Taking control of research at buy-side firms used to mean finding a better way to store fat paper reports than stacking them on the floor or the desk until they toppled over. Nowadays those reports are electronic, and regulators want to know how firms are using them, and how they are deciding which broker dealers are sending good research and how they are allocating their commissions as payment.

For their part, buy-side firms would like to reach an institutional understanding of the research they are conducting so when an analyst leaves a firm his replacement doesn’t have to spend weeks sorting through files trying to make sense of the work that was left behind.

The CIO of a hedge fund – in Connecticut, of course – said his firm needed a way to standardize research and consolidate all the information analysts were pulling together.

“Analysts would pull together their info and dump it in files while they maintained their contacts in Outlook,” he said. “We wanted a unified way of collecting the information so if an analyst left the firm, a great deal of the research and knowledge wouldn’t walk out the door with him. We wanted a system that enabled the next person who took over the work to be able to look up a security and quickly find the models, research and important notes that the [previous] analyst had been working on. We also wanted to be sure that analysts looked at all the factors we deemed relevant. A new analyst coming in from another firm that was concerned with a set number of data points might not include the same data points that we wanted to have taken into consideration.”

The hedge fund turned to an application from Code:Red called Red Alerts RMS (Research Management Solution). Red Alerts RMS organizes, monitors, and tracks the value of sell-side research as well as the recommendations and performance of buy-side analysts.

Code:Red runs on Microsoft technology – C# and .NET client software. It stores information in a Microsoft SQL Server database where researchers can place just about any sort of information – from Office files, to images, to standard research reports and video clips – and use SQL’s full text search engine to easily navigate data. Code:Red uses many of the advanced features in SQL Server such as Reporting Services, Notification Services, and Indexing Services to keep investment managers informed about changes to their portfolios and watch lists, whether they are connected or remote.

“We integrate information from just about any source a client needs to perform their due diligence and manage their research,” said Dwight Wyatt, co-founder of Code:Red, “We integrate content from sources such as Capital IQ, Thomson’s Street Events, and holdings and trade data from Eze Castle’s Traders Console and present it back in one view for a portfolio manager, trader or analyst.”

The product goes much farther than just allowing analysts to share data, Wyatt explained. “Before Red Alerts, analysts might have shared spreadsheets on common drives, but this presented issues with version control and synchronization of information,” he said. With Red Alerts models, research, and recommendations are categorized with advanced tagging information as well as time and price stamped as they are entered into the database.
Customization is another big advantage of Code:Red. With Red Alerts, firms now have ultimate flexibility around fundamental and technical research integration. This is a departure over the way buy-side firms have tracked research in the past with limitations imposed by legacy systems such as file servers). Clients can determine the methodology they want to use, build the appropriate fields into Code:Red, and then have their analysts fill in the information they want to track. 
“Customers can easily track fundamental data from Capital IQ side-by-side with their analyst’s estimate and create derived values using Red Alerts custom formulas. You can also track your broker’s trade ideas, how good they were and in turn whether they triggered a trade,” Wyatt said.

The Connecticut hedge fund CIO said his firm holds a broker vote twice a year where analysts can review the research and ideas they have received and determine where trading will be directed in the period ahead.

Code:Red ensures that the vote is based on the actual value as recorded at the time the ideas or recommendations were received over the last six months, the CIO said.

“We ask the analysts to go back and tell us about how the research quality was for the brokers they have done business with, how many ideas the broker has provided us. What we have found, of course, is that when we were doing these queries we had to rely on the analyst to remember how well the brokers had serviced them. Memory is a funny thing – if the broker gave them a good idea in the last week they would score better than if they had given them 10 good ideas in the last year. It’s a trivial task to run the reports out of Red Alerts, and all the rankings are numerical, along with a count of good ideas,” he said.

The fund has Code:Red installed on about 70 percent of its analysts’ desks.

“We’ve tested the theory on how we want it to work,” explained the CIO. “In terms of reports and rankings we have built a large number of custom fields in the database. Now all new research goes into the Code:Red templates, but the fund hasn’t gone back to load old research into the system. Since the power of the system is dependent on the volume of data that is in it, I would not think we have realized its full power. We are starting to standardize all the information, but we still have a huge amount of research that resides outside the database. It’s a slow process to incorporate that research into it. However, rather than go back three years for each analyst, we decided that as of January 1, 2006 all new research goes into Code:Red, and by end of the year it will be our primary source of information.” 

“Research management systems and broker valuation and reporting tools are invaluable to improving the performance and throughput of analysts, enabling firms to grow their research coverage and raise their alpha,” Wyatt added.

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