Damn the Torpedoes


“We are going to expand.” –Mark Roberts, Off Wall Street, as quoted in Barron’s December 29th, 2008

New York – Despite the grim environment – fewer institutional clients, reduced spending on research, the end of Research Settlement subsidies for independent research – some intrepid research firms are expanding. What better time to hire than during a recession? As Baron Rothschild is reputed to have said, the time to buy is when there is blood in the streets. Easier said than done, however.

We are forecasting a very tough year for equity research.  As we noted in October, commission spending on research is likely to be down 40% in 2009. Layoffs are spreading to the buy side, with all types of investors cutting positions. Citadel, Perry Capital, Ramius Capital, Glenview are some of the hedge funds with publicly reported layoffs, but most of the cutbacks are not publicized. Commentators are predicting that 30% to 50% of hedge funds will close. We predict a 15-20% decline in spending on alternative research in 2009.

And then there is Mark Roberts of Off Wall Street, a boutique research firm best known for its short ideas, saying in Barron’s: “We are going to expand our staff here this year in anticipation of the cycle coming back and on the theory that many of our clients are going to be even more dependent on outside independent research than they were.” In the article, he acknowledges that many hedge funds – his primary client base – won’t survive. Yet, he is expanding.

Granted, short ideas specialists like Off Wall Street benefit from market environments such as this one, along with forensic research and earnings quality analysis. Mark Roberts, whose firm has been around since 1990, has been through cycles before, however, and cites another reason for expansion: increased demand for outside independent research.

Off Wall Street is not the only firm viewing the current turmoil as opportunity. We recently profiled a startup, Access 342, which is attempting to set up a platform for marketing security analysts to the buyside.  Other firms are also in the market to hire analysts. Soleil Securities has been adding new research analysts to its platform. We reported in November that Soleil recently added 3 new research teams to its platform.  Research Edge, founded in 2007 by ex-hedge fund PM Keith McCullough, has added four prominent analysts over the last year to its platform.

In Hong Kong, research marketer Enzard Limited has successfully implemented an ‘analyst hotel’ for analysts to take advantage of Enzard’s regulatory status and marketing capabilities. The analyst writes the research and Enzard takes care of everything else (publishing, compliance, account management, IT, invoicing, payment collection etc.). Analysts can either work physically in Enzard’s Hong Kong offices or virtually from another location. Enzard’s approach has similarities to the platforms set up by Soleil and Street Brains.

Another bright spot is fixed income analytics. With traditional credit ratings in disarray, fixed income investors are turning to alternative credit research like CreditSights and Gimme Credit, and analytics providers like Markit, Intex or Credit Derivatives Research.

We recently highlighted other growth areas – mashup technology, search-driven platforms and research management systems – which are increasingly being applied to investment research. As the buy side gets leaner, it will leverage technology to stretch scarce analytic resources.

Expanding in the midst of contraction is not easy, but for a few areas of alternative research the best time to move forward is when everyone else is retrenching.


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