I’ll be visiting the San Francisco Bay Area May 5-8, and hope that you can attend some of my investor seminars to the Wharton and Columbia Business School Alumni Clubs:

Topic: “Squeezing Blood from a Stone: The Professional Investor’s Guide to Eliciting Information”

Host: Wharton Club of Northern California
Learn how professional investors elicit maximum information in minimum time from industry sources. How do you ask just the right questions to get a CFO to open up and tell you about his company? This training is based on best practices in the intelligence, psychiatric, law enforcement, and journalist communities.
When: Wednesday, May 7th, 6pm cocktails, 7pm program
Location: Perkins Coie, 101 Jefferson Drive, Menlo Park, CA 94025
RSVP and more details: http://www.whartonclub.com/article.html?aid=901

Topic: “Where are the Deals? Venture Capitalists, Hedge Funds, and Private Equity Firms’ Best Practices in Deal Creation and Deal Origination”

Host: Columbia Business School Alumni Club of Northern California
What are you doing to identify companies in which you can successfully invest? Learn about recent research on where institutional investors source their investments; how to identify companies with the earmarks of an attractive opportunity; and how to increase your inflow of worthwhile referrals from both intermediaries and investable companies.
When: Thursday, May 8th, 6pm cocktails, 7pm program
Where: Pagemill Partners Auditorium, 2475 Hanover Street, Palo Alto, CA 94304
RSVP and more details: http://www.acteva.com/booking.cfm?bevaid=158041

Also, I will be attending the Association for Corporate Growth Grow! Awards on Tuesday, May 6, at the Computer History Museum in Mountain View ( https://chapters.acg.org/sv/uploads/events/922FC1DF84A74255B0B429DC3FC81104.pdf ), which may interest many of you.

Matt Nelson of Tower Group was kind enough to give me permission to post his thoughtful slides on "Web 2.0/Enterprise 2.0 in the Financial Services Industry", from the recent New York Financial Markets World conference on "Web 2.0 and Enterprise 2.0 in Capital Markets."  Christopher Rollyson and he briefly discussed his presentation here .

A Bullish Slant from this Key Market

We recently listened to a conference call with a preeminent expert in the Indian gold market, and several of the points raised during the call merit the attention of commodity-oriented investors. Short term macro issues like the weakness of the dollar or global inflation are often cited as reasons for gold’s recent moves. We believe the Indian market is at least as important as these drivers in determining the near term future of this key commodity.

Hosted by Nitron Circle of Experts and BNY Jaywalk, the talk with the senior gold expert raised several critical points:

• India is the largest national market for gold in the world, in terms of tonnage. Recent demand growth for gold in India has been nothing short of staggering, with Q207 demand at 370 tons, up over 90% from last year. In fact, incremental demand from India represents virtually 100% of marginal global gold demand in the second quarter of 2007. Understanding the economic and social variables for Indian gold demand is therefore critical to forecasting global gold prices.

• Current market fundamentals for gold demand in India are robust. Strong economic growth and a rising currency certainly help, but it is equally important to understand the broader economic role gold plays in the country. Many deep-rooted beliefs as well as social customs serve to underpin a rise in gold demand as India’s economy continues to expand.

• Two products drive gold demand in India – investment products (bullion/coin) and jewelry. The intersection of demand for these products is the wedding season in India as well as a series of important religious festivals. Both of these start in the back half of October and run through late January. Gold plays an important role in intergenerational wealth transfer in India, and weddings and religious festivals are key points when families often hand wealth down to the next generation.

• Gold also plays an important role in India as a store of value, especially in rural farming communities. Its good price performance through recent global capital markets turmoil has served to further burnish this reputation. Banks even offer “mortgages” to buy gold, recognizing how important this investment is in Indian culture. Farmers will also use gold as a way to preserve wealth in anticipation of potentially lean times ahead.

• Indian gold merchants are sitting on seasonally peak levels of inventory in anticipation of the wedding and religious festival seasons. Banks have large stocks of bullion and coins, for the same reason. Should the imminent rush of demand not materialize in the next few weeks, both the jewelry stores and banks will have to start to unload inventory. Mitigating some of this risk is the relatively weak production profile of gold mining enterprises. Existing mines supply only a small part of the country’s overall demand, face steep cost/ounce constraints, and have long start-up phases.

We therefore believe that gold investors need to watch the Indian gold market very carefully over the next few month. With gold near multi-year highs, there is little room for disappointment in this important market.

If you would like to arrange a conference call with this expert or otherwise gain insights into the commodity markets in India, please feel free to contact the Nitron Circle of Experts.

For more information on Nitron Circle of Experts please visit www.CircleofExperts.com.

Nitron Circle of Experts is a subsidiary of Evalueserve, a leading provider of Knowledge Process Outsourcing services – custom research, analytics, and intellectual property solutions . For more information on BNY, please visit: www.BNYJaywalk.com .

Christopher Rollyson took some very detailed notes on the recent New York conference on "Web 2.0 and Enterprise 2.0 in Capital Markets." They're worth reviewing.

I have attached below some notes from last Monday's Financial Markets World conference on Web 2.0 / Enterprise 2.0 in the Capital Markets Industry , at Bayard's, New York.  

My own talk was on "How to Source Deals with Web 2.0 Technologies". It was focused on how private equity funds, venture capital funds, and hedge funds can more efficiently find companies in which they can invest. Slides are here. 

Lauren Buckalew from our Shanghai office took notes, below:

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A pilot study on awareness and use of Web 2.0 by Canright Communications and Evalueserve found that of the executives surveyed, 44% were “extremely” interested in Web 2.0 for business, but only 17% felt “extremely” or “very” knowledgeable about the technology.

The survey results—which were distributed at the Financial Markets World Web 2.0 / Enterprise 2.0 in the Capital Markets Industry event today—mirrored the speakers’ sentiments: the business community in general imagines grand possibilities for Web 2.0 technologies in the workplace, but the barriers to adoption, such as lack of understanding at the executive level or compliance issues, are still great.

I came to the event excited to be educated. I knew a little about Web 2.0, but I was overwhelmed by the possibilities I saw in the news and just wanted authoritative instruction on how to filter through all of the noise.

The most informative sessions to get the overview were Matt Nelson of TowerGroup’s opening remarks, and the last talk I attended, Dion Hinchcliffe’s ‘Applying Enterprise 2.0 and Web 2.0 in Financial Services: Early Notes from the Field’. In fact, Dion’s absorbing speech would have been better placed early in the day, as it provided a good background, real-life examples of Enterprise 2.0 successes, and a straightforward summary of its shortcomings.

Other speeches and roundtables drilled down on specific topics, like Instant Messaging, Collaboration, Web 3.0, and David Teten’s talk on using Web 2.0 to source deals (I did not hear the last talk by Tom Steinthal of BSG Alliance). Since I was learning about these areas for the first time I was only able to understand on a superficial level, but was most impressed by Penny Herscher of FirstRain and her simple yet sharp insights.

Stephen Leung, a Senior Manager at BEA Systems, who was a panelist on both the ‘Web 2.0/Enterprise 2.0 in the Financial Services Industry’ and ‘Rich Internet Applications and the Client Portal: Using Web 2.0 to Improve the Client Experience’ panels, spoke on the infrastructure and applications side of Web 2.0, and probably received the most questions from the audience.

Although the roundtable topics had various titles, and nearly all of the discussions went overtime out of lively discussion, I didn’t come out of the event in control of Web 2.0 like I thought I would; I just learned how much more there was to it, especially more creative uses of Web 2.0 apps for businesses than I could have imagined.

In following the “Top 10” theme used by Xignite Chariman/CEO/Founder Stephane Dubois to kick-off the first roundtable, here’s my Top 10 Learnings from the event:

10) Web 2.0 technologies should fit into existing workflow and should be invisible to users.

9) The finance world’s secrecy and competitiveness inherently conflicts with Web 2.0’s nature of viral, self-correcting information sharing.

8) Longtail, mashups, fine-grained entitlement, folksonomies, meta data, geo-tagging and MetaWiki are good things… once you understand them.

7) Individuals can use Web 2.0 tools to leverage existing social networks to generate sales or make deals. One can do this outside of any business structures, based on one’s own diversity of contacts, character, competence, the relevance and strength of one’s contacts, and access to information.

6) Executive decision makers’ lack of information on and understanding of Web 2.0—“What’s the ROI?/I don’t have time for this!/Kids these days and their crazy technology…”—prevent companies from realizing adoption. Any new technology would face similar barriers.

5) Web 2.0 is not a technology or a step in development, but a social concept.

4) Legal/compliance teams haven’t yet figured out how to effectively regulate Web 2.0 tools without reducing them to meaninglessness. But giving employees unbridled Web 2.0 tools is also not recommended.

3) Internal company wikis—which act as a unified log for all project developments and conversations—are a successful example of Enterprise 2.0 in the real world. Key to success is to motivate employees to use it and control the structure themselves.

2) Each element of SLATES (Search, Links, Authoring, Tagging, Extension, and Signals) is required for a Web 2.0 tool to be effective.

1) There is no clear solution for how the capital markets industry should integrate Web 2.0 into business. The interest is there, but Web 2.0 is still effectively consumer-driven, not enterprise driven.

More discussion on Enterprise 2.0 is in order, but before then, more actual application of Enterprise 2.0 in the workplace would be more informative.

I'm looking forward to speaking at an upcoming conference, Web 2.0 / Enterprise 2.0 in the Capital Markets Industry, on September 17 in New York.

Liz Abraham of Financial Markets World reports that they still have slots for a few speakers with experience in using or implementing Web 2.0 in the capital markets industry. If you're interested and qualified, contact liz.abraham(at)FMWOnline.com .

My topic is How to Source Deals Using Web 2.0 Technologies, focused on how investment bankers, hedge funds, and private equity funds source investments.  I also will be on a panel on Web 3.0.  Preliminary outlines of my presentations are at the preceding links.  If any readers have suggestions on this general topic, I would welcome them.

HBS professor Mark Bradshaw reports

"The prediction was that all [Wall Street sell-side research] analysts would be more optimistic for firms that were issuing debt and equity securities than for firms that were either not engaging in such activity or were reducing their financing needs. An integral part of the forecasting function that analysts perform is assessing the need for external financing to fund operations. Thus, analysts are already intimately aware of what financing needs a company is likely to have. Accordingly, in periods leading up to a need to go to market for financing, we predict that all analysts would tend to increase the level of optimism embedded in their published research. This is exactly what we found."

