The Changing Face of Research


New York, NY – On September 26th and 27th, Institutional Investor held its 17th Annual Alpha Hedge Institutional Investment Conference in San Francisco California.  Besides discussing a wide range of industry specific topics like the importance of creating a global resilient portfolio, diversification, and alpha opportunities in the global currency and fixed-income markets, a number of broader topics were addressed, including the changing face of research.  Alvin Kressler of Bloomberg Tradebook, David Riedel of Riedel Research, and Mike Mayhew of Integrity Research Associates contributed to this panel discussion.   The following blog presents the highlights of this panel discussion.

The panel started out by addressing the biggest changes to the investment research industry over the past decade which include Regulation FD in 2000, the Global Research Analyst Settlement in 2002-2003, and commission unbundling which has had more of an impact in the UK and Europe than in the US. 

Certainly, with all of the press coverage of insider trading, many wanted to know how expert network firms fit into the independent research space and whether this segment had a future.  It was pointed out that expert networks, like other parts of the independent research industry were really a result of “unbundling” the traditional sell-side research product.  Admittedly, some buy side shops are forming or have formed their own internal expert networks.  However, the consensus was that there is still going to be a need for dedicated buy side and sell side analysts in the future.  The panel concluded that the largest, most well-established expert network providers would be viable players going forward, despite significantly diminished demand currently. 

The panel also discussed the buy-side’s willingness to pay for independent research.  Integrity Research explained that the buy-side currently spends between $1.5 bln to $1.7 bln on independent research annually.  There is an increased understanding by those who do pay for research that “you get what you pay for”.   In other words, those clients who claim that they are unwilling to pay for any research are not getting differentiated research.  They do not have that “edge”.  Hedge funds have clearly shown a willingness to pay for independent research, though many long only investors have followed suit.  Alvin Kressler discussed that the Bloomberg Tradebook platform enables the buy-side to pay research providers in whatever manner they want – either through CSAs, through a bundled arrangement, or with a check. 

The panel also discussed what type of clients are most interested in 3rd party research and what they are looking for.  It was agreed that clients who know what they are looking for in terms of investment ideas, questions to ask, etc., love independent research, whereas clients who do not know what questions they are trying to answer do not.  Consumers of research clearly want that edge referenced above. They are looking for analysts who have experience in the industry or in the case of global investing, analysts on the ground.  David Riedel explained this was the reason he had 31 analysts on the ground in 15 countries.

This led to a conversation about what research is going to look like in 3-5 years.  While it is likely that there will be continued change in the research industry in the future, the panel felt that clients would turn to good independent analysts as “trusted guides” given the oversupply of information.  In this environment, the written research report will be seen more as “marketing” the analysts’ knowledge, whereas the real value-add will come from access to and dialog with the analyst and his or her team.  The difficulty will be (as it is now), ensuring the buy side is willing to pay for what the research is worth. 

The panel also agreed that the current demand for more compliance around independent research could have a profound impact on the future of the industry as some firms would not be able or willing to make the investments necessary to address the concerns of their buy-side clients.  Consequently, these firms would likely disappear.

There were a couple of specific questions about whether or not people pay for Macro and Technical research.  The panelists agreed that clients saw significant value in macro and policy research – particularly given the volatility of the markets.  Alvin Kressler discussed what Bloomberg TradeBook was doing in this space with Roubini, Lombard Street, and Bretton Woods.  He also acknowledged that since some clients really value technical research providers, Tradebook was also providing these services.  David Riedel addressed a question from the audience regarding whether a fund with $100-$300 million AUM was too small to use independent research.  He thought this was actually a sweet spot for independent research providers as this segment was underserved by the large investment banks, and they would get a lot of attention from the small independent research provider.

All in all, the panel discussion was highly interactive, with considerable participation from the audience.  It was clear that the topic of investment research is still an important and interesting one for participants on the buy-side.


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