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Hedge funds and non-hedge fund institutional investors: Traditional buy side hobbled by lack of research

A study by Integrity Research Associates shows a disparity between research conducted by traditional buy-side firms and their hedge fund counterparts that could explain the latter’s outperformance.

Integrity surveyed 43 directors at US-based hedge funds and non-hedge fund institutional investors.

The results reveal that non-hedge fund firms rely significantly on forensic analysis, which includes earnings quality forecasts. More than 50% of non-hedge funds respondents said they rely on such research, compared with just 35% of hedge fund respondents.

Hedge funds put greater emphasis on using "expert networks" as part of their research methodology. Thirty percent of hedge funds surveyed said they used such a method compared with just 4% of non-hedge fund respondents. The report says: "This may be a function of the drive for hedge fund firms to seek original insights that are not widely distributed in the market. As to why non-hedge fund firms are so disinterested in the expert network space, we suspect that this is predominantly a function of inertia and a traditional reliance on sell-side research."

Hedge funds also placed more emphasis on uncovering unique research for investment-making decisions. Twenty-five percent of hedge funds felt that developing a rigorous research valuation process was extremely important to the firm, whereas only 13% of non-hedge funds felt the same way. Both parties, however, agreed that finding external research would become increasingly important over the next 12 months.

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