"Even more interesting is that the optimism embedded in analysts' forecasts differs depending on whether the firm is issuing debt or equity securities. For firms that issue securities, their concern is the initial pricing of those securities. The pricing of equity is largely determined by the long-term performance of the firm, whereas the pricing of debt is limited on the upside, with investors standing to recapture principal and receive interest payments. Accordingly, we see that analysts' optimism varies with the type of security being issued. For debt, the optimism is restricted to near-term earnings forecasts (i.e., the next two years); for equity, the optimism is concentrated in longer-term forecasts (i.e., growth forecasts, target price forecasts) and stock recommendations."

In other words, not only is sell-side research impacted by the investment banking needs of the companies covered, but it's impacted in a very sophisticated and targeted way.  Interestingly, Bradshaw found that this was true regardless of whether or not the analyst's employer was current providing investment banking services to the client.  "The predictions in prior research were always that the affiliated analysts would be more optimistic than the unaffiliated analysts. This always seemed odd to me because unaffiliated analysts want to be affiliated so they can realize the benefits of associated investment banking fees and other ancillary services such as mergers and acquisition work, private placements, asset financings, and so on."

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Robert Peck of Bear Stearns recently presented on the theme "Yahoo should buy Facebook", with a rough valuation of Facebook. I have to admit my skepticism of this argument. Yahoo has a history of not taking advantage of its acquisitions (Broadcast.com…).

Far cheaper than buying Facebook would be to provide a systematically integrated user experience across all of those different brands. Most noteably, Yahoo owns Yahoo Groups, which to this day has one of the most active user bases of any online community. There are roughly 6 million Yahoo groups, with an average of perhaps 10 users each, and many of those users (including me) are not impressed with the quality of their current user experience. (The 6 million figure comes from Jeff Weiner of Yahoo, but the figure of 10 users each is only a rough estimate.)

Yahoo already has tremendous reach and many of the most noteworthy brands in the Web 2.0 space (Flickr, Delicious, etc.). Integrating all of these brands is a mammoth missed opportunity.

I enjoyed tonight's talk by Peter Thiel at NYC Junto, on "How New Technologies Thwart Government and Promote Freedom". Junto is a libertarian-focused discussion group organized by Victor Niederhoffer. I've been following Peter's writing for a while, since we overlap directly in our interests in investing and in online networks. Peter is President of Clarium Capital Management, an investor in both LinkedIn and Facebook, and was co-founder and former CEO of Paypal.

Peter started with two questions:

1) Let's assume libertarian view is correct. Why aren't more people libertarian?

2) What do we do about it? How do we make the world more libertarian?

Answers to question 1

- maybe libertarianism is not in peoples' interest

- lack of education

- [Cf. Bryan Caplan's book, The Myth of The Rational Voter]

Answers to question 2

When Peter was an undergrad, he might say:

- Education

- Go door to door

- Convince people to vote for candidates

But as he got older, he saw this is very hard to do.

(highlight of the evening: Victor Niederhoffer's toddler son wanders around Peter's legs at this point)

An IQ test for libertarians: ask them how optimistic they are. The more pessimistic they are, the smarter they are.

One solution: move control of money from the government to individuals. But you cant do this via plebiscite. If there was a form of money that government couldn’t measure or track, you'd have a powerful alternative. This insight was genesis of Paypal in late 1990s.

In mid 90s, several companies were creating alternative currencies: Cybercash, Digicash, etc. All of the initial attempts were going out of business. Money has a network-like aspect. How do you create a new currency when no one else is using it?

All these efforts had run aground against this rock. So Paypal started by leveraging against existing systems: credit cards, checks. Send money to anyone with an email address. Started with 24 employees at Paypal. Preloaded accounts with $10. Started to spread. We grew at 5-7% compounded daily.

Einstein, "Compound interest is so miraculous it could only be created by G-d".

Initial theory was very idealistic. In reality we ran up against many obstacles, the first of which were customers. Massive amounts of emails/customer service inquiries.

Spring/summer 2000: discovered bad people are out there. Whole wave of fraud, including Russian mobsters, tried to exploit Paypal. Someone threatened Peter's mother unless PayPal unfroze his account. Then that person ended up shot dead.

Found dystopian website in Former Soviet Union: "Carders World". A carder is someone who steals financial information on people. This was a marketplace for personal financial information. They had a manifesto saying that they were going to take down the capitalist system. Paypal information was there.

2001 period: next obstacle was government. Initial Paypal strategy was to ignore government regulations—'we are not a bank'; ' none of these laws apply to us'. If we rolled this out quickly enough, the government couldn't stop us. "If you have a world where everyone is a criminal, you have to change the law."

Visa/Mastercard tried to come up with rules to prohibit Paypal from using their service. Government was even slower. Radical technological change must be fast.

In 2001/02, when company went public, things really hit the wall. The person investigating their S-1 thought that his job was to stop companies from going public. "He was demoted in government, which is a really extraordinary thing to happen."

Businessweek article said that state of Louisiana hadn't quite signed off on this. SEC investigator told Paypal management that state of Louisiana was going to shut this down. So in middle of roadshow, Peter had to track down government regulators in Louisana and convince them that Louisana did not want to get reputation as a particularly backward place. "So within 2 days, we managed to get that stopped. At the time we had 100,000 Louisana users."

"We are now in 100 countries. 3^rd largest payment brand after Visa/Mastercard in the world. "

How successful were we? Paypal currency is still denominated in national currencies. If you only have one form of currency, you're beholden to the issuer of that currency. Our initial vision inspired in part by Argentinean economic turmoil. If you can force competition between governments, you'll have stabler currencies.

Early 1980s: high inflation rates all over the world. Since then, it's gone down almost everywhere. Forms and symbols can persist well after the substance is gone, e.g., Queen's face is still on UK currency. Technology has been a very powerful force for decentralizing things.

1960s Time magazine cover: picture of 1 big computer that could run the world. Cf. Hal 2001. Computers as a force for centralization is a classic image. In the 90s, power shifted to individuals.

Famous early example: Soros distributing fax machines throughout Eastern bloc.

If everyone becomes a currency dealer thru Paypal, it changes the world.

So much has changed. For example in 1971: it was illegal to own gold and other currencies in the US. 1971 Treasury Secretary said, "It's our money---we can print as much as we want and it's the rest of the world's problem". You can't imagine Hank Paulson saying something similar today.

Power is shifting ineluctably away. Will technology continue to be a force for decentralization?

Why did 1960s vision of centralized computer not happen?

Peoples' ability to process information is flat, but the amount of information has gone up dramatically. So the only solution is decentralization. This is also why Moscow can't set the price of potatoes in Vladivostock.

You may be able to approximate information processing to a problem solveable in polynomial time---and then you have AI, and the 1960s vision of a centralized computer processing everything.

By 2050, we could have thousands of different countries. We have 10-20 years to push as hard and far as we can in direction of more liberty.

Q: How do you prevent Paypal from being used as electronic hawalla---form of terrorist financing?

A: We have protections in place---abide by Patriot Act.

2002: first year number of printed checks in US went down.

Q: question about Second Life and inflation

Q: question about goldmoney.com

A: The problem with gold is that when you really need it, it's not there. In 1933 the government confiscated all the gold bullion in the US.

Q; How do you promote libertarianism?

A: When I was young I tried to reduce the demand side (demand for regulation), but then I saw it was much too hard. So now I focus on the supply side. If I expand the supply side (e.g., more options for currencies), I reduce the amount of government in the system.

I want to promote change without being obliged to go through an election or plebiscite.

Governments are losing power to inflate because of technology. The risks are now tilted to deflation, not inflation. A deflationary environment is hard to invest in, because you can't just lever up and pay things off in cheaper dollars. Private equity and real estate are bad ideas in a deflationary environment. Donald Trump's argument is that you should be short dollars by going long real estate, is disastrous.

Q: How does Facebook promote libertarianism?

A: Facebook will be the dominant next media company . Since the old media companies are non-libertarian, this in itself is good.

Hedge funds are a way to bet against stupidity of governments.

Q: Could you comment on US visa policies and their impact on competitiveness.

He commented that once a tipping point happens, it's impossible to go back. Once the camel's back is broken, it can't be healed. Right now the marginal tax rate in NY is ~50%. In London it's 0%. So it's compelling for a hedge fund to set up shop in London, not NY.

There's a definite shifting of centers of quality overseas. It's happening faster in finance than in technology, but it is happening. (Audience member mentioned that Microsoft is setting up research centers in Canada and elsewhere specifically because they cant bring the researchers they hire into the US.)

"[The market for hedge fund talent] is what economists call a winner-take-all market — essentially a tournament in which a handful of winners are selected from a much larger field of initial contestants. Such markets tend to attract too many contestants for two reasons.

The first is an information bias. An intelligent decision about whether to enter any tournament requires an accurate estimate of the odds of winning. Yet people’s assessments of their relative skill levels are notoriously optimistic. Surveys show, for example, that more than 90 percent of workers consider themselves more productive than their average colleague.

This overconfidence bias is especially likely to distort career choice because, in addition to the motivational forces that support it, the biggest winners in many tournaments are so conspicuous. For example, N.B.A. stars who earn eight-figure salaries appear on television several nights a week, whereas the thousands who failed to make the league attract little notice....

A second reason for persistent overcrowding in winner-take-all markets is a structural problem called “the tragedy of the commons.” This problem helps explain, for instance, why we see too many gold prospectors, an occupation that has much in common with prospecting for corporate deals. In the initial stages of exploiting a newly discovered gold field, adding another prospector may significantly increase the total amount of gold found. Beyond some point, however, additional prospectors contribute little. The gold found by a newcomer to a crowded field is largely gold that would have been found by existing searchers."

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The folks at Landslide have figured out a great marketing strategy: If you view a demo of their "sales workstyle management" system, they'll give you a free copy of The Virtual Handshake--Opening Doors and Closing Deals Online.

Alex Salkever of Inc. wrote in Turning Sales Into Science that Landslide "gives sales staffers what they need, when they need it, to close a deal."  In other words, Landslide provides salespeople more infrastructure, so that they can focus more on selling and less on all of the other activities that distract them from their main job.

Link: Watch a Landslide demo, get a copy of The Virtual Handshake

Dealmaker Magazine has a useful survey of 2006 compensation at top private equity firms and investment banks.

They've done their best to make it hard to replicate this data without sharing your own personal data with them.

The page with this data in the printed magazine is written with hard-to-copy formatting, and the online version is presented in graphical form so readers can't just cut and paste it.

Click here and register for the data: http://www.dealmakerdaily.com/magazine/article/4444.html

UPDATE: For another excellent compensation survey, see TheFundBusiness Survey .

The team from AQ Research (at whose conference I'll be speaking tomorrow in London) has written a blog post about an idea I've chewed on for a while: ‘A Marketplace for Research’.

There are a number of gross inefficiencies in the current research business, and inefficiencies are usually the breeding ground where new business models can be created.  Among those inefficiencies:

• Many people on Wall Street are paid large amounts of money to do identical work, e.g., probably hundreds of investors have slightly different models of what Microsoft's earnings will be

• Money managers pay a lot for a product, research, whose exact value they don't know.   

• Research analysts, who are supposed to be experts in valuation, don't know exactly how to price their own product.

The idea of a marketplace for research addresses many of these inefficiencies. As one small example of a research market, I know of a boutique research firm which explicitly auctions off certain new analyses to, e.g., the top four bidders among their clients.

Another model: there are quite a few startups which provide a marketplace for retail investors to share their research, although of course in the vast majority of cases this research is far inferior to what is sold to institutional investors.  These sites are hoping to benefit from the wisdom of crowds effect, as does the Circle of Experts.

• SeekingAlpha.com, which channels contents from hundreds of bloggers to provide insight on a range of industries. They pay the bloggers nothing, but monetize the traffic through advertising. Bloggers participate for exposure.

• Marketocracy , a research company and fund which has recruited over 55,000 people to manage over 65,000 model portfolios. It then invests based on the best picks of those participants.

• Feeling Bullish, BullPoo, Digstock, and SocialPicks - all of which are discussion sites in which your public discussion of investment ideas is systematically ranked. The SocialPicks site is currently down.

• Stocktickr positions itself as a "trading journal" in which you can keep track of your trading ideas. Asking people to submit this information manually won't work—they need to have partnerships with all the major online trading services. (Update: compare with Mint, which has executed this idea well.)

• Bivio, a site which helps individual investors form investment clubs. They provide accounting and fund management services, including investment partnership accounting and tax software.

• Motley Fool CAPS, a Motley Fool service that lets users place predictions on a publicly listed stock’s performance vs. the S&P 500 over a given time frame ( See Techcrunch's writeup)

Sony, for instance, paid $65 million for a video-sharing site called Grouper.com and started a nifty service through which you can load your favorite clip from one of its movies — say, Jack Nicholson barking, “You can’t handle the truth” at Tom Cruise in “A Few Good Men” — onto your MySpace or Facebook page.

 Over the last few weeks, other media companies have accelerated their efforts in social networking.

For example, the Hearst Corporation on Jan. 8 bought a small company called eCrush.com.

And the Walt Disney Company, the CBS Corporation, Viacom and NBC have all been busy planning new social networking features for their various Web sites.

I enjoyed participating in AQ Research's recent conference on "The Future of Research", last December 5.

I finally had a chance to edit and post my notes on the panel on Research Pricing.

Speakers:

Lisa Shalett, Chairman and CEO,

Sanford C Bernstein Paul Spillane, CEO, Soleil Securities

Chair: Albert Alonzo, AQ Research Lisa Shalett:

 If research is really a discrete model, you could say that should have a fixed price.

 But I believe research is actually really an advisory service, an interaction, part of a broader process----part of the mosaic of ideas.

 No money manager on the planet will say he has just one source for investing. Research should be priced in direct proportion to the value creation or value destruction.

 By comparison, money management industry prices its service in proportion to its own value creation or value destruction. Unbundling and transparency are two separate concepts.

 The idea that research pricing should be tied to volume or fixed is another concept.

 I believe strongly that research should be tied to volume.

 Paul Spillane: For us to be successful, we have to determine a fee. We are the only part of the finance business that provides product for free.

 I don’t want us to be paid based on our stock-picking performance. 1-2 fund managers, and a batch of hedge funds, have given us a price schedule: you bring in a company manager, I'll pay X. you provide an expert, I'll pay Y. you set up road show for me, I'll pay Z.

We're trying to ascertain value of what we provide. Our analysts only get paid if customers say, "Pay them". It's all client-directed.

 Alonzo: Independents have always been transparent, but sell-side have dragged their feet in complying with menu pricing. Shalett: Trading commissions should be going down slowly.

 There's no reason why they should be flat or rising. The wool is being pulled over the money management industry's eyes.

Marginal cost of executing /clearing a trade is close to zero, and Sanford Bernstein is not even a scale player in this business.

If you want to save money on research & trading, start there first! Spillane: If you're head of research at a bulge-bracket bank, you focus your effort on minimizing outliers, so no one can sue you.

 You're not focused on creating alpha. Money management industry is afraid to say what they're paying for research. If a money manager says it's paying 2 cents for research someone can sue. But if you say you're spending it on execution, it's harder to complain about it.

Look at Jefferies settlement. Shalett: Broader public policy question: what does research provide?

 Buy side says they're paying for liquidity, for there to be a dialogue. Trading cost curve has gone down 6 pct. annually since 1975, to 3.5 cents now.

 The regulators want you to be democratic, give access to everyone.

Pricing mechanism should be scale neutral, to not overly advantage the largest money managers. Alonzo: Why do indies still get paid so much less than sell-side?

Spillane: Because we let them! We don't know what we should be charging. We don't have enough senior-level relationships. We don't know if we're being overpaid or underpaid.

 You have to be willing to walk away from underpayment. Shalett: We don't put a formal price on our services. But we use the concept of fair share.

We use polls, Greenwich polls. We're paid 1/3 of what we should be paid, if you compare our ranking in polls with the total payments to research providers.

That hasn’t changed in 13 years. The reason is that the sell-side has a lock on being systematically overpaid.

 Spillane: Lisa, you have the power to change this. Just shut them off. Shalett: We'd shut them off if Thomson would implement the change to make it easier to shut people off.

(laughter) Questions: What would it take for you to get out of execution?

Shalett: It will only happen if we can be confident that we'll get paid 3x what we're paid now. In Europe, implementing CSAs as follows: 8 bps for execution, 7 bps for research, plus 2 bps for proprietary research when paying sell-sides. These sell-side firms are holding the indies' money for 90 days, paying no interest.

If there were a DTC, a Switzerland, for these commissions, I'd join it and exit trading. But I don't believe in what's being implemented today.

 Alonzo: CSA gives firms freedom to use traditional payment mechanism. Is now the right time to push on pricing? Shalett: Depends partly on extent to which funds are generating substantial alpha.

 Hedge funds are willing to pay unlimited amount for good research. Spillane: How do you get a return on capital that you can't measure? If someone could provide a utility function for research, big banks would sign up and then focus on prop trading.

 We're entering dangerous part of cycle, because we've had good returns for several years.

This is first year in 10-15 yrs when more hedge funds closed than opened.

 So it's a tough time to talk about pricing. Shalett: Big banks are generating 30% ROE.

 They're good businesses. Mayhew: Will we see a more level approach between pricing of sell-side and indie research?

Spillane: We won't move to unbundling until we're forced to. We won't subject ourselves to the soft dollar pool, which is only 7-15% of giant pool of commissions ($14-$15B in US).

 I don’t want to be in the kiddie pool. Barry Hurewitz (Morgan Stanley): We have 500 analysts .

 Average buy-side person with a $50M commission pool has 11 buy-side analyst. Lisa might have highest per-hour price on the Street, today.

 I don’t see why you can't just price your services explicitly; that's what we do. Shalett responds: From 75 to 2000 (decimalization), trading was a commodity, because market was very concentrated.

 Most volume going thru NYSE specialists, whether it came from MS or GS, or it was OTC (fulfilled by market-maker). Post-2000, you had fragmentation of liquidity, which meant differential execution quality.

 Trading has become a more differentiated product.

 Capital commitment actually mattered. Now, pendulum is swinging back.

 Technology is reconcentrating liquidity. Buy-side can trade directly with the market.

Vast majority of executions are commodities, or will be in next 2 years.

 So prices should be going down. It doesn't make sense that prices go up.

CSAs favor some players over others. Macroeconomics don't stand up to scrutiny, and industrial behavior is being perverted as a result.

 Spillane: Morgan Stanley can't price by the hour, because there are too many constraints.

Customers aren't willing to set a price.

 There are way too many internal pressures calling your #1 ranked analyst to come to a meeting, go to a conference, etc., to say simply that he bills at $3000/hour.

Following are my rough notes from AQ Research's recent conference on "The Future of Research", on December 5.

The speakers on this very strong panel were:

 Scott Lessing, Chief Operating Officer, Citigroup Investment Research Shubh Saumya and

 Jai Sinha, Partners, Booz Allen David Weild IV, CEO,The National Research Exchange

 For more information on Booz Allen's views on this subject, see their report, Saving Sell-Side Research.

 Lessing: This question [of how to make investment research pay] is less pressing than it used to be 2 years ago.

 We're coming from a great year for our clients and research.

 There's been a shift towards payment for quality of research Jai Sinha:

News of death of research was greatly exaggerated. Components of value of research include distribution and service, as well as actual content.

Any time commissions are not explicit, there is waste. We don’t need to necessarily force change in the model Weild: Quality is in the eye of the beholder.

 What is quality to an actively traded hedge fund isn’t necessarily quality to a longer term account or a public company.

 I noticed Monika Schulz with Wall Street Letter in the back.

 She recently conducted an interview with Candace Browning, the Director of Research at Merrill Lynch.

Candace, when asked how the research product had changed, responded that it has become more "trading focused." It’s clear that public companies are having a tougher and tougher time getting the support that they need from the largest sell-side firms to reach long-term investors.

These accounts don’t generate enough commission volume to merit much attention yet they are the most important accounts for CEOs to reach.

As a consequence, more firms will need to ensure aftermarket support themselves. Let me share one interesting anecdote: I was talking with the CEO of $350-$400M Australasia-based company.

 A bulge bracket firm was taking this CEO on an all-expenses paid roadshow in New York and Boston to see institutional investors. This CEO couldn’t believe his good fortune and asked me “Why?” I asked him to share the list of accounts he was visiting and it was clear that most of these accounts (e.g., Tiger, SAC, Goldman Sachs Principal Strategies) were so large as to likely be prohibited from owning a stock of his market capitalization.

The CEO went on to say that all of his conversations focused on industry trends and not his company – a clear sign that they were mostly wasting his time.

We recently did a project for a $750M VC. They were working with a $500M company going public.

The bank with whom they were talking about going public didn’t have coverage on even one company with a market cap under $1billion.

While I might choose that firm to take me public, I sure need to be careful about who is going to support my “little” company in the aftermarket.

 Lessing We cover 3000 stocks. We've been expanding small/mid-cap stocks. Weild: We run one funny analysis. We look at daily volume per analyst per stock.

 This analytic shows that if you cover a firm within Dow 30, you're still competing for more volume/analyst than smaller cap stocks.

In fact, the median Dow 30 stock generates about 300,000 shares of volume per analyst per day, which drops to about 90,000 shares per analyst per day for the median stock in the S&P 500.

 Compare this to the NASDAQ Composite, which is more actively traded than the NYSE Composite, and the median stock generates only about 30K shares per analyst per day.

