While many buy-side institutions continue to try to place a value on sell-side research, others are beginning to do their own research and are starting to cut sell-side research out of their planning entirely. "We don't really rely on the sell side," says Charles Frumberg, founder and managing partner of Emancipation Capital, an activist value hedge fund.
"If you are a direct institutional investor, you either have a methodology that allows you to do your own work, or you're in a heap of trouble," continues Frumberg, who had a long career on the sell side as cohead of equities for SG Cowen Securities Corp., and as director of U.S. equity research and cohead of global research at UBS Securities. "To rely on the sell side is just not a viable investment strategy."
In Frumberg's view, the sell side has been disintermediated over the past five years by regulations put into effect in the post-Enron and WorldCom environment. First, he points to Regulation FD, which requires public companies to provide information to analysts evenly. As a result of the mandate, Frumberg says, the corporate world stopped providing any information, thus making it more difficult to be a sell-side analyst.
Second, according to Frumberg, the separation of research from investment banking cut off the funding. A third issue is the pricing, forcing the sell side to unbundle the services it provides to the buy side. All of these factors combined have led to a flight of financial and intellectual capital, according to Frumberg. While "the sell side had questionable value for a long time, its marginal value is greatly diminished," he says.
For this reason, Frumberg began using firstRain, a search-based application that trolls the Internet looking for information across a wide variety of sources, including blogs, corporate Web sites, obscure trade journals, FDA drug trials, litigation filings and more. "We use it more for stocks that we already own," explains Frumberg. "But we do use the inputs to shape our opinion, and that's really the name of the game. Can you find that incremental piece of information that helps you with your investing?"
Delivered as a hosted software model, the company configures the system so that portfolio managers and analysts spend about 15 minutes with the company to indicate which companies and trends are of interest to them.
"The real value out of the product is the input you provide at the outset -- the list of names, what sort of sources -- which defines the ecosystem (i.e., companies, major suppliers and competitors) you are looking for without being very specific," Frumberg says. "And the company does a very good job of piecing together the pieces of that ecosystem."
"The problem for the buy side is time and how to deal with the information overload," says Penny Herscher, president and CEO of Foster City, Calif.-based firstRain. "The results are delivered through e-mail before the market opens or at some frequency during the day or via a portal."
Ultimately, Herscher adds, firstRain's goal is to change the status quo. "The cost of doing nothing is missing information about your investment, which for the buy side is a nightmare," she says. 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