project involving all of the major stakeholders in the market. As part of this research, we carried out a detailed and extensive buy-side survey during the 3rd quarter of 2009 in which we interviewed 283 institutional investors, 122 of whom commented about their usage of expert networks. The complete results of this research will be available in a new ResearchFocus report on the topic which will be published later this week. The following are a few of the findings from this survey.
Importance of Expert Networks
Buy-side investors place a fairly high value on the services offered by their expert network providers, with very few users claiming that expert networks are not an “important” part of their research process. Over 40% of all users felt that expert networks were either an “extremely” or “very important” part of their investment research process.
Some distinctions may be drawn between different types of investors. Hedge fund users were three times as likely as long only users to rate expert networks as important to their research process: six in ten hedge fund users rated expert networks as either “extremely important” or “very important”, while close to 30% of long only users did the same. While less than 5% of long only users said expert networks were “not important” to their research process, not a single hedge fund user felt the same. This supports the contention that hedge funds remain the most engaged buy-side market for expert network services.
What are expert networks being used for?
Over two-thirds of all investors use expert networks primarily to obtain market and company background pertaining to the various investment theses they are researching. Following this, European users are most likely to be interested in forecasts and macro/economic issues, while North American users are most likely to be interested in current trends. Accounting and legal issues are significantly more likely to be of interest to North American users than their European counterparts.
Between hedge funds and mutual funds, the biggest area of difference was in the level of interest in macro/economic issues. Over 60% of mutual fund users said they used expert networks to gain insight on macro/economic issues, while less than 40% of hedge fund users betrayed any interest in this area.
Expert Network Usage Trends
Based on our survey of investment firms, Integrity estimates that slightly less than 40% of buy-side firms in North America and Europe currently use expert networks. This is an extremely high market penetration compared to many other types of alternative and independent research.
60% of buy-side clients who use expert networks reported using them between 0 to 9 times per month, with the median buy-side participant in our survey conducting 5 expert consultations per month via the various expert network services they subscribe to. Although the number of power users who conduct more than 25 consultations is very small, it should be expected that these users are responsible for a disproportionate share of expert network revenues.
Usage of expert networks has remained relatively steady over the last 12 months, with the vast majority of users (over 70%) reporting no significant change in their usage. Close to 20% of the participants in our survey reported that the number of expert consultations they conducted in the past 12 months has increased, while slightly more than 10% report that the number of consultations has actually fallen.
Close to two-thirds of expert network users use 1 to 3 expert networks regularly. It should be noted that while a firm may have subscriptions to multiple expert networks, these results are reported at the level of an individual user (portfolio manager or analyst). There is, however, a fat-tail of ‘power users’, approximately 20% of our survey population, who report making use of 10 or more expert network firms. Nevertheless, the median buy-side user in our sample uses 2 expert networks on a regular basis.
Only 10% of all users reported adding any new expert networks to their roster over the past 12 months, while 5% reported firing any expert networks over the past 12 months. However, due to the perceived sensitivity of disclosing such actions, these numbers may be significantly underreported.
Type of Experts Demanded
We also surveyed buy-side users regarding the types of experts they would find most valuable, and to whom they would like improved access in the future. Hedge fund investors showed the most interest in gaining improved access to independent consultants, managers, and entrepreneurs. Meanwhile, long only investors were most interested in improving their access to senior executives of firms, as well as independent consultants and managers. There was a relatively low level of interest in doctors, accountants, and lawyers, indicating that the market for access to these types of experts is already very well served.
The results are fairly consistent across geographic regions. North Americans investors showed higher interest in purchasing managers, operational staff, and sales staff; meanwhile, European investors showed a high level of interest in management, senior executives, and business owners.
Geographic Coverage Desired
Geographically, expert network users of all kinds are most interested in gaining access to high quality experts in Asia – this was a consistent preference regardless of the location of the respondent or the type of firm.
Our study also reveals that expert networks have a very low (statistically insignificant) market penetration rate in Asia – and a very small percentage of expert network firms have any kind of official presence in Asia. Clearly, this is an area of unmet demand for expert networks – from both Asian investors and even more strongly from foreign investors investing in Asia.
Users are most interested in getting better access to experts in the financial services industry, clearly an area of greatest unmet demand. Investors were also interested in getting better access to experts in the technology and healthcare sectors – at least in North America. European users showed little interest in health care. These trends are probably cyclical and dependent on market conditions.
It is interesting to note the high level of interest in health care in spite of the low level of interest in doctors and medical professionals. It seems there is currently a high level of interest in non-medical health care experts.