 This is partly the reason why if you're analyst #30 on IBM, you're still competing for more volume than analyst #2 on a mid-cap stock.

 A rule of thumb is that you are generating about $0.01/share/day available to research. The balance is siphoned off by program trading and low cost algorithmic trading.

Thus, despite the fact that accounts reject the need for more "maintenance research" on large cap stocks, the fact is that the stocks are so broadly held and generate so much volume per analyst that the economics are compelling.

Lessing: Volume of trading doesn’t drive our coverage decisions; it's investor interest. In addition, there is very little correlation to an idea that we generate and how we get paid.

 We can get paid in IBM trades for a small cap idea.

 Weild: Yes, but investor interest tends to be correlated to trading volume.

 Plus, your definition of small cap is apt to be higher than ours.

We’re looking at sub $500 million market cap companies and Citi is probably closer to $750 million and larger. Lessing: Agreed. Sinha: Unbundling will allow people to pay differentially.

Lessing: there's room for many different payment models. We're very adaptable in how we get paid. Greenwich Associates surveys say that 20-60% of commissions are allocated to research, and rest is execution (capital commitment, execution services, etc). I suspect that FSA data will be roughly comparable.

 We'll hold on to a larger percentage of this pot than competitors, and it's because our quality is higher. Sinha: The more street-dependent buy-side firms will allocate a larger percentage to research.

 I see a hollowing out of the middle, of the 35th person providing IBM coverage.

 Weild: Citigroup provides a whole host of products and services that the independent firms don’t – equity derivatives, enormous sales trading, algorithmic trading (Citigroup bought Lava Trading not that long ago), securities lending, and Citigroup is the #1 underwriter of equities globally.

Citi has a great portfolio of services that go beyond simply research and that gets reflected in commission payments.

Sinha: There is aligning of consumption with spend Spelling: We have a discussion with client about what resources we can commit to them; what % of payment pool should be sent to them.

Audience Question: What threats can you make?

I had a client say, "Show us what you're giving us. If you don't have that, how can you tell us what you're going to take away?" We have 3000 accounts.

 There were 4 contacts at one particular account who were heavy users of our research. They were the people we needed to upsell.

Tiers are binary: you turn it on or off. If you want research to be a profit center, how do you do that?

Saumya: How often is there a mismatch of clients who are dramatically underpaying? One of our clients asks, 'What is the research product?'

 Lessing: We don’t talk about resources cost in dollars per hour. We talk about where the client ranks with us, and say we believe you're underpaying.

I had lunch recently with David Jackson, CEO of SeekingAlpha, and a former neighbor of mine.

I thought that many of our Circle of Experts would benefit from contributing to David's company.

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Articles published on Seeking Alpha reach over a million readers per month, about 17% of whom are finance professionals.

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I took some notes on Sandra Manzke's talk at this week’s World Hedge Funds Summit .

I have enclosed slides from her Toronto presentation and a Eurekahedge presentation.

 Biography of Sandra L. Manzke Sandra Manzke, Chairman and Chief Executive Officer, founded Maxam Capital Management LLC in April 2005.

Prior to that, Sandra was the founder and co-CEO of Tremont Capital Management.

She was responsible for the oversight of Tremont’s operations and the development of Tremont’s business plan.

 She was also a member of the Investment Advisory Board. Sandra oversaw the creation and sale of Tremont’s life insurance products, which were the first to use hedge fund investments.

 Prior to the formation of Tremont, Sandra was a principal at Rogers, Casey & Barksdale, Inc., a pension fund consulting firm, from 1976 to 1984.

 While there, she served as the senior consultant to a number of major corporate/ERISA clients. From 1974 to 1976, she worked as an independent consultant at Bernstein Macauley where she was responsible for reviewing the firm’s investment products.

 She was at Scudder Stevens & Clark from 1969 to 1974, where she established one of their internal measurement systems during her tenure as an Investment Manager.

Sandra holds a Bachelor of Fine Arts degree from Pratt.

NOTES

Managers close, but they never close permanently.

When they reopen, they reopen for existing investors.

 Such prominent managers as Marc Druckenmiller, Marc Kingdon, Marshall Wace are not in any index, so the indices are always partial. Managers are slow to report sometimes, particularly after a down month.

 When Cerberus closed to new investors, some indices took it out entirely.

 But then they reopened to new investors, and they weren't let back in. Providers of Investable Hedge Fund Indices include: EurekaHedge & MAXAM HFR: index is index of all funds that have managed accounts with them.

 CSFB MSCI FTSE Dow Jones Greenwich Van Royal Bank of Scotland Deutsche Bank—retail focused S&P is no longer offering investable hedge fund index Today 300 hedge funds in Hong Kong, about 300 in Canada Now launching a LatAm product.

 They launched a JV : Eureka is a data company, MAXAM is asset management.

How index is constructed: - Assets over $50m - Allocate initially to 30 largest managers - Flexibility to match country allocation, market cap, and strategy comprised in index - Rebalance semi-annually - If a manager closes ,the fund stays in the index A lot of fund of funds do not outperform the index, so people will move to the index.

It's much cheaper to move to the index. $250K minimum

I enjoyed the October 30 Hedge Fund Panel Discussion by the authors of, "Hedge Funds: Insights in Performance Measurement, Risk Analysis, and Portfolio Allocation", sponsored by the Chicago GSB Alumni Club of Greater New York. Heidi Christensen Goldstein did pre-introduction Then Cyrus Claffey, President Chicago GSB Club of NY, made formal introduction Moderator:

David K.A. Mordecai President Risk Economics Limited, Inc.

Mark Shore Former COO of VK Capital Inc.Morgan Stanley, New York

Hilary Till Co-Founder & Portfolio Manager Premia Capital Management, LLC, Chicago (Premiacap.com) Formerly Chief of Derivative Strategies at Putnam, and formerly at Harvard Management Company. BA Statistics UChicago. Fulbright Fellow LSE. Advisory board of natural resources hedge fund/fund of funds Now editing a book on commodity investing

Fabrice Rouah Ph.D. Candidate McGill University, Montreal Institute of Financial Mathematics Studies CTAs/hedge funds in general

 Jacqueline Meziani Senior Director Standard & Poors, New York – hedge fund indices. Chemical Bank, Citigroup MBA Stern 10 years at S&P Product Manager: Ops, marketing, licensing, research. My job is to catch things if they fall.

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Mark Shore Book excerpt and Slides Ch. 25 Study: modern portfolio theory assumes returns to be normal—but is this true?

Most asset classes are not bell-shaped normal curves. Can higher statistical moments (skewness, kurtosis) offer a clearer picture of risk-adjusted returns?

 How do hedge funds and managed futures perform individually and simultaneously as diversifiers in a traditional portfolio?---expanded Harry Kat 2002 study of hedge funds and managed futures Sharpe ratio is widely misused --- Sharpe Ratio = (returns-RF rate)/std deviation Assumptions: - historic results have some predictive ability - mean and variance are sufficient statistics for evaluating a portfolio - Distribution is symmetrical….BUT many studies have shown that time-series distributions are asymmetrical - An investment with lower correlations (such as alternative investments) may add greater value with a lower Sharpe ratio Sortino Ratio ----- (return-MAR)/downside deviation ---- is a better concept of downside risk.

 If Standard Deviation goes up, does that mean risk has increased? Not necessarily. Schneeweis & Spurgin (2002): the independent returns of alternative investments are not as important as how they may benefit the overall portfolio. Consider co-skewness of each portfolio component.

 Co-skewness may be utilized to reduce "volatility shocks' or tail risks Kurtosis- the fatness of the tail by the peakedness or flatness of the returns distribution Beckmann and Scholz (2003) Kraus and Litzenberger (1976) support a rational investor's preference for positive skewness and reducing volatility Till (2002): mean-variance metric is most appropriate when returns are symmetrical.

 Thus using it for asymmetrical returns assumes the investor is indifferent between upside volatility and downside volatility Kahneman and Tversky Kat study (basis of Mark Shore work): asked if hedge funds and managed futures complement each other? Answer: yes, when managed futures receive >45% of alternative investment allocation.

 Indices for Kat study: S&P 500 index, 10 yr Salomon Bros govt bond index, and a portfolio of 20 funds, and the Stark 300 index of managed futures Shore study: S&P 500 index, Citigroup Corporate bond index, HFR fund of fund index, and CISDM Conclusion: Sharpe ratio may overestimate the risk-adjusted returns by de-emphasizing the downside volatility of investments with negative skewness.

Sharpe ratio may understate the risk-adjusted returns of investments with positive skewness by penalizing positive volatility. S-ratio is a good ratio to use.

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Ms. Hilary Till Slides Hedge Funds: Quantitative Insights

1. Return Sources

A. Inefficiencies What is capacity of hedge fund industry (with an alpha advantage) ? (based on argument in Foss (2004)) If hedge funds are exploiting inefficiencies, someone must provide them. Assume: Maximum tolerance of average investor supplying inefficiencies: -50 basis points (assumption based on size of inefficiency in global fixed income markets) Size of global capital markets: $55 trillion Required excess return for hedge funds: 10%. Ergo: implies the hedge fund industry could go to $2.75 trillion under management.

 Caveat 1: prop traders also are fighting with hedge funds to exploit these inefficiencies

 Caveat 2: many strategies are based on earning risk premia, not on exploiting inefficiencies.: Relative-value bond funds, equity risk arb, value vs. growth, small cap stocks, high-yield currency investing. Examples drawn from Cochrane 1999ab, etc.) I.

Return Sources C. Illiquidity Reason: tick-by-tick evaluation of a good investment is painful. Nassim Taieb (2001), Fooled by Randomness, Table 3.1: An investment of 15% return, with 10% volatility/year, implies: Scale Probability of Making Money at Different Scales 1 yr 93% 1 q 77% 1 mo 67% 1 day 54% 1 hr 51.3% 1 min 50.17% 1 sec 50.02% So on a tick-by-tick scale, you'll suffer about half of all days from a feeling of losing money

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Fabrice Rouah Review of the Academic Hedge Fund Literature (Ch. 13) Slides

1. Performance Persistence—do winners repeat? 3 methods to analyze this: + 2x2 contingency tables + binomial model (multi-period) + regression of current performance returns on past rerturns Summary: Little evidence of persistence, especially long-term Most persistence is due to losers continuing to lose Some losers increase volatility in attempt to boost returns.

 2. Factor modeling No transparency, so investors attempt to identify factor exposures.

Important for anyone holding several funds (pensions, FoFs) Helps to eliminate funds with similar strategies.

 Linear models are difficult because of the non-linear relationship between HF returns and asset returns (options, short-selling).

R squareds for hedge funds are dramatically lower than those for mutual funds (which are typically 0.8-0.9), i.e., these conventional factors have low explanatory power.

