Hedgeye Risk Management, an independent research firm, moved markets by releasing a twitter post previewing a forthcoming negative report on Kinder Morgan. The incident confirms the growing importance of social media in the distribution of research.
Kevin Kaiser, a 26-year-old energy analyst at Hedgeye, jolted Kinder Morgan, North America’s largest oil and gas pipeline and processing company, with a Twitter post and an email sent to clients on September 4th claiming Kinder Morgan and its associated companies “is a house of cards, completely misunderstood and mispriced.”
No specifics were provided but Kinder Morgan Inc (KMI) shares dropped 6 percent taking $4 billion off the company’s market capitalization.
Kaiser had previously released a negative report on Linn Energy, sparking a public battle with Leon Cooperman in the pages of Barron’s.
By the time Hedgeye released the full report on September 10th, the stock had mostly recovered as prominent investment bank analysts reiterated their buys on KMI. On the day the report was published KMI rose 2%, suggesting that the report was being shrugged off, but the stock resumed its plunge in the days following and is now nearly 8% below its price before Hedgeye’s Twitter post.
Although much of its research is targeted to institutional investors, Hedgeye Risk Management has a retail component to its research. The firm was founded in 2008 by Keith McCullough, who was previously a portfolio manager at Magnetar Capital and Carlyle-Blue Wave. It provides daily macro-oriented commentary and has added equity coverage by recruiting sector analysts from hedge funds and the sell side through a revenue sharing business model.
The growing importance of social media for research distribution is reflected in the FBI’s monitoring of Twitter and Facebook for insider trading violations. The SEC has ruled that using social media sites could be an appropriate means of distributing important corporate information, permissible under Regulation Fair Disclosure. And bogus tweets purporting to come from noted short sellers such as Muddy Waters and Citron Research have tried to manipulate stocks.
Although social media seemingly offers a low cost distribution mechanism for independents, it only works if the analysis has the credibility to back it up. Kaiser’s Kinder Morgan tweet had credibility because of his previous work on Linn Energy. It is not clear whether his credibility has been helped or hurt by the Kinder Morgan report.
The other consideration for independents is the importance of exclusivity. One of the key strengths of independent research, especially for hedge funds, is the fact that it is not widely distributed, allowing clients to take positions before the research is fully reflected in the markets. An active social media profile is not consistent with having an exclusive, limited client base.
Use of social media also brings compliance concerns, to ensure that the firm has explicit policies on its use for research dissemination. Nevertheless, it is clear that investors are increasingly relying on social media and its importance to research distribution is here to stay.