The algorithm has come to research. Fund management firms are quickly embracing a growing set of automated tools to manage and evaluate research on potential investments.
That means they are now creating technical frameworks-and mathematical formulas-that govern how they store, search for and retrieve information on companies in which they might invest.
Research management is one of the top 10 items that investment firms will spend their technology budgets on this year, according to Tower Group in Needham, Mass. Yet another study conducted by Boston-based Aite Group predicted that investment firms will more than triple their spending on research management tools to $148.3 million by 2012 from an estimated $40.2 million this year.
"Firms can replace inefficient and disorganized filing systems based on e-mail and shared folders or proprietary applications that require ongoing investment and support," said Mark Rice, senior vice president and general manager of Tamale, a research management software unit of Advent Software, best known for portfolio management systems.
In September, Advent said it received a U.S. patent for some of the business methodology backing Tamale RMS, its research management system. Tamale RMS allows portfolio managers and research analysts to tag research and create a sophisticated matrix of relationships between research items. Case in point: a public pharmaceutical company, the latest drug it is developing, rival companies, their drugs for the same or similar illnesses and their approval status. The platform then filters through data such as financial models, contacts, news, events and websites to identify the most relevant information for the investment decision-making process.
Last year, a survey conducted by Advent found that research management solutions such as Tamale can make it far easier to centralize, organize and search all the research data a firm receives and generates. The cost savings: about $1.1 million a year for a fund manager with a team of 25 analysts. Smaller firms could save about $500,000 annually.
Research technology can help prove a company is conducting due diligence on investment decisions. "Investors are asking if managers are sticking to their strategies and will ask for proof of how their decisions were made," Rice said.
With Tamale, Advent is one of a growing group of vendors specializing in giving professional investors access to information that might move markets or have relevance to their strategies. The services are based on a common premise-that news, shifts in public opinion, or changes in analysts' opinions and forecasts can affect a company's stock price.
Foster City, Calif-based FirstRain said it relies on search algorithms and pattern detection to help its clients sift through research. Such an approach identifies relationships between companies, market topics and management and then provides the user with information from the web that might otherwise be missed.
In 2008, it introduced FirstRain Management Monitor to help identify the management changes affecting a company or industry. It gathers changes and quotes made by chief executive officers and other top executives in both official and unofficial capacities plus publicly reported instances where companies, employees and spokespeople declined to comment on company activities and events.
A separate service also launched that year called Blog Monitor, uses an algorithm to identify the most relevant, quality news and opinions on blogs. It's far more sophisticated than a standard search engine for which the research analyst must read all the information, prioritize it and then make a decision. Instead, Blog Monitor relies on a Web-results database to prioritize and pull out trends from blogs.
"The problem we are solving is how do you detect and organize all the data so the portfolio manager can analyze information and derive trends that would otherwise be invisible to them if they just searched using the Google engine," said Penny Hersher, president and chief executive of FirstRain, whose customers include mutual funds and hedge funds.
"An algorithmic-based search engine can identify the patterns and trends must faster than a human," Hersher said.
YouDevise, a New York and London-based global investment management technology firm, offers a service called Trade Idea Monitor-also known as "The TIM", which enables sell-side firms to submit targeted trading recommendations to money managers. Idea "authors" can identify key parameters, including currency, pricing method and investment amount.
Ideas can be sent directly into quantitative or algorithmic black box trading systems and all open ideas are compared in real time to relevant indexes. "Closed" ideas create a historical database of the author's performance. The firm only charges broker-dealers for using the service; however, buy side firms typically compensate their brokers for ideas based on performance.
"The ultimate goal is to allow fund managers to capture the alpha that is being generated externally to their own research departments, benchmark their internal analysts and their brokers, regain visibility on market sentiment that has become obscured by the fragmentation of market venues, and a better sense of just where to allocate their commission dollars," said Tim Murphy, general managing director of the Americas for youDevise.
Thomson Reuters Research Management System allows fund managers to locate, organize, track and leverage research through comments, tags and ratings. The service is offered through the Thomson ONE Investment Management and Thomson ONE Investment Analyst desktop information services and soon will be on its new flagship online information service, Eikon. In December, users will be able to receive alerts on mobile devices.
StarMine, a research arm of Thomson Reuters, also offers the StarMine SmartEstimate, a weighted average of analyst estimates that places greater value on the most recent estimates from the best analysts. The best analysts out of 25,000 sell-side analysts tracked are those who are not only historically the most accurate but who also make a revision either higher or lower than their peers.
When compared to the consensus estimate, buy-side investors are able to use the SmartEstimate to anticipate future earnings revisions and predict earnings surprises.
"Once upon a time, you could make money by trading the event. But that's not the case any longer. Now investors must anticipate these events," said Tim Gaumer, director of fundamental research for Thomson Reuters in San Francisco.