 Particularly important study: Agarwal & Naik 2004 Non-linear returns make linear modeling difficult

3. Portfolio diversification Many styles have low correlation with equity & bond indices. Stress testing indicates they hold up well during market downturns.

 Funds should not be co-integrated with markets or with themselves Adding hedge funds to a traditional portfolio increases its risk-return profile Simulation indicates 5-20% allocation Correlations: tend to be low (0.37 vs. S&P 500).

High p value means there's not enough evidence to show that correlation is anything other than zero.

4. Survivorship bias Compares returns of portfolios.

 This is the bias you will experience if you analyze a portfolio that contains only live funds. Usually about 300 bps.

In Mutual Funds, it's usually <100 bps.

This is the most important of all biases.

 5. Survival analysis how long can HFs be expected to survive, and how fast do they die? New area of research New inflows are from institutional investors They wish to invest long-term, but are worried about high attrition rates.

Seek funds with longevity Factors driving survival are the same factors driving survivorship bias. 50% survival time (i.e., half-life)= one-half funds die before this date, and one-half die after.

 Estimates are of 5-6 years. Most of these studies are very biased because they usually only use funds born after 94. But one of the better studies says >10 years. No surprise: low returns, small asset base, young manager age all correlate with high mortality

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Jacqueline Meziani Disclosure: "I am not a quant." Edward Blum, my former colleague, is the major researcher on this chapter Studied equity long/shorts Short position serves following purposes: alpha generation, hedging of market risk, earning interest on short position while collecting short rebate Managers may use futures and options to hedge their positions. Overall, net exposure of E L/S funds tend to have a positive bias.

High beta funds usually have high net market exposure are often concentrated.

Moderate beta funds hold proportionately more short positions that would lower net market exposure.

 High beta variability may indicate several things: manager consistently includes securities different from those in benchmark. A market-timing fund manager is controlling beta.

 A stock-picking fund manager does not manage beta b/c he is concerned primarily with fundamentals of stocks in the portfolio Investable E L/S indices are fairly clustered Managers tend to go long small cap stocks and go short large cap stocks. Managers want more liquidity on short side.

Negative relationships with value premium.

These managers were taking long positions with growth stocks and short positions with value stocks (although this finding is less robust).

 On average, E L/S hedge funds returns are drivne by returns of the global equity market, size premium, and the value premium.

My colleague Scott Lichtman took notes on Ian Bremmer's talk Monday night at this past week’s World Hedge Funds Summit . Dr. Bremmer's prediction that Rumsfeld would resign proved accurate within 48 hours.

Ian Bremmer, President of Eurasia Group, and author of The J-Curve: A New Way to Understand Why Nations Rise and Fall, spoke about understanding the stability of political regimes and how investors can pick the right countries/regions, sectors, and investment strategies to make the most of this analysis.



Opening question: Why is Iran a much greater risk to the world economy than North Korea? What does China take from the US during business negotiations that Russia doesn’t?



These questions are addressed through his theory of the "J-Curve". Imagine a graph with Societal Openness on the Y axis and National Stability on the x axis.

The graph line starts high on the left as very closed nations are very stable, plunges downward moving right as nations that attempt small become much less stable quickly, then gradually rises towards greater stability as open policies such as rule of law, freedom of press and democratic voting proceed.

 Think of the Nike swoosh with the tail opening on the right – or a check mark with a rounded bottom.



Iraq, on the upper left, was stable under Hussein’s closed (oppressive) regime policies, in terms of impact on the economic markets. The direction of shifts in the J-curve has implications for the size, type and duration of investments in a given country.

 Some of this is common sense, but Bremmer’s knowledge of the political environment, layered on the J-curve analysis, makes for very worthwhile food for thought.

See more below on China (and role in Africa), India, North Korea/Japan, Russia and oil, and the US elections.

North Korea: The j-curve tells us that regimes like this naturally rebound to maximum ‘closed’ status. Open democracy is far too risky for the regime to ever consider, so trying to isolate the country through sanctions actually is a reward for Kim Jong-Il. They’re calculating their position – alerting the world ahead of a nuclear test, so that the US and China could coordinate positions, with China’s interest in maintaining status quo to gradually ascend as regional superpower, damping any real sanctions.

The worst case for Korea is if Japan and China agree and N. Korea can’t play them off each other. Japan may become the ‘Israel of Asia’ – close US ties, longstanding differences with its neighbors, nuclear capable . If Japanese and Chinese economies slow and their governments want to bolster popular support through rhetoric, watch out for potential sea-based military conflict. But it’s most likely that those economics grow and N. Korea is relatively harmless - all the government really wants is money and self-preservation. (and cigars and brandy)

China: In China, the pro-growth politicans are out. That’s not a problem, because for 5 years there has been gridlock on any issue like IP protection or foreign investment in assets. With a more conservative government in place, they can actually afford to make a few accommodations in these areas that will keep relations stable with the US.

Bremmer predicts a worsening situation in ’08, at the time of the Olympics in Beijing. "Scheduling it in 08 was a mistake." That’s in the middle of a US election, when congressman will use the high profile event to put pressure on trade and human rights issues. While the Chinese will do their best to focus on a smooth Olympic event with an agenda on Tibet, free press, the Shanghai faction will attempt to make noise or worse. There’s a 20-40% probability of a modest shock occurrence during the event. Compare the Atlanta Olympics.

China is taking maximalist investment positions in unstable countries. Chinese is being taught as second language in African schools. 2 months ago in Zambia elections, a candidate promised he would recognize Taiwan as a nation. That even being an issue shows a lot of anger about China investing in copper, being close to dictatorial local governments, smashing trade unions, etc. China is starting to control commodities sources.

One offsetting factor for the decline in US influence is Bill Gates and the Gates Foundation, which has more influence in certain failed countries than the US and many European nations. "Bufffett's donation to the Gates Foundation was some of the best foreign policy news I've heard."

India: A great environment for the top 2% of the population, which makes a case for investing in luxury products. But will they gain a solid middle class? Bremmer thinks most pundits are too optimistic and we’ll see slower than expected growth in metrics like purchase of cars.

Russia: Relations with the US are in their worse state since Kosovo. The government is going after the metals, telecom, auto, aviation industries – anything they perceive as strategic. If you are working or investing in a strategic sector and not aligned with Putin, you are in trouble.

Russia has a rising middle class, even in Siberia. If you’re part of this market – consumer brands, high-end services, corporate office building – then you’re making money.

Russia feels humiliated about zero sum game with West in last 10 years. Under Clinton, we created an oil pipeline from the Caspian Sea to Europe bypassing Russia. Russia lost control over Georgia and the Ukraine, now they’ve gotten the Ukraine back and are trying to get Georgia back. If that happens, the trans-border oil pipeline contract will be renegotiated.

The good part about investing in Russia is they just want to rip you off monetarily. In contrast, in China they want to take your intellectual property, then compete with you.

Russia sees Iran as a useful geopolitical hedge against US in the region. China sees it as a problem to be contained.

Eastern Europe: looks good/stable. Romania/Bulgaria are relatively closed and hard to invest in, but their P/Es are cheap compared to other Eastern European countries.

Iran – He predicted some sanctions will pass unanimously. The markets won’t react immediately. Somewhere in 2007 it will get ugly. Iran has open press, young activists, which puts it on the volatile part of the j-curve. It benefits them to focus their population on the nuclear confrontation with West. Sanctions help them. But military action by Israel wouldn’t help him (stability-wise).

We have 18 months until the point of no return, when Iran can make nuclear weapons on their own, then 3 years until weapons are readily transportable, according to intelligence in US & Israel. Similar in Britain.

If moderates gain ground, then maybe political actions from the West will make a difference. But oil prices are too strong, which makes the closed society more stable. Israel will likely choose to attack Iran if it comes down to a close-range nuclear threat.

US elections: Bremmer predicted the elections’ impact, noting "Elections are tomorrow, so I get the chance to be wrong immediately."

He predicted Rumsfeld and/or Cheney stepping down, Cheney ostensibly for health reasons.

 This would allow the GOP to insert a fresh VP that could gain national prominence and become a momentum leader for the presidential race in ’08, saving the GOP from a wide-open (unstable) race.

McCain is a front runner but is having good and bad days now (even for a President, he’s relatively old at 72).

 It’s very likely that neo-isolationism will pick up on many fronts – you’ll see it in trade protectionism, reactions to offshoring job losses, and immigration restrictions.

I'm enjoying visiting Toronto this week at the http://www.worldhedgefundssummit.com/ . Here are my notes on today's Investment Research Panel, preceded by the speaker biographies.

Moderator: David Weild IV

The National Research Exchange (The NRE) is the originator of Intermediated Research^SM, which helps public companies to secure greater visibility and liquidity in the public markets and research providers to establish new sources of sustainable revenue. Their proprietary analytical tools enable users to evaluate the competitive strengths of research providers and the equity capital markets performance of investment banks.

David Weild IV served as vice chairman of The NASDAQ Stock Market and spent fourteen years at Prudential Securities, where he served as president of PrudentialSecurities.com, head of corporate finance, head of technology investment banking, and head of equity capital markets. He also chaired Prudential’s Equity New Issues Commitment Committee.

Doug Atkin

Majestic helps investors gain an independent perspective of companies and their sectors based on our exclusive relationships with proprietary data sources. We are experts in identifying and securing industry data licenses and turning that information into meaningful research. Doug Atkin was previously President and CEO of Instinet Group, where he conducted the IPO (NASDAQ: INGP), developed Instinet’s research, international trading and correspondent clearing businesses, and led a consortium of nine global brokerage firms that took a majority stake in the virt-x stoc exchange. He served on both the Trading Committee and Market Structure Committee of the SIA. Doug was selected one of the Top New Yorkers of 1999 by New York magazine for his leading role in redefining the financial marketplace. In 2000, Institutional Investor profiled Doug as one of the top 10 individuals making the greatest impact on e-finance, and was presented with The Travers Bell Memorial Award of Distinction sponsored by the SIA. Doug serves as a member of the Board of Directors of Starmine and WR Hambrecht. He is a graduate of Tufts University.

Scott Lichtman

Nitron Advisors, Inc. is an independent research firm, specializing in providing institutional investors and law firms with real-time, frontline information through our proprietary Circle of Experts. Our clients learn from our experts through one-on-one consultations, customized surveys, and interactive events. Our clients include investment banks, hedge funds, mutual funds, private equity firms, and law firms. Visit www.NitronAdvisors.com for more information.

