As buy-side firms pursue higher returns, asset managers and hedge funds increasingly are consuming alternative research. Not to be cut out of the value chain, the bulge-bracket brokers are building platforms to market and distribute independent research from third-party firms while capturing the buy side's execution dollars through the brokers' electronic trading desks.
In late February, Goldman Sachs, the most aggressive broker at assembling an alternative research platform, formed a separately branded company, Hudson Street Services, to offer investment professionals access to a select portfolio of unique research sources, tools and data sets. "Hudson Street addresses the direction in which our [institutional] clients want to take their business," says Michael Sanders, managing director, Goldman, Sachs & Co., and head of Hudson Street, which has offices in Boston and New York.
Institutional clients are aggressively building their own research capabilities, which includes independent, third-party research, notes Sanders. "As their business changes, they're looking to also utilize independent third-party providers of research," he continues. "We're looking to supply tools and services to the clients' build-out."
Goldman is helping to introduce the third-party providers to its institutional customers and is guiding these firms to tailor their research to meet the needs of Goldman's buy-side clients. "We're also offering distribution to the content providers," explains Sanders, who says Hudson Street will receive a fee if any of the research firms acquire an account. Goldman also is forming exclusive relationships with research providers, even taking minority stakes in some.
As of July, Goldman had invested in six independent, specialized research providers: Investors, a performance-measurement tool for research; Asset4, a large store of environmental, economic and policy data; Connotate Technologies, an Internet monitoring tool that enables firms to create agents that automatically mine the Web; Supply, a global technology leader that provides data sets and analyses on technology value-chain issues; and Medley Global Advisors, an independent source of international monetary and fiscal policy research for hedge funds and asset managers. And in the spring, Goldman became the majority owner of Wall Street on Demand (WSOD), an Internet company in Boulder, Colo., that provides a technology platform for delivery of product.
By assuming a stake in these firms, Goldman can share in the economic value they generate. And by helping the content providers grow their distribution, Goldman is only increasing that value. In addition, sources say, Goldman is forming an expert research network similar to Gerson Lehrman Group, Standard & Poor's Vista Research or Bear Stearns' Primary Insight. Such services introduce institutional investors to industry experts in specific products or companies who may charge as much as a couple hundred dollars an hour for their advice.
"The definition of alternative research and independent research has broadened to not just people writing research but also the technology that organizes research as well," says Dushyant Shawrawat, senior analyst at Needham, Mass.-based TowerGroup. Brokers are getting involved in independent research "because it helps people pay the bills easier," he adds, noting that dollars are shrinking on the proprietary research side.
As a result of the Securities and Exchange Commission's (SEC) approval of soft dollar arrangements last July, Shawrawat explains, "The smart firms are going to the research firms as well as the technology players that can qualify for a piece of the research budget."
While Goldman is leading the shake-up of the research landscape, rival brokerages also are positioning themselves to work more closely with alternative research providers. Credit Suisse's commission management program ResearchExchange, or Rx, is introducing a new feature this year that points buy-side firms toward third-party broker-dealers and independent research based on the names they are trading through Credit Suisse's various trading desks. "We're providing a medium where the research providers can offer up reports and data, and it's really up to the clients as to what they want to source or view," explains Eugene Choe, a director within Credit Suisse Advanced Execution Services (AES).
Meanwhile, Merrill Lynch is putting the finishing touches on an alternative research offering. "We want to continue to attach ourselves with content and idea generation," says Michael Lynch, head of global commission management at Merrill Lynch. "Quality research, both fundamental and primary, provides you with better performance. At the end of the day, this is a performance game." Merrill has not announced its partners or a launch date for the product.
But the question is, why are bulge-bracket firms building portals for alternative research when the content could pose a threat to their own proprietary research? Analysts say the trend is driven by the move toward unbundling the cost of research from the payment for executions and the rise of commission-sharing arrangements (CSAs) or client commission arrangements (CCAs). The CSAs and CCAs allow institutions and hedge funds to pay independent research providers with commissions while simultaneously consolidating their broker relationships with the brokers that offer the best execution.
While the buy side wants to have a growing number of research providers, or "alpha providers that help them make the right decisions, some on the buy side may consider whether they really need 50 to 75 brokers," says Merrill Lynch's Lynch, noting that institutions can't manage that many broker relationships efficiently.
But "Hudson Street is not a reaction to the SEC review [of soft dollar arrangements]," asserts Tom Conigliaro, managing director in charge of Hudson Street distribution and head of Hudson Street's third-party research and brokerage business."Rather, it's a natural extension to our rapidly growing soft dollar platform," he says. "Clients are expressing an increased interest in alternative sources of research, and Hudson Street was created to address that demand."Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio