The Hunt for "Wild and Crazy Ideas"
Hedge fund managers increasingly turn to others for investment advice
December 3, 2007
They are paid more than their peers in the mutual fund industry to uncover hidden value in disparate markets ranging from commodities to derivatives. They've been known to lend money to pop singers or shop in Chapter 11 bankruptcy sales. But, increasingly, some hedge fund managers are turning to outside research for investment ideas.
"Hedge funds, for the most part, are looking for non-traditional research," says Michael Mayhew, chairman and co-CEO at Integrity Research Associates. Specifically, he says, hedge funds are interested in primary research and expert networking that allows hedge funds to poll end-users of a company's product. Also, they want research gleaned from the Internet. "Any wild and crazy ideas, hedge funds like," says the chairman of Integrity Research Associates.
Forty-five percent of hedge fund research directors utilize external sources such as independent research shops, a survey conducted by Integrity Research found. That information from external sources is re-evaluated each month. The New York consulting company based its findings on a survey of over 20 directors of research at hedge funds. "Hedge funds use external sources to help find unique research," Mayhew says, adding that if a hedge fund manager thinks an idea will generate a return, they will go anywhere they can to find research that will test that idea.
"Hedge funds are all about exclusivity," says Michael Ross, partner at TABB Group, a research consulting firm that works with hedge fund managers. "The large syndicated research is less and less valuable because the more people it gets sent out to the less alpha [return] there is available in the ideas," says Ross.
Doug Atkin, president and chief operating officer at Majestic Research, a New York-based independent research shop that covers nine sectors and 500 companies for clients including hedge funds, is among those to get calls from hedge funds looking for custom research. "Specifically they rely on us to track data and analysis, then form an investment thesis to track a trend before the market catches on," he says.
Majestic sifts through massive amounts of data from more than 200 million web pages a month and relies on more than 40 industry sources, such as corporations.
Hedge funds find non-traditional research extremely valuable, and 35% of hedge funds value research based on forensic and quality-of-earnings analysis, Integrity found. Forensic accounting that analyzes companies for accounting irregularities and patent analysis has become a more popular research method. A hedge fund looking for shorts, mainly fundamental hedge funds, want forensic accounting research and ratings on financials, Ross says.
Hedge funds are increasingly looking beyond the US so there are more investors eyeing emerging markets. There has been increased demand for primary economic research because a lot of hedge funds look outside the US for returns, Mayhew says, adding that hedge funds want policy and political risk analysis.
In addition to getting a fix on the political scene overseas in emerging markets, hedge funds are perusing smaller companies. Integrity's survey of hedge funds discovered that more funds want small-cap research to help them unearth potentially high-growth firms not well known by investors. Also, the survey of hedge fund professionals found that many are interested in expert networks to get original insights not widely broadcast in a market. There is a lot of demand in the industry for consulting as well, Mayhew says.
"Expert networks give hedge fund professionals an opportunity to talk to experts and get their point of view on uniquely tailored questions they have," says Sanford Bragg, co-CEO and president of Integrity.
Of course, hedge funds not only want finished reports; they are looking to analyze the raw data for investment ideas internally. Tools that analyze data, rather than pre-packaged reports, are growing in popularity because they allow the hedge funds to "put their special twist on information," according to Ross.
jessica.papini@sourcemedia.com
(c) 2007 Investment Dealers' Digest Magazine and SourceMedia, Inc. All Rights Reserved.
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