Scott Lichtman has nearly twenty years of experience in financial services, technology and consulting companies. Among his previous positions were oversight of Messaging/Collaboration Product Management and Marketing at Communicator Inc — a provider of communications, compliance and operations-related information services for institutional investors and brokers; Senior Director of Marketing at InterWorld, the e-commerce software provider that drove the online growth of firms including Nike, Disney and GTE; Senior Director of Strategic Marketing at Oracle Corporation — where he managed pricing, e-commerce sales support and business development; and IT & Strategy consultant at Deloitte Consulting. Mr. Lichtman also ran his own online-collaboration consulting firm, Vitaltouch Consulting, and in that capacity guided operations for a firm that provided banking services to low-income individuals. Scott has written analyst reports and articles on topics ranging from pricing strategies in the technology industry to online communities. He received an MBA from Harvard Business School, a Master of Economics from the London School of Economics and a Bachelor of Science degree from the Massachusetts Institute of Technology.

Paul Spillane

Through experienced sales and trading professionals, Soleil Securities Group connects institutional investors with an expanding network of accomplished independent research providers. They gather and filter insightful, actionable research ideas and deliver them to portfolio managers, buy-side analysts and trading desks. They also provide trading services through which asset managers can direct order flow as payment for the ideas and services they value. Paul Spillane has been in the securities industry for over 25 years. He started his career at Goldman Sachs, where he worked in fixed income, foreign exchange, commodities, futures, and options products. He then moved to Deutsche Bank, serving as managing director and head of global market sales for the Americas. Spillane subsequently transferred to global equities as a senior member of the executive team responsible for building the global equities businesses. Most recently, he was responsible for establishing Deutsche Bank’s Global Relationship Management program.

Paul Warme

Lusight is an independent investment research firm, with a focus on Global Emerging Markets. They have taken a unique approach to the production and distribution of investment research by developing a web-based Open Research Platform that allows clients to access our research reports, plus all of the inputs and tools we've used to produce our research, including company data, interactive financial models with base case forecasts, and a powerful analytical tool. Lusight conducts much of its operations in Toronto, leveraging an international research staff that has emigrated to Canada. Paul Warme is a co-founder of Lusight, and currently serves as Managing Principal and Head of Research. Paul has 15 years of international banking, M&A and capital markets experience. He began his career with Scotiabank's strategic investment group and was involved in evaluating and executing acquisitions in Latin America and Asia. He also spent two years in Chile advising Scotia's local affiliate on banking best practices, and one year in Mexico restructuring a distressed bank. Most recently Paul spent five years in New York as a senior analyst covering emerging markets financial institutions at Paribas and ING Barings, where he was also head of Latin America research. A Canadian citizen, Paul holds an MA from the Johns Hopkins School of Advanced International Studies.

PANEL

Doug Atkins: Majestic is a data-intensive research firm. Very technology- and data-based. Just like technology augmented the trading model, we're augmenting research through technology. We scrape 100m websites/month: number of eBay listings, what people are paying for keywords on Google, what 3500 doctors are prescribing, what they're offering as samples. Our team brings these multiple data sources together to give another perspective to investors on the companies and markets they have holdings in. The goal is to either track, confirm or refute their hypotheses.

Scott Lichtman: Nitron helps institutional investors increase their returns by providing direct access to senior industry experts. The experts we provide are used via phone and in-person consultations. These industry executives have highly specialized expertise and are provided on short notice, to comment on questions ranging from likely customer response to a new technology, to means of estimating production from an oil or mineral deposit, to predicting the impact of regulation impacting healthcare service providers.

We serve hedge funds, bulge-bracket prop desks, mutual funds, private equity and venture capital investors in the US, Canada and Europe. Our clients particularly find our service useful in two situations: a) a quick take on a situation for opportunistic investors that are scanning across sectors and continents for opportunities, and b) specific due diligence on an investment target by long-hold and private equity firms.

Paul Spillane: Our goal is to be the premier aggregator and distributor of intellectual content, providing a range of services to our clients. We do specialty dinners, bringing management on the road, etc. Our analysts only get paid if you, the consumer of research, value their insights and choose to pay them. We are a virtual research organization, partnering with outside, 3rd-party providers.

Paul Warme: announced as the ‘Canadian representative’ on the panel, as Lusight and all its analysts are based in Toronto. They not only serve BRIC (Brazil, Russia, India, China) but other countries such as Kazakhstan, Colombia, etc. We have both dedicated and opportunistic emerging market investors as clients.

David Weild: What does your firm do that investors value most?

Paul Warme: We focus on mid-caps/small-caps in those emerging markets. The companies usually are not covered at all, or only by local brokers. We deliver not only research product, but also all the models and raw inputs that went into that research. We do this with a proprietary research platform we developed---a workflow tool.

Paul Spillane: Some hedge funds like our anonymous trading desk, some like our recommendations, some like our access to management. Each and every client can use us as a virtual research dept.

Scott Lichtman: Clients value that Nitron’s industry experts are (1) senior, (2) specialized and (3) have fresh insights.

1) Senior. We seek the most senior experts to validate investment hypotheses of our clients. Example: a Senior EVP of Operations for one of the largest automotive firms; a chief strategist of a major group at Microsoft; the former chief of exploration for one of the world’s largest oil & gas firms.

2) Specialized. One client recently asked for an expert on the specific extraction costs and political conditions surrounding a proposed mining project in the Andes mountains. Only a small number of people in the world are qualified to answer that question.

3) Fresh. Because the questions posed to us are so specialized and because we reach over 100,000 experts to address requests, we’re careful to use experts sparingly. This means that the same opinion is often accessible to only one or two firms rather than the many that may receive typical published reports.

Doug Atkins: Majestic’s customers are looking for info that tracks, confirms, or blows out their investment thesis.

David Weild: What specific services are you focusing on now?

Paul Spillane: We're looking at 3-5 new research models/week that come out. Moving into fixed income—recently signed with partner that covers 350 fixed income issuances. Will soon expand into international services.

David Weild: I've heard of funds saying, "I'll be your 12^th customer, but I don't want you to take anyone else." How do you balance their desire for limited access, with your desire for growth?

Paul Spillane: Every client wants to feel like your #1 client. We spend a huge amount of time understanding our clients. They all want to be treated as individuals. In our model, we'll just provide best service to the funds who pay us the most----which is often not the largest company.

Doug Atkins: The traditional Wall Street model is hard to fathom. As an analogy, I'd love to get a car, drive it for a year, then tell the auto salesperson how much I’ve decided to pay for it. And maybe say, "I didn't use the car so much; I don't want to pay." We have 90% client renewal rate. Cover 110 names in 9 sectors. We also do a lot of custom work.

The way we address the challenge of balancing exclusivity with growth is through tiered access. We also will Dutch auction off our 'silver-bullet' data to 2-3 people.

David Weild: How do you all price?

Scott Lichtman: We provide more help when customer shares more about their strategy. We charge a quarterly retainer, or occasionally charge on a by-project basis.

Paul Warme: We're primarily a commissions-based model, which is what clients prefer. We spend a lot of time trying to figure out how to charge for our services.

Paul Warme: Subscription model. A lot of custom/bespoke work, priced on an ad-hoc basis. For clients who have formal internal voting processes, we're on the voting list for about 10 firms, and usually generate additional votes that mean clients pay us more than their base subscription price.

David Weild – It’s a sign of the dynamic nature of the research business that each firm here is using a variation of pricing models.

David Weild: How do funds measure value?

Doug Atkins: First, some thoughts on the regulatory backdrop:

+ Big issues are soft dollars. SEC just says there needs to be more disclosure.

+ Reg FD.

Paul Warme: A lot of Asian Emerging Market IPOs are taking place in London, partly to avoid the Reg FD/Sarbox issues.

David Weild: Good news: the SEC is very sensitized to the issue of over-reactive regulation, and trying to make US environment more friendly to attract more listings. I expect this legislation to be right-sized to be more accommodating.

David Weild: What are the biggest changes you expect to see in the research product or industry over the next three years?

Paul Warme: You'll see a proliferation of research models. Some of the innovations will be completely unexpected from today’s standpoint.

Paul Spillane: There will be a lot of consolidation. This is the most exciting time to be in the research industry. Next 3-5 years will be a cornerstone of next 25 years.

Scott Lichtman: Certain trends are evident though it’s hard to time the future. The New York State Criminal Code used to state that persons "Pretending to Forecast the Future" shall be considered disorderly and liable to six months in prison. But in terms of trends, traditional/background research is becoming a commodity---can be delivered quickly and thoroughly by PhDs offshore who are paid $25,000-$50,000/year (e.g., Evalueserve).

What you will see as one response to research commoditization is the aggregation of different forms of research in tools that aggregate multiple viewpoints on a market or issue. For example, with a research aggregator, we're now piloting the capability to pull up a ticker, review related research reports, then click on a 'talk to a relevant expert' button with professional biographies to review, all from one screen/one interface.

With the commoditization of traditional research and the decline of that economic model, I think we’re also seeing a significant reduction in coverage of smaller cap firms. The economics just aren’t there for the sell-side to provide as broad coverage as before. So instead people will come up with new economic models to address the ‘long tail of coverage’. In fact, we are announcing today a unique partnership with the National Research Exchange. They serve companies that want to deepen their coverage by facilitating research coverage, and we provide the experts who are readily available to analysts and investors to comment on markets. The experts are chosen and accessed independently from the covered companies, providing greater independence to their commentary.

Doug Atkins: The analog is what happened to trading platforms. Customers will be able to take fundamental data from Majestic, and combine it in-house with their own research.

Quietly hidden in [Scott] Adams' groundbreaking work is a financial formula so simple it rivals Einstein's E=mc2. In its original form Adams' formula was apparently so heretical and so explosive that no major house would touch it when he proposed publishing it as a one-page book. After initial rejections, he announced sadly that "if God materialized on earth and wrote the secret of the universe on one page, he wouldn't be able to find a publisher" either. ... Fortunately for America's 95 million investors, Adams' secret nine-point formula was finally revealed in "Dilbert and the Way of the Weasels." Notice its simple brilliance in the exact reproduction of his formula:

1. Make a will

2. Pay off your credit cards

3. Get term life insurance if you have a family to support

4. Fund your 401k to the maximum

5. Fund your IRA to the maximum

6. Buy a house if you want to live in a house and can afford it

7. Put six months worth of expenses in a money-market account

8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement

9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio

Less than three years after emerging from nowhere, the hot social networking website MySpace is on pace to be worth a whopping $15 billion in just three more years. Or is it? And is the much smaller Facebook really worth the $900 million or more Yahoo is reported to have offered for it? The problem, say Wharton experts, is a dearth of information -- including data on expected revenue generation and cost structure -- to plug into the standard valuation models.

Nitron Advisors' COO, Scott Lichtman, took detailed notes on last Thursday's panel on "The State of Independent Research" at the New York Society of Security Analysts.

