"Independent" Equity Research

I've taken a closer look at some of the independent startup research firms aforementioned... Am I crazy, or do they just look like a bunch of unemployed sell-side research analysts with an added twist? Who's going to pay these guys?

Maybe the correct question is, who's gonna pay them $100,000-200,000/yr plus $1-5m?

Um, I guess no one, that is, on a subscription basis. Perhaps on a performance measurement basis. Wouldn't that be great? Finally, compensation based on quality research and not number of phone calls you make in a day. I bet their are plenty of analysts out there that would prefer this model of compensation.

If there are happy, quality analysts out there that want nothing to do with investment banking, I bet the bankers are eventually going to create a separate category... perhaps pay some investor relations firm stacked with former sell side analysts that enjoy marketing more than analyzing.

Equity research is still a hard game for newcomers to get into. I remember Yankee Group back in 2001 intending to enter equity research... just a wild guess here, but perhaps the problem they ran into was that they didn't have any equity research analysts on staff and couldn't afford to hire even the unemployed equity analysts!

If these new independents are going to make it, they I believe it will be due to the successful growth of independent asset management firms. Obviously Fidelity, Wellington, State Street aren't going to pay these independents... they already have an army of their own buyside analysts sifting through scores of sell-side research reports every day.

If these independents are smart, they will treat their hedge fund and other small asset-management companies as partners. A lot of phone calls, a lot of meetings with the portfolio managers.

But then, how is this different from the sell side? No investment banking revenue. At least for me that's not such a big issue. Like a lot of youngerer analysts, I got into equity research thinking our job was to research stocks, not pitch investment banking services.

I can't wait to get started again on real research. In business, there is no process more exciting than analyzing stocks and collecting accolades for your investment ideas.

Comment from Anonymous:
Long only shops like Fdelity, Putnam etc. probably won't pay independent shops but hedge funds will. My experince of working in a independent research shop for the last two years showed me there is money to be made if the service is innovative and adds value to the research process. The independent shops who are going to survive are the ones who provide some sort of proprietary data to hedge fund managers and don't spread it all over the street through trading desks and research salesman.

I am starting my on firm in January and will focus only on hedge funds. These guys will pay you if you provide them with good data.

Comments

[--H]

Hi Stephen:

I accidentally ran into your blog via Typepad, which I also use.

I am an L3 candidate and am residing/working in San Francisco. This is almost the exact topic discussed on an SASF roundtable I attended last month:
http://www.sasf.org/cfmfiles/cal/pastevent2.cfm?id=338&t=g&d=Z

Anonymous is correct when pointing out that boutiques research materials are for hedge funds' consumption. Boutiques also are supposedly getting some of the pie from the pots collected by Spitzer from the penalties paid by sell-siders.

If I'm not misunderstanding you; my thoughts on research resemble yours, in a sense that I prefer to see "pure research" not driven by banking businesses.

But in a real world, I think it's tough (or almost impossible). The edge research analysts is supposed to have is "access to company's management and their info.". Does not have to be inside information, as prescribed by CFAI, but good analysts can develop their own edge via "mosaic theory".

This access and info. will be tough (again almost impossible) to get if more negative things is written about a company. And it does not even necessarily have to relate to investment/corporate banking businesses, just an example of chicken/egg process.

I'm glad I found your blog and will add it to my bloglines.