The Relevance Rift

The Relevance Rift

Jeremy Bentley, APR Smartlogik
Originally published in the June 2006 issue

Back in the 1980s, the financial world was one of the first to get to grips with structured data, carefully analysing the most valuable and potent pieces of information (usually to do with performance or risk) and making them rapidly accessible through powerful databases. Today, such structured information access has become a commodity, to which all institutions and other players have easy access. The new challenge is unstructured data, typically held in the form of documents, but also embracing emails, web content, and other modern formats, thought to contain some 70-80% of financial organisations’ corporate ‘knowledge’. Unlocking and employing that knowledge is today’s objective.

Competitive advantage for hedge funds is inextricably linked to being able to find relevant information as rapidly and easily as possible, so that informed investment decisions can be made. In turn, broker analysts want to gain priority attention and business from hedge funds by providing access to wider, but highly relevant, information. Much of this is held in unstructured form. Yet being able to find and employ that information brings rapid, hard-dollar returns for both the hedge fund and the information provider.

For the sell-side, this level of information management is closely related to the growing need for organisations to bring together their different lines of business in order to manage and mitigate risk. Even where mergers and acquisitions have not occurred, most financial institutions have developed different technology platforms, data formats, and categorisation schemes for each line of business – brokerage, custodianship, FX and money markets, payments, and so on. The cost of consolidating disparate systems, formats and categorisations is potentially massive, so techniques are being sought to try and mitigate these costs, and in turn boost their capabilities of providing quality information services to hedge funds.

We recently commissioned research to investigate how much, and in what specific ways, the buy-side felt sell-side information was either deficient or strong. The research tracked a number of factors that had been examined with the same audience in 2002, producing important trends. Before we analyse these findings, let us briefly look at why this issue has become so important, particularly for the hedge fund community.

The information flow

Recent years have seen the volume of communication between broker/securities house analysts (the sell-side) and the buy-side increase enormously. One brokerage – part of a major international investment bank – recently admitted sending in the region of 25 million emails to its buy-side customers every year. If this is scaled across the western world’s sell-side players, then we are talking about over a billion analyst messages per year, much of it concentrated in London and New York. The result is that each buy-side manager is receiving hundreds of messages every day, and is inevitably therefore suffering from information overload.

In great part, the flood of research emails has been fuelled by the reality of instant messaging in a market that prizes timeliness. However, increased transaction volumes have also been the result of a more volatile – though now generally positive – market. In a faster moving marketplace, fund managers increasingly demand a greater quality and depth of information on which to base their decisions. Tightening stock market regulation of listed companies over the information they must disclose has increased fund managers’ expectations regarding reliable information.

At the same time, new regulatory moves in the US and the UK are aiming to shine a spotlight on the amount of commission that is paid for trade execution, and the amount for finding research. This follows the milliennial scandals – recently laid bare by the US judiciary – where fraudulent salesmanship wrapped itself in a thin veil of pseudo-research. Transparency is intimately connected to accurate and relevant information provision. The British Bankers Association, in one of its documents on transparency , comments “research should be distributed taking into account the different categories of its intended recipients…”

In parallel, the last couple of years have seen a huge resurgence in the popularity of hedge fund formation. As far as analyst information provision is concerned, this has further fuelled the information demand to satisfy fund managers who aim to provide greater returns yet contain investment risk through some form of knowledge arbitrage.

So, the ease of modern communications, plus an increasing demand for deeper, timely data, has given rise to the phenomenon of fund managers being swamped by information, much of it not directly relevant to their immediate sphere of interest. Sell-side analysts clearly have a problem. The analyst’s role is to provide relevant, high quality and timely information to the buy-side, in order to encourage fund managers to process transactions through their company. If the information sell-side analysts are providing is not highly relevant, and rich in the required data, then they are unlikely to achieve their commercial purpose. Equally, those that do provide information tailored specifically to each buy-side customer’s needs can rapidly stand head and shoulders above their competition. This is a massive advantage in a market where transparency between research and execution fees is helping to further commoditise the offerings of some market makers.

Our research findings

We commissioned telephone research amongst the UK-based top 50 fund management companies. Overall, the study revealed a striking relevancy gap between the sell-side and the buy-side. Staggeringly, only 32% of the information that fundmanagers receive from the sell-side is deemed to be relevant to their needs. Furthermore, information quality has evidently deteriorated since 2002, when just over half (54%) of all messages were judged to be directly pertinent to the fund managers’ sphere of interest.

