Sticker Shock: Small Hedge Funds Seen Ditching I-Banking Research Under MiFID
For the past several months we’ve discussed many theories about how the new MiFID II rules in Europe might drastically change the investment banking research business model. For those who haven’t followed this narrative, MiFID II is a new set of regulations in Europe that requires investment banks to charge separately for research as opposed to just lumping it into an asset manager’s trading fees.
Here are a couple of our thoughts/predictions:
- Investment banks will find that there just might be a very large bid/ask spread between what they think their research is worth and what their clients are willing to pay for it.
- Exorbitant research fees will create even higher barriers to entry for upstart hedge funds and cause existing small funds to ditch research vendors altogether.
- Large asset managers will be forced to cut back their research vendors leaving smaller, independent research shops doomed.
So far, it looks like 2 out of 3 of our predictions have come true.
Just last week our first prediciton seemingly came true when Deutsche Bank announced plans to slash the price of their fixed income research in half due to a “lack of demand” (see: Deutsche Bank Forced To Slash Fixed-Income Research Price By Half On Lackluster Demand).
Now, as Bloomberg points out today, small hedge funds are seen ditching pricey research packages because they simply can’t afford it.
“The numbers I’ve heard in terms of what’s going to be paid looks completely impossible for smaller managers,” said Samuel Gruen, who started Lightfield Capital last year and whose his firm manages $20 million from London. The rules will force people to “rethink the investment process when launching a hedge fund.”
Theron de Ris, who oversees less than $10 million at Eschler Asset Management, said he plans to stop getting outside research altogether because of the new rules.
“I’m not going to consume sell-side research for the foreseeable future,” said de Ris, Eschler’s London-based managing partner. “It’s not going to change my world if they stop coming.”
Of course, in the end, MiFID II’s new research rules only serve to reinforce the advantages that larger and wealthier asset managers have always had over smaller funds. Since 2009, over 80% of hedge fund failures have come from small funds with under $100 million in capital to manage and that’s likely to only get worse.
Meanwhile, even Tony Chedraoui, founder of Tyrus Capital which has $2.3 billion in AUM, tells Bloomberg that his firm is evaluating what research is essential and what it can safely “scrap.” All of which means that prediction number 3, on our list above, is well on it’s way to coming to fruition.