A new State of Our Union 2019 research report by Jefferies Prime Services has found that next generation research and development processes are flourishing, as managers revisit their approach to research in order to stay current on emerging themes and tools to improve the investment process.
Beyond the motivation to remain ahead in the age of data and technology disruption, Jefferies has also found that allocators are more frequently inquiring about manager research processes to ensure that their capital is maintaining an edge.
“We produce the State of Our Union report every year (the first was published in February 2018) and we do all of the primary research ourselves; everything is done in-house,” explains Shannon Murphy (pictured), Managing Director, Jefferies Prime Services Strategic Content.
“The report allows alternative fund managers to have a look in the mirror and get a sense of what their competitors are doing.
“We also produced the inaugural Millennial Survey because as this demographic represents the next emerging generation of investors and fund managers. We wanted to find out how they are changing the way in which they source, digest and value information. As information has become ubiquitous, what is the next level of intelligence separating the have’s from the have not’s? Who are the ones thriving in this new environment and what have they been doing?”
Murphy runs the strategic content initiative at Jefferies, focusing on strategic and thematic research in equities; essentially anything that impacts the way its hedge fund clients do business but which doesn’t fall into the single stock FAANG world (Facebook, Apple, Amazon, Netflix, Google). Prior to joining Jefferies two years ago, Murphy spent five years at Credit Suisse and prior to that she ran a research programme at Harvard University.
The State of Our Union report says that gaining an investment edge is no longer about getting a piece of information first – nor is it enough to harness the most data.
Next generation R&D has created a new generation of forward thinking investors, and this, suggests Jefferies, “will create the next divide between winners and losers”.
So how are managers revisiting their approach to research?
Murphy tells Hedgeweek that there is a growing realization that research itself “is a function that needs ongoing revisiting, iteration and improvement”.
“Increasingly,” says Murphy, “funds are adding directors of research or education that straddle both investment professionals – helping them tease out what is skill and what is luck in their investment process, what is their hit rate on idea generation etc. – and at the same time serve as a content provider and a thought leader to LPs.”
These individuals are effectively helping arm investment teams with their own internal sell-side research function.
As new technology tools and systems are used by millennial managers to come up with novel ways to conduct research activities, at the same time, allocators themselves are paying close attention to the research processes a manager has in place.
“Allocators now have the tools to drill down to single name analysis,” says Murphy. “They used to have to spend a huge amount of money to get a full understanding of their pan-sector exposure and there was less transparency. Now, there is more transparency and communication and the good allocators know when their managers drift or pivot in their investment strategy.
“Simultaneously, they know when they are paying for beta. They want to understand how managers are updating their processes to stay ahead of cutting edge opportunities and investment ideas.”
Allocators are increasingly asking about firms’ internal “R&D” efforts, working to understand research efforts to ensure that managers maintain an edge in today’s market. As the Jefferies report states:
We are witnessing funds devote resources to building out internal R&D projects that source, collect, and analyze big data with fast-growing sophistication. At the same time, managers are repurposing broker votes to best capture expenditures and measurement of the inputs they receive, and better align needs with counterparty core competencies.
Jefferies suggest that multiple factors are driving firms to revisit their own research processes and inputs from front-to-back, including:
1. Growth of data and anticipated acceleration of available data
2. Increasing cross-asset correlation
3. Shift in invisible forces impacting and creating new investment opportunities
4. Crossover and convergence of themes across sectors impacting business models and
5. Revisiting alignment with (and core competencies of) counterparties
To respond to this evolving research trend, Jefferies Prime Services is building on its core competencies and expanding its research group.
“For example, we have a data science working group that works closely with our corporate access team. Corporate access has done a good job of serving as matchmaker between company management teams and our clients. The next iteration and version of that is not just management teams and experts but heads of data in different business verticals such as healthcare, energy companies: the aim being to broaden and deepen our offering.
‘It’s not just about offering best-in-class macro research or fixed income research. Who is also offering best-in-class thematic research to help managers think about their portfolios at the broader level? Trends now bleed across sectors, and if you’re only focusing on what you think is your vertical, you might miss the next trend that completely changes that particular business vertical over the next decade,” explains Murphy.
Every hedge fund manager’s research process will contain certain idiosyncrasies but in the eyes of allocators, what differentiates one manager from another is the complete ease and transparency with which they are able to communicate that research process and say, ‘We intentionally have a group of both generalists and specialists, as well as quants or data professionals, and are constantly improving communication and building a better toolbox for research’.
“It is today harder for managers just to state: “our proprietary research process comes up with best ideas and a proprietary allocation model ranks those ideas by level of conviction.” Now, you need to be a lot more granular as to why each individual is in your research team, what their core competency is, and what their contribution to the portfolio is – and how you measure that,” remarks Murphy.
Another key finding in the report is the acceleration of specialization and “variations on a theme” business models within the hedge fund industry, which has created a new alignment between allocators and managers, collaborating to create more precise and aligned solutions and strategies.
In 2017, for the first time more than 40 per cent of open mandates for Equity funds were targeting niche or specialist managers. In 2018, that number grew by 30 per cent to over half of all open allocator searches.
The era of supermarket firms that try to be everything to everyone seems to have waned, as allocators seek a more precise match for their portfolios, suggests Jefferies.
A third key finding in its inaugural Jefferies Millennial Survey found that expert networks, traditional data sets and ‘ideas dinners’ are no longer the preferred sources for investment idea generation.
Specifically, the survey identified a growing reliance on audio as a key data input, with the average millennial reportedly listening to four podcasts regularly.
“Managers now (and will in the future) have a 24-hour research process. It was kind of true in the past – you’d receive research reports and read them on your iPad, maybe you’d watch the odd video. But what we are increasingly hearing is, people are listening to their top four podcasts during their commute, when they’re on the treadmill, when they’re at home and it’s this idea that millennial managers are constantly gut checking themselves and looking to learn, incrementally, from a variety of different sources.
“One manager told us recently that one of the best resources he uses is a well curated Twitter feed. There are implicit things said in that community that are invaluable to his research process,” says Murphy.
The Jefferies Millennial Survey reveals that millennials are nearly twice as likely to listen to podcasts as those born prior to 1981, but the universe of podcasts consumed is four times as large, on an individual basis.
The fact is, millennial managers are constantly watching, listening and reading a variety of sources for new ideas and inspiration. The old fashioned model of relying on a small cohort of sell-side analysts for research insights is no longer relevant.
We live in an age of constant data communication.
Unsurprisingly, Jefferies is now creating video content to present clients with bite-size edits of its research papers. No doubt, podcasts will also become a key tool in the Jefferies research armoury – as they, and the wider PB research community, support the future generation of hedge fund managers.
“If they are up and open to listening to what we have to say, why wouldn’t we invest in these content avenues?” concludes Murphy.
