Keith McCullough, chief executive of New Haven–based Research Edge, an independent research provider for hedge funds, knows what it’s like to be an ostracized naysayer. For years McCullough, a former hedge fund managing director for the global private equity firm Carlyle Group, was a vocal critic of hyperleveraging.
“People just didn’t want to hear about it,” he recalls. “I really took a lot of heat.”
McCullough, who launched Research Edge in 2007, sees a burst of demand now for independent research in the face of losses and redemptions at hedge funds, which, in his view, have been plagued (like much of the investment world) by weak research.
A fundamental reshaping of the research landscape may be at work, as struggling investment banks reduce their analyst ranks. New York–based Integrity Research Associates, a data provider that tracks investment researchers, estimates that the number of senior publishing analysts at sell-side investment banks and brokerage firms has fallen by nearly 40 percent over the past year. More often than not, laid-off analysts end up in independent research.
The market is there for it. Hedge funds and other money managers, as well as institutional investors, continue to require solid research. Boston-based Fidelity Investments, which recently launched an online tool ranking the quality of independent research firms, noted an uptick in demand for reliable analysis. “Expanding in the midst of a contraction is not easy,” concedes Sanford Bragg, president and CEO of Integrity. “But for a few areas of alternative research, the best time to move forward is when everyone else is retrenching.”
Disputing the market consensus has often separated leading independents from the rest of the pack. Mark Roberts, founder and head of Cambridge, Massachussetts–based independent research firm Off Wall Street Consulting Group famously issued a rare dissent on Enron Corp. months before the energy giant’s spectacular collapse in 2001, for instance.
Michael Dolan, head of research sales at Instinet Group, a New York–based brokerage and trading platform, notes that small-shop independent research has been growing for some time. “Over the past five or six years, we’ve seen the market move from very large, highly scaled independent outfits to considerably smaller entities,” he says. “We’ve heard from a number of analysts who are quite comfortable working with a roster of 15 to 20 clients using just one assistant.”
John Eade, president and director of research for Argus Research Corp. in New York, says hedge funds will continue to rely heavily on independents. “Some of the most successful independent research products have come from the expert [independent] networks,” he explains. “Corporate access also scores highly among hedge funds — and may be even more important if sell-side research is cut back.”
Hedge fund managers, of course, shouldn’t assume analysis is good just because it touts itself as independent, cautions Donald Luskin, CIO at Trend Macrolytics, a Menlo Park, California–based investment-strategy firm.
“The point is to make the right call — not just to be independent,” Luskin notes. “Only the ones that can really add value will thrive. Most likely, those will be the specialist firms that really know what’s going on in some particular area of focus.”
