Sell-side research heads said they will have to continue to redefine their business models, as heightened regulatory scrutiny concerns make the research world less attractive and lucrative offers from hedge funds contribute to a talent drain.
"We have to figure out as an industry how to create a career path here to attract and retain the best people," said Paula Dominick, global director of credit research at Goldman Sachs, adding the firm typically loses analysts at the peak of their careers. The boom in hedge funds and increased regulatory focus is making the research job less appealing to analysts who like the interaction with traders and salesmen, with research heads estimating upward of 90% of recent departures from sell-side research have headed to hedge funds.
To address regulatory concerns, Lehman Brothers has deemphasized and in some cases stopped publishing in areas such as distressed, said Ravi Mattu, global head of fixed-income research. Goldman, meanwhile, has instituted a three-hour black-out period following the publishing of a research report and a change in an analyst's recommendation. During that time, traders will only take incoming requests to make markets but are not permitted to front run the demand, explained Dominick. Mattu added Lehman may institute a similar rule. And also to prevent conflicts of interest, Morgan Stanley's research division now operates as an independent operating unit reporting directly to the head of fixed income, added Ryan Marshall, global director of fixed-income credit research.