New York, NY – According to an article in this week’s Wall Street Letter, Goldman Sachs has begun marketing a list of its analysts’ “high conviction” stock picks to its institutional clients. During the first half of 2007, this portfolio of stocks outpaced the S&P 500 by 3.6%.
This strategy is a little strange as countless studies (including one we just completed) have shown that the performance of analyst recommendations is not very valuable to the buy-side. It is also a risky approach as the performance of sell-side research has typically lagged the broader market — particularly in sideways or down trending markets.
However, one argument for this move could be the growing demand from hedge funds for trading ideas — or a research provider’s highest conviction ideas. This interest in “trading ideas” first became popular with a strategy employed by UK hedge fund manger, Marshall Wace, called TOPS (short for Trade Optimized Portfolio System).
The Marshall Wace system initially gained significant interest from both competitors, brokers, and regulators. Some complained that the strategy encouraged sell side analysts to offer Marshall Wace their best ideas on a preferential basis, in order to guarantee large commission payments. However, last year, the Financial Services Authority cleared Marshall Wace and other operators of so-called “Alpha Capture” systems of any wrongdoing, saying the firms had a series of checks in place to prevent market abuse.
Numerous “trading idea” systems have been released in recent years, including FactSet’s AlphaMetrics suite of products and YouDevise’s Trade Idea Monitor. In fact, a few hedge funds have reportedly been working on setting up their own “trading ideas” networks to capture and reward brokers and alternative research providers on the performance of their highest conviction research ideas.
Other Wall Street firms have also decided to market the performance of their best ideas. According to the WSL article, Deutsche Bank and Morgan Stanley are also planning to roll out a list of their top picks benchmarked to the S&P 500.