For the past seven years, the research team at Gartmore Investment Management has been using a proprietary spreadsheet-based system to help it manage and evaluate equity recommendations from sell-side analysts and salespeople. The system wasn’t easy to develop. “When you’re looking to measure recommendations yourself, you think it’s going to be easy,” recalls Liam Pagliaro, head of research at London-based Gartmore, which manages $80 billion worldwide. “The reality is much more complex, costly and prone to errors.”
Managing the barrage of investment ideas from brokerage firms has only gotten harder. Portfolio managers can be hit with hundreds of Bloomberg messages and thousands of e-mails a week from institutional salespeople -- more than the managers can possibly read. Now Gartmore is giving up on its proprietary spreadsheets; it and other hedge fund and traditional money managers are adopting new systems to filter and evaluate those ideas -- and reward the brokers that generate the best ones.
London-based long-short equity hedge fund Marshall Wace, which has $7 billion under management, has been collating investment advice electronically since 2000 using its proprietary Trade Optimised Portfolio System (TOPS). More than 150 brokerage firms enter about 750 trading ideas into TOPS every day. Marshall Wace portfolio managers review all trade ideas while TOPS tracks statistics such as absolute and relative performance.
Marshall Wace executes favored ideas through previously designated brokers to get best execution. As a result, only 12 to 17 percent of trades are transacted with the firm that contributed an idea: The hedge fund splits commissions between contributor and executor.
Two years ago, London-based technology vendor StreamVPN launched an Internet-based system called Alpha Network that was designed “to help hedge funds extract better-quality ideas from the sell side and filter out noise from e-mail and Bloomberg messaging,” says managing director Erik Wästlund, who works out of New York. Buy-side users, including long-only fund managers as well as hedge fund managers, invite salespeople at brokerage firms to submit trading ideas that fit certain criteria -- say, for large-capitalization U.S. equities, or for short sales only. To date 80 percent of the sell-side idea contributors nominated by buy-siders have been salespeople rather than analysts. Alpha Network can accept only equity or exchange-traded fund ideas, both long and short, and pairs trades. Each salesperson specifies a conviction level for the idea, and the system calculates a track record for each salesperson according to the profitability of his or her ideas.
Fund managers, including Gartmore and Stockholm-based fund manager Robur, also use the system to benchmark the investment ideas generated by their own in-house research analysts. “It’s easy to measure the performance of a portfolio manager,” says Magnus Bakke, head of equities at the $40 billion-in-assets Robur, “but we like to measure our analysts as well.”
Members of both the buy side and the sell side pay to use Alpha Network: 100 brokerage firms are on the system, and buy-side users are split evenly between mostly European hedge funds and mutual funds. StreamVPN’s foray into the U.S. market, begun in late 2004, is picking up steam. In mid-March 2005 the company launched Alpha Pool in the U.S.; the new product, which debuted in Europe in mid-2004, is designed to allow sell-side firms to share and measure the best trading ideas being generated by their salespeople, analysts and traders.
And what will become of those Bloomberg messages deluging portfolio managers? Bloomberg itself is trying to make the messages more useful and easier to manage. The financial information service has launched its own Data Message service that will “harvest the intellectual property of brokers and managers,” says product manager Steve Raaen in New York. The service made its first appearance on the Bloomberg system late last year. Sell-siders can tag a Data Message with a ticker symbol and note the urgency of the message and whether the content is positive, negative or neutral on the security. Users can search their Bloomberg Data Messages for analysis -- say, of small-cap Italian stocks. So fund managers should find it easier to pan the nuggets of gold from the sell side’s river of recommendations.
