Why Do So Many Investment Managers Seek Direct Access to Experts?
- The first driver of demand is the ever-more-perfect efficiency of the markets. The vast majority of investors underperform the indices. Regulation FD makes management's proclamations a commodity instantly priced into the market. Investors need unique, creative, frontline insights to truly differentiate themselves from their competition. Traditional research methods give investors data only after it has passed through many pairs of hands. Ironically, Nitron Advisors is a middleman that cuts out the traditional middlemen: the sell-side research analysts, the journalists, the research firms, and so on.
- The second driver of demand is the fact that the traditional producers of research are heavily conflicted. A study by TheMarkets.com and Sapient found that "The buy side prefers to get its information via direct industry access"; "the majority of the buy side does not look to the sell side for investment ideas".[1] Recent sell-side research scandals have dramatically publicized this problem. 95% of the 82 firms ranked by the Wall Street Journal as the "Best Stock Pickers on the Street" and 100% of Institutional Investor's 2000 top investment research firms have line of business research conflicts.[2] Nitron Advisors recently completed an informal survey of hedge fund managers and found that most professional investors use sell-side firms for execution and capital commitment, not for their research per se.
- The third driver of demand is the ever-increasing time pressure on buy-side analysts. They do not have the time to read hundreds of pages of industry background. The best way to manage the daily data deluge is to work with a guide who can directly answer your most difficult questions. A good expert is a Sherpa who can help you zoom in on the most important news in the industry.
[1] "Listening to the Buy Side: Tactics for Delivering Value", TheMarkets.com and Sapient, June 2002.
[2] "Conflicts of Interest Are Eroding the Market's Integrity and Internal Controls", Senate Testimony of Scott Cleland, CEO of the Precursor Group®, December 18, 2001.