However, the report highlights that there is evidently a hunger from fund managers for relevant information from sell-side analysts. In a world where irrelevant email and phone calls have become the subject of restrictive legislation, we nevertheless see fund managers trying to be positive, with three quarters of them declaring that they would be happy to receive more messages from the sell-side if only they could become more tailored to their specific needs.

So this general lack of relevant information provision can be regarded as an opportunity. Anecdotal feedback tells us that best practice sell-side organisations are taking advantage of the situation to shine against their counterparts’ lacklustre performances.

Extranets – a golden opportunity?

In particular, fund managers were seen to be fairly regularly using sell-side extranets – information portals for fund-manager clients – but they were rated low for ease of use and relevancy of information provided. FMs commented that sell-side extranets need to be highly automated, recognising the fund manager’s particular usage patterns, areas of interest, and making the information search process as supported and effortless as possible. Extranets that could search across a number of different financial instruments and areas of interest – equities, fixed income, FX, etc – were felt to have a substantial competitive advantage.

But since 2002, there has been a downturn in the perceived usefulness of individual broker extranets. We believe that this is largely because, as more sell-side players have hurried to create such extranets, a polarity has emerged between best and worst practice. This polarity is exemplified by our research findings which show that as many extranet user accounts lie dormant as are actively used. Formulaic extranets which do not base themselves on an audit of fund manager needs and behaviour simply do not get used, and drag down the industry average and perceptions.

Respondents commented that sell-side extranets need to be highly automated, recognising the fund manager’s usage patterns, areas of interest, and making the information search process as supported and effortless as possible. Visitor recognition can work on two fronts: first, the fund manager puts profile information on his/her areas of interest into the extranet search and find system. Second, the system recognises previous searches. Both sets of customer information are used to (1) pro-actively serve up information from the brokers research repository that it thinks may be relevant; (2) generate email alerts when the system detects relevant new information.

Manual functions for the ‘super-user’, such as advanced search, were felt to be irrelevant at this stage, as they assume very active participation, and available time, in extranet searches on the part of the fund manager. Again, relevance and convenience are the key.

However, the downturn in perceived usefulness does not seem to have suppressed their inclusion in the fund manager’s range of consultative sources, nor their use by a substantial proportion of the fund management community, with 57% of respondents using sell-side extranets either daily or weekly.

Email overload

FMs felt that a fundamental step in improving information services was tailoring the receipt of email alerts to only relevant items. But sending relevant email alerts to the buy-side is not deemed sufficient by fund managers unless it is also integrated with the broker’s extranet. Email alerts need to incorporate hypertext links so that the recipient can click straight through to the information that interests them. Convenience is everything for the fund manager. In fact, anecdotal feedback highlighted the general opinion that if the sell-side delivers more tailored analyst emails to hedge fund managers, it will automatically generate heavier use of their extranets – a ‘double bubble’ of competitive advantage for both sides.


Our research study clearly identifies shortcomings in the relevance, richness and usefulness of analyst information provided by the sell-side to fund managers. For hedge fund mangers, for whom timeliness and accuracy of information is especially critical, this is having a serious impact on their perception of the sell-side, as they feel inundated with information that is irrelevant to their decisions. Moreover, the situation has deteriorated since research was last conducted in 2002.

Hedge fund managers are happy to build relationships with favoured analysts, but on the meritocratic basis of information relevancy and quality. Broker extranets are favoured if they are integrated with email alerts, and can recognise fund manager profile during a visit, serving up relevant data and options based on that attribute and usage profile.

Fund managers should not be expected to expend much effort actively searching broker extranets, but need to be encouraged onto the site via email alerts with hypertext links that they can easily click through. Advanced functionality (e.g. advanced search) on an extranet is a low priority – automated support for ease of use is, by contrast, top priority. Such extranets also need to provide a single face between the fund manager customer and the totality of the broker’s available analysis, spanning equities, fixed income, FX, etc.

There is an evident opportunity for sell-side companies to improve their services before hedge fund managers lose patience. Those who have already taken initiatives on this front have gained competitive advantage and are regarded by fund managers as the chosen few from whom they actively wish to receive more information and alerts.

Emerging technologies are enabling the automatic research of information from a wide variety of online sources, personalised to the profile and activities of the individual fund manager. The scaleability of such technology solutions provides the sell-side with an opportunity to fulfil market demand for improved relevancy and richness without incurring uneconomic costs. We foresee that sell-side organisations who are taking advantage of these new technology solutions to enhance their client service are gaining an immediate boost to their reputation amongst fund managers. They are also, therefore, obtaining competitive advantage and bottom line growth if the current correlation between information quality and transaction commission holds true.