New York, NY – According to an article published last Friday by MarketWatch, hedge fund Balyasny Asset Management decided to suspend its use of expert networks pending the government’s investigation of insider trading charges. Barry Colvin, vice chairman of the firm explained that “the entire hedge fund industry is doing the same.” However, based on discussions with other buy-side firms and expert networks providers, Integrity Research sees little evidence of such a slowdown.
Buy-Side Nervous as Investigation Comes to Light
Clearly, many buy-side firms have been nervous following the November 20th article published in the Wall Street Journal which reported that federal authorities were “preparing insider-trading charges that could ensnare consultants, investment bankers, hedge fund and mutual fund traders, and analysts across the nation” in what could be the largest such investigation on record.
In the days following the initial article, federal authorities have issued subpoenas to numerous hedge funds and mutual funds. On November 24th, Don Ching Trang Chu, an employee of Mountain View California based expert-network firm Primary Global Research, was arrested on charges that he provided inside information to hedge funds.
In fact, over the past few weeks numerous journalists have asked the team at Integrity Research Associates what we thought the impact of the insider trading investigation would be on the independent research industry. We surmised that clients would probably suspend their use of expert networks and channel check research providers while they evaluated their own compliance policies, reviewed their records of past expert network use, and assess the compliance systems of their research partners.
As a result, we were not surprised by the news reported in MarketWatch last week that Balyasny had decided to suspend its use of expert networks (click here to read the article in its entirety). In fact, Barry Colvin’s explanation of the firm’s decision made complete sense to us. Colvin commented “We do a review every year of our use of consultants and the relationships with them. Since our review was coming up pretty soon anyway, we just decided to move it forward a bit.”
Few Buy-Side Firms Reduce Use
What has surprised us is that few hedge funds and mutual funds have actually reduced their use of expert networks in recent weeks, with even fewer cancelling these services altogether. Of course, we have heard that a number of institutional investors immediately canceled their use of Primary Global Research once the arrest of Don Ching Trang Chu became public. These clients probably felt the risk of using the service was unwarranted given the cloud of uncertainty that has surrounded the firm.
However, a few sources that we have spoken with have explained that buy-side usage of expert networks has not declined very much at all. In fact, some say that the number of calls fielded by expert networks has fallen less than 5% since news of the federal insider trading investigation broke a few weeks ago, while less than 1% of existing clients have made the decision to cancel their subscriptions of these services. Providers of channel check research have also reported that few clients have decided to reduce their use of their services.
Compliance Questions Abound
We have heard that buy-side investors have had a number of questions for the expert networks and channel check providers they work with. Most of these have been so they can better understand the specific compliance policies and procedures that they have in place. In fact, some expert network providers have told us that a few of their clients are increasing their use of compliance systems that have been in place for quite a while.
We suspect that in the next few weeks, buy-side firms will continue to think through the compliance policies and procedures they want to implement across their organizations. This will include issues like:
- Public company employees: Should they prohibit their employees from contacting employees at publically traded companies?
- Doctors involved in drug trials: Should they ban calls altogether with doctors who are involved in overseeing drug trials?
- Do Not Call lists: Should they implement a consolidated “do not call” list, and if so how should they do this?
- Recording calls: Should they have their expert network calls recorded, or should they even have transcripts made of their calls?
- Channel checks: What type of channel checks calls should they do using expert networks, and what types of channel checks should they avoid to do with these type of services?
Ultimately, in addressing these and other related issues, buy-side clients will need to determine the balance that makes sense for them between increased compliance and performance.
For a more detailed discussion about how these issues might apply to your own firm, please contact Michael Mayhew at Michael.Mayhew@integrity-research.com or call me at 646-786-6859.