ANALYSTS at big brokerage firms are increasingly becoming short-term trading strategists for hedge fund clients rather than providers of research to longer-term investors, according to Bloomberg.
Sell-side analysts are so busy chasing lucrative trading dollars from hedge funds that they don’t have time to even take calls from big mutual fund managers.
“You have to call at off-peak hours, like early in the morning,” Steven Roukis, who helps manage $1.7 billion as research director for New York-based Matrix Asset Advisors Inc., tells Bloomberg.
He tells the news agency he used to get half an hour on the phone with Wall Street analysts five years ago, but today he’s lucky if he gets five minutes with anyone. He now relies heavily on the Internet and original sources for his information. (See? One more reason to get your IR website into shape.)
Opposite of what companies want
The problem is that hedge funds are more profitable clients for research departments. The average brokerage takes in $33 million a year in stock-trading commissions from a hedge fund, compared with $16 million that a typical mutual fund will spend, says Bloomberg, quoting Greenwich Associates data.
The changes mean that sell-side analysts, which investor relations departments have long considered a vital constituency, are now on the opposite side of what many companies want to achieve with their IR programs.
While many companies want the sell-side to provide broad dissemination of written research to long-term holders and prospects, sell-side analysts are counseling elite cliques of hedge funds on short-term trades.
Don’t care what companies do
At JPMorgan Chase & Co., the third-largest U.S. bank, top-ranked steel analyst Michael Gambardella tells Bloomberg he can spend more than half his day talking to hedge funds.
At Credit Suisse Group, global equity research head Stefano Natella has told his staff to cut the number of customers to 200 from 600 to pamper the most profitable money managers.
“The only time you can distinguish between clients is analyst time,” Natella tells Bloomberg. “Hedge funds want to pick the analysts’ brains for ideas.”
Former Bank of America Corp. analyst James Wicklund, who left his job three weeks ago after more than 15 years in equity research, tells the news agency:“Half the people I talked to don’t care what companies do, they’re wondering, `Will I make money if I buy or sell this stock?”
He says the shorter time frame of hedge funds and their disdain for depth has caused research reports to lose most of their value.
Assigned to trading desks
Tom Larsen, head of research at Harding Loevner Management LP, which runs $5 billion of assets tells Bloomberg that there’s strong demand for “idea-generating” analysts.
“Company knowledge combined with actionable ideas might replace publishing research on paper all together,” he says.
Bloomberg says Merrill Lynch and rival Lehman Brothers Holdings Inc., along with UBS, are among firms that have assigned analysts to trading desks. They now discuss strategies with hedge fund clients and no longer publish research.
Margaret Cannella, head of U.S. corporate research at JPMorgan tells Bloomberg: “Analysts spend more time with clients as well as the trading desk, providing actionable ideas.”
Former Merrill energy analyst Chris Jarvis tells the news agency he was told to spend more time pitching investment ideas to clients on the phone instead of putting them in reports or e-mails. He now runs his own hedge fund.
Alright, alright! Someone remind me again why IR departments go out of their way to court and pamper sell-side analysts.
How come these guys and girls get to ask all the questions on conference calls? And why are CEOs and CFOs giving up their precious time to do presentations at broker conferences and host bus tours?
So that some hedgie can short their stock?
Seems the game has changed, so perhaps we need to change the rules.
Related: Mutual Funds Get Busy Signal From Analysts Chasing Hedge Funds (Bloomberg)
Dominic (bio & disclosures) is IR Web Report‘s founder and an online investor relations consultant. He advises leading public companies and investor relations service providers worldwide on using the web for disclosure, engagement and profile building. You can contact him via the contacts page.
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