As the hedge fund industry has grown, so have managers’ demands on equity research providers.
“Over the last decade, the skew of demands on our department has meant that our time spent with hedge funds has consistently grown,” said David Adelman, director of equity research for the Americas at Morgan Stanley. “It has grown before, through and post-Covid.”
In part this growth reflects the hedge fund industry’s performance and asset flows, he said. Global hedge fund assets have continued to soar, hitting an all-time high of more than $4.3 trillion at the end of the second quarter this year, according to BarclayHedge.
“Those are driving dynamics,” Adelman said. “In addition, we’ve also seen the substantial growth and development of platform hedge funds, which are sector-focused funds with individual portfolio managers that follow a particular sector, or multiple PMs that focus on a particular sector.”
The approach taken by these funds is very rigorous and disciplined and relies heavily on sell-side input, he added. “The growth of hedge funds in general but platform hedge funds in particular has had an impact on the relative demands of our analysts and who they service.”
Bank of America has seen a similar evolution of its client base and the focus of its analysts, according to its head of Americas equity research, Brett Hodess. “If you really look at our client base 50 years ago, it was dominated by large, institutional, long-only investors with longer term views for investing. They had excellent investment professionals, but not as many — most of those funds had just a few portfolio managers. And it was somewhat of a homogenous client base, so the products that we produced for them were pretty similar for everybody.
“Now we have a really broad range of clients,” he continued. “We still have those long-onlys, but we also have the giant platform hedge funds that have hundreds of PMs and analysts, who are all specialists in specific verticals. We have smaller and more focused hedge fund clients. We have private equity and VC firms as well as the sovereign wealth funds. So the client base is really different and as a result analysts today have to be focused on the longer term — they have to take a look at the broader picture but also have to be hyper focused on the near term.”
That near term picture has for the last 19 months been dominated by the Covid-19 pandemic, which, along with broader trends in the hedge fund space, has led to increased research consumption by alternative managers. Even 2018’s Markets in Financial Instruments Directive, the European rule that was expected to reduce demand for research, hasn’t dampened hedge fund managers’ appetites — and in fact has contributed to higher demand for Morgan Stanley’s products, Adelman said.
“On the margin, I don’t think that MiFID had a material impact on consumption or our business model, but MiFID plus Covid plus asset growth has all contributed to varying degrees a higher relative demand from hedge funds for our research department’s time and insights,” he said.
It appears hedge fund managers value these insights highly as they have elevated Morgan Stanley to first place in the 2021 All-America Research Team: Hedge Fund Cut.
The bank dramatically improved on its third-place finish last year in the annual ranking of hedge funds’ favorite research providers. Like last year, the votes were weighted by each respondent’s research spend to produce commission-weighted ratings. Morgan Stanley also improved its ranking in the overall All-American Research Team from fourth to third.
Last year’s winner Bank of America took second place in this year’s Hedge Fund Cut, followed by JPMorgan Chase & Co. in third place. Evercore ISI maintained its fourth position, while UBS improved one spot to crack the top five. Three additional leaderboards based on both individual analysts and assets under management were also produced, which closely mirrored the main results.
According to Adelman, Morgan Stanley’s success has come not from catering specifically to hedge funds but just trying to provide the best overall research.
“Morgan Stanley doesn’t have a hedge fund research product. We have a research product that is trying to provide differentiated insight to help all investors make decisions,” he said. “We market that content to clients who have the greatest ability and willingness to pay for it.”
Adelman said Morgan Stanley focuses its product to be thematic and tactical. “We want it to be both strategic and long term and have a real analytical framework, but we aren’t opposed to having a differentiated view making short-term calls as well,” he said.
The research director also touted his firm’s strong individual analysts, who have long tenure in the industry and are given the right resources, and credited a collaborative approach among clients, the business, and the research division. “We expect and we reward collaboration across sector, geography or capital structure,” he said. “That is the hardest type of research to do, but it tends to be the most impactful.”
Research at Morgan Stanley is also very integrated into the overall business, Adelman reported, which “gives us tremendous insights. We have a leading equity business globally and as result we talk to a broad range of investors — whether they are long-only hedge funds or sovereign wealth funds. It lets our analyst know sooner if they are onto something interesting.”
A robust IPO business and subsequent due diligence on emerging companies in a variety of industries also helps. “We have better insight into what is coming over the next hill,” he concluded.