The Information Edge Is Dead On Wall Street -- Replaced With Hunches, Surveys And Pre

Andrew Haigney, El CAP | May 23, 2011, 2:43 PM

Andrew Haigney is Managing Director of El CAP, a Registered Investment Advisor in the state of Vermont that provides investment-consulting services to individual investors, corporations, foundations, trustees, and endowments

Wall Street is driven by information. In the asset management business, information is the lifeblood. Superior information translates to superior investment results, and superior investment results mean big paydays.

As illustrated by the guilty verdict in the Raj Rajaratnam insider trading case, some investors will stop at nothing for information.

It wasn’t that long ago that the so-called “information edge” was readily available, and large investors viewed it as an entitlement.

Companies routinely would make selective disclosures of non-public, market moving news directly to large investors or brokerage firms. I spent the bulk of my career marketing investment research for one of the world’s largest investment banks. We would take the information and repackage it as “research.” Many clients felt that they had no choice but to do business with us because we had the inside track on information.

Early in my career, one of my accounts requested an earnings model from one of our highest profile analysts, and the analyst refused to send the model to my account. I brought the situation up with management. It came to me as a surprise that the reason he wouldn’t send out the model was because he didn’t have a model. It seemed counterintuitive—how could this guy be the top rated analyst in his space and not have an earnings model?

The answer was that he didn’t need a model—he was the go-to guy in his space. If a company had news to release, in many cases they’d just call our analyst and he’d put out a research comment, which was then conveyed to our largest clients first, hence the term “first call.” Everyone knew this analyst was very tight with the managements of the companies that he followed and so naturally they coveted his research.

Then in 2000, the SEC adopted Regulation Fair Disclosure, or Reg. FD, which put an end to selective dissemination of non-public, market moving news. In a nutshell, Reg. FD requires issuers to provide everyone with the same information at the same time. It was the beginning of the end for Wall Street research. Overnight, we went from marketing juicy market moving scoops to marketing hunches, industry surveys, and rehashed corporate press releases.

Not long after Reg. FD, investment research took another body blow when in 2003, the SEC entered into a settlement agreement with major Wall Street firms relating to conflicts of interest arising from the way investment banking and research departments interacted. Our analysts’ windows of insight into their respective industries were slammed shut, research budgets were slashed as they could no longer be subsidized by investment banking fees, and many talented analysts moved on to pursue other interests.

The era of the information edge was regulated away and Wall Street research lost its fastball. Yet amazingly, I never received a single call from a client questioning the value of our research. I guess it’s a testament to the fact that the asset managers don’t pay for the research, their clients do.

Of course the research story doesn’t end there. Enter “alternative research” firms, also known as expert networks, matchmakers, etc. These firms operate on the regulatory fringe. They generally recruit mid-level corporate executives to moonlight as “industry consultants.” Unlike senior corporate executives who are trained to deal with inquiring investors on a daily basis, these mid-level executives usually lack the training found in the corporate suite, making it far more likely that they’ll spill the beans and give away secrets. Raj Rajaratnam apparently put together his own web of experts and paid them handsomely.

Most of these third-party research firms claim that their consultants, or experts, will not disclose any non-public or market moving information. Naturally this begs the question, why would a savvy investor pay these steep research fees if all the information is already in the public domain?

Much to the chagrin of active investment managers, the days of the information edge are behind us. As regulators have discovered the power of wiretaps, investors who want to roll the dice with these alternative research outfits should have a back-up career ready to go.

Read more: http://www.businessinsider.com/why-the-era-of-the-information-edge-is-dead-2011-5#ixzz1NCkD9yw9

 

"Hedge funds are finding that Washington can be a gold mine of market-moving information, easily gathered by the politically connected. The funds are hiring lobbyists -- not to influence government, but to tell them what it's going to do. Several lobbying firms are ramping up their "political-intelligence" units and charging hedge funds between $5,000 and $20,000 a month for tips and predictions."

Heads up fellows!!!!!!! Below is my favorite. (A side note, what industry isn't somehow touched by politics and Congress????? which will have an impact on stock price??? Just asking)

".....members of Congress and their aides don't have a duty under the law to keep information private. They routinely exchange information about politics and policy with lobbyists -- often not realizing that mere morsels are being sold to hedge funds who trade on the tidbits."


"There are a lot of savvy investors who have realized that there is a lot of money to be made from what Congress does," he says. Since 2004 his unit has tripled the number of its clients to two dozen and tripled its staff to 18. He says his clients include wealthy private investors, private-equity funds, investment banks and hedge funds, though he won't disclose names.



Read more: http://www.post-gazette.com/pg/06342/744652-28.stm#ixzz1NCsnBEZL

 

Why A Hedge Fund Comprised Of Junior Congressional Democrats Should Outperform The Market By 9%

(Sigh) I should've been a congenial janitor on the floor of the Senate.

"In other words, everyone is trading on inside information, but nobody more so than those who write the laws that determine just what is considered Insider information, and the penalties associated with it. In the meantime, let the public lynching spectacles of such prominently irrelevant fund managers as Raj Raj continue: the people need their bread and circuses. Especially as fund of funds round up all junior democrats and start roadshowing them to yield-hungry QIPs."

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http://www.scribd.com/doc/56564266/Abnormal-Returns

Yawn. Zzzzzz (sound of snoring) Zzzzzz

 

Biz as usual... the last signature on the Louisiana Purchase was gotten at midnight on the last day, the signer had agents out buying up all the land they possibly could get...

I do recall the days when Market Makers would get market moving news weeks ahead of the public and it made some sense that they would, they needed to brace for the change...

 

SEC has legalized Insider Trading via HFT.
We haven't realized it yet.