It was a well-attended event that covered questions ranging from how independent research firms are capturing value through new delivery models to the impact of Elliot Spitzer's global research settlement and prospects for research jobs on the buy-side and sell-side.

NYSSA notes that, 'These are the opinions of speakers at NYSSA's Career Chat on Independent Research and do not necessarily reflect the opinions of NYSSA or its members. NYSSA does not endorse or promote any of the opinions or products mentioned.'

SPEAKERS

Eric Alexander, President, Institutional Services, Wall Street Access
Michael W. Mayhew, Founder and CEO, Integrity Research Associates,LLC
Paul Spillane, President and CEO, Soleil Securities Group, Inc.
David Teten, CEO, Nitron Advisors
David Weild IV, President and CEO,The National Research Exchange
CHAIR: Richard G. Lipstein, Boyden Global Executive Search BIOGRAPHIES

 He is responsible for strategic development of the firm’s research offering, including coverage of mergers and acquisitions, energy, healthcare, and special situations.

 Previously, he served as director of marketing, and was instrumental in forging strategic relationships that helped the firm grow over the next decade.

 Prior to joining Wall Street Access, Alexander was a vice president with the public relations firm Burson Marsteller, where his clients included AT&T and American Express.


Michael W. Mayhew is founder and CEO of Integrity Research Associates, LLC, a ratings, analysis, and consulting firm for the equity research industry.

 Prior to founding his firm, he was CEO and president of Garban Information Systems, the financial information division of Garban/United News & Media.

 Previously, he was director of strategic planning and business development for Standard Poor’s Financial Information Services Group.

 Mayhew has been quoted widely by various newswires, newspapers, and industry magazines, including Reuters, Investment Dealers Digest, Institutional Investor Magazine, Bloomberg News, Forbes, The Wall Street Journal, The New York Times, Financial Times, and Business Week.

 He is a member of the Board of Directors of Investorside, the nonprofit trade organization for the independent research community, and chairs a committee of the board to establish best practices for the research industry.

 Paul Spillane, president and CEO of Soleil Securities Group, Inc., has been in the securities industry for over 25 years.

He started his career at Goldman Sachs. where he worked in fixed income, foreign exchange, commodities, futures, and options products.

 He then moved to Deutsche Bank, serving as managing director and head of global market sales for the Americas.

Spillane subsequently transferred to global equities as a senior member of the executive team responsible for building the global equities businesses.

 Most recently, he was responsible for establishing Deutsche Bank’s Global Relationship Management program.

David Teten is CEO of Nitron Advisors, a unique research firm that provides hedge funds, private equity funds, venture capital funds, and law firms with direct access to a global network of carefully selected frontline industry executives, scientists, academics, and consultants.

 David also is the coauthor of The Virtual Handshake: Opening Doors and Closing Deals Online, the first business book describing how to take full advantage of blogs, social network sites, online networks, and other "social software.

" He runs TheVirtualHandshake.com, a resource site and blog, and co-writes a monthly column for FastCompany.com.

 Teten was CEO of an executive recruiting firm that he sold to Accolo, and CEO of GoldNames, an investment bank focusing on serving the internet domain name asset class.

 He has worked with Bear Stearns’ Investment Banking division as a member of their technology/defense mergers and acquisitions team, and was a strategy consultant with Mars & Co.


David Weild IV is president and CEO of The National Research Exchange (The NRE), an innovator in products and services that support capital formation.

 The NRE provides patent-pending analytics and facilities that enable the systematic evaluation and long-term funding of research and related services.

 Weild served as vice chairman of The NASDAQ Stock Market and spent fourteen years at Prudential Securities, where he served as president of PrudentialSecurities.com, head of corporate finance, head of technology investment banking, and head of equity capital markets.

 He also chaired Prudential’s Equity New Issues Commitment Committee.

 PROGRAM DESCRIPTION The entire research industry is undergoing a seismic shift that will produce both winners and losers in the coming years.

Some of the more innovative research providers will continue to experience growth, while the total number of independent research firms is to expected to fall almost two-thirds by 2009.

 The need for good research, however, will never go away. Learn the reasons for the coming shakeout and how you can be among the success stories.

 Scott Lichtman's notes: Richard Lipstein Question: Please describe your business models for independent research. David Weild IV: We are a utility for Wall Street to get research paid for explicitly, while achieving coverage and liquidity for smaller public firms.

Coverage continues to be shed across the industry. Fewer IPOs are symptomatic of this. There were < 200 IPOS in each of last 3 years.

 Pre-bubble, there were 460 IPOs/year avg. We have 14 patents.

David Teten: We provide access to frontline industry experts who can provide deep insight into the companies and industries you are analyzing.

 There is a circle of economic agents around any company – suppliers, customers, regulatory observers-- who are in an appropriate position to provide fresh information to investors.

 We provide access to that circle.

 This means your analysts are drawing conclusions and making the buy/sell recommendations (not us), while you benefit from ready access to unique sources.

 There are three trends that drive the fast growth of our model:


1) The destruction of credibility of sell-side research.

2) Trend towards more people, including senior executives, who are managing their careers individually, without assuming they are wedded long-term to a given firm. These "corporate alumni’ are an exceptional base of knowledge.

3) A trend towards people having a public, articulated virtual identity, through personal web sites, bios and resumes online, social network sites, and software that is aggregating people’s backgrounds into a chronological whole.

I discuss these technologies in more depth in The Virtual Handshake- Opening Doors and Closing Deals Online.

We are actively seeking out consulting firms and individuals who would like to consult through our platform.

Paul Spillane, Soleil Securities. Our goal: Premier aggregator and distributor of intellectual content.

We are a registered broker dealer. We have a significant distribution platform, analysts all around the country and an agency trading desk in New York.

 Covering 320 stocks, 32 analysts, 3-5 alternative products. Analysts work when they want, get paid based on deliverables.

Incorporating Fixed income, Commodities, Equities, and commentary on data sources.

If you can think of a new idea, you can provide content in our model. We are looking for employees, firms to partner with and new sources of content.

 Michael Mayhew: Integrity is the leading provider of information assessment and evaluation on the research industry.

We publish research on the industry including a blog, web-based tools, due diligence on 436 research firms. Now adding 60 firms in Europe to the database.

 We help funds find research to add alpha, and mitigate risk in using research. Very little due diligence is typically done on hiring a research firm, especially compared to investing in a fund or fund-of-funds.

 We help funds reduce their risk in hiring a research firm.

 Eric Alexander: We offer clients an integrated service, including access to a team of leading analysts in M&A, special situations, oil and gas, utilities and agribusiness.

 We also offer clients access to a proprietary network of healthcare experts.

 Also have a trading desk – important for clients to gain a full range of service and for us to get paid appropriately.

We customize offerings for each client. Richard Lipstein Question: What are challenges facing independent research firms.

David Teten: Research has a very unusual economic model: You usually get paid well after the service is delivered, you usually don't know how much you'll get paid, and neither seller nor the purchaser knows the exact value of the service.

The value of research varies enormously from highly negative to many millions of dollars, yet it's not common to define, let alone track, the metrics to place a value/price on it.

Also, declining commissions on a per trade basis are putting pressure on the economic equation.

Michael Mayhew: 2 major trends.
1) Biggest challenge is proving value, day in and day out.

The kind of research that could be sold 20 yrs ago has changed. Today folks want trading ideas and proprietary data points.

Very large % of research firms have a tough time proving value, and probably shouldn’t be in business.

2) Getting paid is hard, even if you prove value. David Weild IV: A rough statistic: He took all research analysts, divided by (monthly) trading volume, and got 20,000 shares/analyst. If 50% is program-based, 50% of what's left is algorithm based, and therefore there's only 5,000 shares traded to pay each analyst.

 That's roughly 250 shares/day. At 5c/share that is not a lot of money to spread around, and 5c is a high figure by current trading standards.

 The business is fundamentally bankrupt at some level.

 Clients want 3 things – 1) access to management, (2) experts, (3) traditional research. People want things that no one else has.

Eric Alexander: A lot of what the industry does is a commodity.

 Some of the forms of compensation are a thing of the past.

 It’s much more entrepreneurial now.

Richard Lipstein Question: Buyside firms are decrying the lack of research but cutting back on # of research suppliers.

How did we get in this contradictory situation? David Teten: The buyside is not seeing enough compelling research from the sell-side.

 However, the number of buyside analysts is way up, which shows a commitment to proprietary sources. Michael Mayhew: Other trends are happening too.

 There will be a significant reduction in # of firms getting paid. Firms will separate research fees and execution fees.

You may only have 20 firms getting commissions, but hundreds getting research checks. Richard Lipstein Question: Paul, how does one manage a virtual corporation? Paul Spillane: Everything about the decline in research firms/getting paid is music to our ears.

This is the only industry I’ve seen that has no idea of COGS (cost of goods sold).

We love a value-driven model.

 If you can add value, clients will pay you unlimited amounts.

 So good analysts in their virtual workspace are making 2-3x what they did in a bulge-bracket environment.

"We manage by compensation."

The industry needs to get away from the lack of connection between quality and reward – casual votes on who should get what.

We have the same regulatory framework that any registered broker-dealer has, with the analysts being registered 86s or 87s.

Our good analysts work "24x7" at times because they love the work and get paid well, and other times take a break.

"It’s an absolutely fantastic time to be an analyst. The bottom is here."

The # of stocks covered by bulge-bracket firms is going lower and lower. The bottom line is here, there will be less people around, but those who are good will be making money.

 Like Nitron, we only pay an expert when they get a phone call. Eric Alexander: Research revenues might go from $3.9bn to $3.6bn, but it's still a big opportunity.

 David Weild IV: Wall St research firms are getting smart that they do get paid. Roughly 50-70% of bulge bracket revenues for an offering are for the deal, and 30% is to provide coverage, but the funds aren’t always allocated to that purpose.

It seems like Reuters and Thompson want to know who is consuming their research and cut out people who are drinking for free.

The tide is turning on getting paid. Eric Alexander: We are still committed to trading desk model. It’s hard without a desk; it's integral.

 The buyside sees their traders as integral to their team and so do we.

 AUDIENCE QUESTIONS Q to Soleil: What does it mean for an analyst to "deliver" value and get paid commensurately? Paul Spillane: There are many ways to signal how to pay: a voting mechanism, # of visits set up, commissions paid. Clients now are responsible, e.g. Via the UK's regulations, to say how research is allocated.

More hedge funds have a formal voting mechanism due to regulatory requirements.

 Checks come in with specific analyst names on them to us.

Michael Mayhew: All about producing good research.

 To one client that’s management access, to another it's industry expertise, and to another it's performance recommendations.

Issue is that if you produce me-too maintenance research, models that don’t outperform, you have to worry.

Question: What about outsourcing research to India and other places.

Eric Alexander: This question is symptomatic of how much has become commoditized. Reg FD has commoditized information.

