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Revenge Of The Researchers

01 November, 2011

Richard Sherlund is in many respects back where he started. For nearly two decades, Mr Sherlund was frequently called “the axe” – slang for the top analyst in a sector. Technology was his sector and Goldman Sachs his employer.

In 2007 he left to try his hand at putting his research into practice by investing money on behalf of clients. “I wanted to try something different, be broader and run money, and get some new experience,” he explains.

Now, many of the largest hedge funds, asset management firms and banking boutiques that thrived before the crisis are struggling. Bonuses have fallen sharply for many and some sectors, such as hedge funds, have been hit hard by high-profile scandals.

Mr Sherlund, for example, worked for a brief time at Galleon Group in 2007, whose founder Raj Rajaratnam was recently convicted of insider trading. Mr Sherlund left quickly (for reasons unrelated to the charges later filed against Mr Rajaratnam) and started his own fund using seed capital from prominent technology executives, including Paul Allen, Microsoft co-founder.

“The buy side’s gone through a trauma,” he says. “But the sell side has as well.”

The difference is that some of the changes in banking have been beneficial for the role of the analyst. With G20 countries agreeing to force banks to rely less on trading for their own account, client-facing businesses have taken on more importance.

Mr Sherlund says this has forced sell-side analysts to improve their work since the 1990s: “There has been tremendous commission pressure, and analyst compensation has gone down a lot from where it had been. But I still think changed things for the positive.

“It was probably good to have that cleansing taking place. The integrity of the business has been preserved, and analysts now work really hard to try to distinguish themselves, trying to get a step ahead of competitors and have that valuable perspective that people want to talk to you about,” he says.

One of the reasons he returned was to be a part of the industry conversation, which he says is harder to do on the buy side. “The buy side can be a little isolating,” he says. “I like the interaction. Being an analyst is not stockpicking, it’s communicating with clients and companies.

“I’m able to work with others in the firm, and make this work globally and across sectors. It’s fascinating,” he says.

“We’re in the early stages of the next wave of tech companies, which is what makes it exciting right now. It’s like watching Mad Men – you can’t wait for the next season. [Good research] has a point of view on where this industry is going, who’s better positioned. The company learns from you as you learn from them.”

Sell-side research is also becoming more valuable to bank clients more generally. A slumping market and less money flowing to shares has slowed the advance of high-frequency dealing, which often grew at the expense of fundamental analysis.

“There is a much more constructive view of the value of research than what I saw five years ago,” says Jay Bennett, managing director of the equities practice at Greenwich Associates, a banking industry consultancy.

According to Greenwich, investment firms last year voted to allocate more of their commission dollars to research – and away from trading: 59 per cent, up from 53 per cent in 2009.

“Uncertainty in the markets always increases the bid for research, and especially for research that has proved to be different and prescient,” says Steve Blitz, senior economist at ITG Investment Research.

Mr Blitz began his career as an analyst at Salomon Brothers in the 1980s but left to manage fixed income assets at Offitbank and Lazard Asset Management. He joined a research boutique in 2009 that was last year bought by ITG, a New York-based electronic execution brokerage that was investing in research.

Analysts are also finding opportunities at banks similar to those they found at hedge funds in years past. Hsulin Peng this year returned from working at an energy hedge fund to join Robert W. Baird, the Milwaukee-based investment firm, building up a new energy research team.

At the hedge fund, Ms Peng, who started her career as a sell-side analyst at Citigroup, would be involved in stockpicking and expanding the sectors the fund was investing in. That was appealing because of hands-on investing opportunities, and often involved less back-office administrative work, fewer hours and less travel than being at a bank.

But the opportunity to help build a new energy research practice on the sell-side, where she could ensconce her own models and develop her own clients, struck the same entrepreneurial chord.

“I don’t know that this is an especially good time to be on the sell-side,” says Ms Peng. “And there is nothing wrong with being on the buyside either. But Baird presented an opportunity, and being an entrepreneurial person, I decided to pursue it.”

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Revenge Of The Researchers

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