Trade ideas research paper9th December 2016
Investment recommendations go digital
Headlines everywhere tell us that active managers are generally underperforming, and that investors are increasingly favouring passive investment schemes. Having worked extensively with people on the buy and sell-side, we believe that active managers will fight back – using quantitative management strategies.
Quantitative funds, who we regard as a niche class of active fund manager, use a wide variety of data inputs and sometimes complex algorithms to drive systematic trading decisions. Other active managers have traditionally relied on more limited sets of information such as revenue and cost models to analyse individual companies. We expect that all active managers will increasingly adopt what have been specialist quant techniques to look at a wider range of data, using machines to interpret that data and input to final decisions. To gain a more detailed understanding of this we commissioned research looking at how those on the buy-side consume and use the data provided by the sell-side.
We asked Niki Beattie, Founder and CEO of Market Structure Partners and Rebecca Healey, now Head of European Market Structure and Strategy at Liquidnet, to interview fund managers, running both fundamental and quantitative investment strategies and based around the globe. The respondents represent investment firms managing $5.6 trillion* in total and comprise both global and domestic managers.
Key findings from the research
Active Investment Management is under pressure and has been losing out to technology driven investment styles. The major beneficiary of this shift was passive management but quantitative management is also growing. Other active managers are taking notice and a new style of quasi-quantitative model is emerging, requiring new tools and techniques and expanded data sets.
- 94% of respondents expect quantitative techniques to become more popular
- 61% of those interviewed are already reacting to aggregate market sentiment rather than individual research recommendations
- 69% of respondents thought that the best quality recommendations in small and mid-cap now come from local and regional specialists
- 56% of those interviewed are now paying fees for other third party data sets
This creates different demands on the sell-side and quantitative managers are leading the way in redefining the service requirements. The industry is moving away from an emphasis on individual research recommendations towards cumulative data streams from a diverse set of multiple sources. This provides a faster, continuous view of market sentiment.
As the amount of available data increases, the ability of humans to process it is declining and the sell-side is finding it more difficult to be heard. The traditional buy and sell-side relationships based on written research and conversations are unsustainable.
- More than half the interviewees now delete or ignore over 50% of the emails and phone calls they receive from their brokers
- 44% of those interviewed already have automated processes in place to manage incoming information from brokers
- 66% of the firms interviewed valued broker research either to a small degree or not at all
Sell-side firms must recognise that, while demand for access to investment recommendations remains strong, the delivery and consumption of these recommendations is undergoing radical transformation. There are clear opportunities for firms that embrace a digital model.
Read what some of the media have to say about our research:
Institutional Investor: Little Value in Sell-side Research, say Managers
Markets Media: Fund Managers Find Little Value in Broker Research