Michael Mayhew: Couple years ago, the avg cost of wall st to cover a company was $192K – per company.

There was an absolute need to lower that cost, so moving some research oversees made a lot of sense.

But value-add of a research firm can’t be outsourced. David Weild IV: But you can create new value by leveraging offshore resource.

 It may become a necessity to have competency in offshore inputs.

Paul Spillane: The last mile is where the value is. We get 7 calls/month from Indian firms to provide us with outsourcing.

Most of those analysts don’t have 86s/87s and don’t talk to management.

 Offshores won’t complete with mainline analysts, they will focus on filtering through existing data in more conventional ways, at least for now.

 Offshore won’t be a huge threat.

 We think $8bn will be paid out, over time, in hard research.

 If you look at outsourcing initiatives in the technology world, JPM outsourced their platform to IBM in a multi-billion deal, but brought it back in-house when the deal expired.

 We’ll all experiment with it, but when cost goes up for offshore it will lose competitiveness. We used to pay $25K for an associate abroad, now its $50K.

 Richard Lipstein: One bulge analyst I know is having increasing quality issues, exacerbated by language barriers, time differences.

They didn’t see benefit anymore. Michael Mayhew: I’m concerned about long term risk. If we outsource associates, when do future senior analysts come from? Are we going to hire the offshore people and bring them here? David Teten: All of this gloom & doom is great news for Nitron.

Offshore people working off same public data further commoditizes publicly available analytics. Basic Yahoo! finance data is free.

There are so many hedge funds out there, and they're all obsessed with chasing alpha, which they can't do with the same tools as everyone else.

 (The hedge fund incubators, incidentally, remind me of the dot-com incubators we used to see, which is a sign that there is a surplus of hedge funds. 2006 is the first year when we're on track to see more hedge funds shut down than open up.)

Audience Question/Observation: In the last few years, lot of great info free on internet has become available in forms of blogs.

Incredible corporate-experience types, speaking their minds and providing insights while going after eyeballs.

They are getting paid $550K/year monetizing eyeballs (Editor's note: I know extremely few bloggers earning that type of money!).

Paul Spillane: This industry has to recognize that as a threat. The audience member asking the question has worked in tech – so she's better able to know where to find quality information.

 The insights aren’t there for (isolated) associates to make money.

 Michael Mayhew: There is a model that’s been developed over a few years, for readily available info: Research that is restricted to small # of clients (and which delivers alpha).

Hedge funds will pay lots and lots of money for restricted access, which means 30,40, or 60 clients. Hedges won’t trade off blog content because it's available to thousands/millions of people.

Also, most hedge funds don’t want to say: "if this deal blows up, I’ll tell my manager I got the info free off the internet. " Give me a break! David Teten: If I have really good info, am I giving it for free on a blog? Publicly-available information (on a blog, New York Times, etc.) is designed to be relevant to the average person.

 If you want customized analysis for your portfolio/your situation, then you typically pay the person who produced the analysis that's broadly relevant. He proves his credibility with his general analysis.

Eric Alexander: Blogs are a threat. Collaborative relationships deliver distinct ideas. You need a talented, experienced analyst with an expert network to find the alpha idea.

Blogs don’t work standalone but they are a valuable contribution.

 Paul Spillane: Most investors have an overload of info.

 We have a product to grade blog: Collective Intellect.

Using AI to sort through hundreds of millions of blogs a day to rate for accuracy.

This product is on desks of some of the largest prop trading desks in the world.

It can be a CYA, but you can’t sort through all the available info and it becomes more productive.

 Audience observation: Great bloggers are identified and filtered by word of mouth.

 Experienced people don’t read every single blog.

Paul Spillane: But imagine if you can also grade them all.

 We’re excited about the prospects.

David Weild IV: In my west coast conversations, a lot of funds are using expert networks.

 One guy I spoke with was a well respected 1990s internet analyst.

 Widely followed. He said that one key problem with Wall St research is deteriorated quality.

 Because of Reg FD, executives are uncomfortable with sharing corporate info.

 Sourcing of independent experts has become very important.

 One guy is using expert networks to do due diligence on potential portfolio co’s.

 Won’t replace need for direct access.

Audience Question: What’s the career opportunity and income oppty for sell-side analysts.

Do you see migration to buyside? What about buy/sellside relative compensation? Eric Alexander: It’s important to be part of an organization with a regulatory structure, so the analyst can focus on the work.

 There’s an opportunity to be more entrepreneurial these days.

Locked in salaries and guarantees are much less available.

Richard Lipstein: The top of the Internet bubble skewed compensation and demand for analysts.

Comp for internet analysts gone down significantly.

They used to be able to make 7-8 figures.

Compensation has bottomed out because of disappearance of guarantees and extreme salaries.

 Not easy for sell-side analyst to move to the buyside because they’re viewed as a salesperson.

 However, hedge funds hire more sellsiders, young ones, than mutual funds.

 It’s worth noting that a typical analyst will make more than 98% of the US population rather than 99.9% in the past.

 Paul Spillane: You summed it up perfectly. It’s not easy to move to the buyside.

But everyone is still paying people 6-7 figures.

A lot of doctors, lawyers, fireman who don’t get paid that – who arguably provide critical value to society.

David Teten: I saw a talk by a prominent person in the research industry, who said, "If you meet an analyst that’s been on sellside for more than 5 yrs, they’re not good at picking stocks, because if they were, they'd get a job on the buy-side."

There is increasingly a disaggregation of analyst's responsibilities. Management access is highly valued by the buy-side–but that’s a concierge service firms like ours (Nitron) do more effectively than generalist research firms.

 Richard Lipstein Question: The typical independent research firm is much smaller than bulge bracket dept.

 There have been problems, eg Overstock.com took a research firm to court for allegedly being part of a plan to devalue and short sell the stock.

 How can small firm deal with intimidation of big corporation, particularly when issuing negative research? Paul Spillane: Associate yourselves with a firm with strong compliance.

 Reputation of your employer is important to focus on when you are an analyst.

Unless you commit fraud, you are in a good position to make clear statements - your opinion is your opinion.

One analyst whose opinion dropped a stock 50% (is rumored to have) received death threats – from a retail firm! Richard Lipstein: I think it’s more an issue of small research firms can't cover legal costs to defend themselves.

 Paul Spillane: Agencies like SEC, NASDAQ won’t allow that intimidation…and the First Amendment. Eric Alexander: Be clear who the customer is.

It's not the company covered, it’s the investor.

 Paul Spillane: WSJ or NYT would love to ‘defend’ the small guy with strong opinion.

The court of public opinion doesn’t cost much. And it's great PR. David Teten: Most of time, the analyst is doing right thing.

 Owen Lamont research showed that, the more a corporation fights a critical analyst, the more likely it is later on that the analyst is correct.

Jeff Skilling said "They’re on to us," in response to a certain piece of independent research.

That's a great ad for independent research! (As Jim Chanos pointed out in a recent talk).

Audience Question: Given internet bubble, do you see another shakeout? David Weild IV:

There’s a rationalization, but other models are flourishing.

The big shoe that dropped wasn’t the bubble, it was decimalization in 2001.

 That cuts 95% of the commission flow.

 The internet brought direct transaction models and commission compression – commission went from $350 avg to 5 bucks.

David Teten: Creative destruction is a benefit, not a bug, of capitalism.

Net net, people are making a lot of money in finance.

The industry is always evolving, companies change, people move around, but the quality people do just fine.

 Michael Mayhew: For sell side research, unbundling will have a big impact.

When asst mgr has ability to select research and broker independently, that will really impact someone like Goldman Sachs.

 If they charge 4c/sh, how much is for research and how much will get they for this Question: What’s the track record of Spitzer agreement to channel $s to indie firms?

Eric Alexander: Some large firms got huge funds channeled to them.

We’re not in that space at all. I’m hopeful this is over soon, it hasn’t been effective at all.

David Teten: Spitzer uses lawsuits effectively for gubernatorial campaigns, but not necessarily in the pursuit of justice.

Someone asked a panel I participated on earlier this year "where should I invest, as a retail investor?" Look, you as a retail investor have the worst information and the worst prices.

You're much better off hiring a professional, by putting your money in a mutual fund, hedge fund, or hiring a Financial Advisor.

Spitzer agreement was a solution in search of a problem.

The retail investor will almost inevitably have inferior returns to the professional, because of the nature of the industry.

 Richard Lipstein: The Wall St. Journal said ‘you can’t legislate against greed’. David Weild IV: I’ve talked to many of the NASD regulators.

 All agreed that the Spitzer agreement has been an "absolute disaster".

 Jack Coffee, of Columbia, on their board, calls it a new form of government.

It has created a level of paralysis – 3 years left, and firms are afraid to innovate.

Every bulge bracket says behind close doors won’t pony up again.

It hasn’t expanded coverage to new names. It was a grand experiment that failed. "This is a drug."

Has failed to expand coverae.

The audience member asked what are usage statistics for the independent research that had to be posted.

 5% of retail hits are on the indie research, the rest is from the main provider.

 The only success from the agreement is focusing people on the problem – Wall St research has greater integrity today.

Teten: There is one pressing, highly important public policy goal that the Spitzer settlement achieved: Spitzer won the primary. Question: Comment on future consolidation in independent research firms.

Is pace likely to quicken? A panelist said there are over 400 firms today. Michael Mayhew: 450 firms in N. America. We certainly believe in consolidation but not across the board. Restricted providers will do quite well.

Fundamental data-based research will consolidate.

 My partner has argued that research is frankly a lifestyle business for many.

 If you have a dozen clients paying $100K each, you can have a nice business for a few analysts.

I suspect the number therefore will be unusually high, but fundamental traditional research will find it increasingly difficult to get paid.

 David Teten: Consolidation per se doesn't concern us.

I would be worried if the overall pie shrinking dramatically.

But to my knowledge, expert networks are the fastest growing sector in the research business.

 Consolidation means we buy or get bought, and there are worse things that can happen.

 Eric Alexander: For full disclosure, my business partner in the audience asked the consolidation question.

 The alternative to a lifestyle approach to making some money in research is being part of collaborative effort.

 When someone like Monsanto wants to do a deal, they can turn to one of our deal specialists.

 Richard Lipstein Question: What about the idea of a corporate rollup, e.g. how Eric Alexander got Foresight. Eric Alexander: That wasn’t an acquisition but a subset of analysts were attracted to our platform.

 David Weild IV: Question for Michael--What # of firms have > 5m revenues? Michael Mayhew: Quite small, < 10% of 450. Lot of folks with $1m revenue.

Some consolidation when firms go out of business, other when firms get bought. Question: Going back to the value of research, how is the way investment firms are compensated linked to value? In an unbundled world, mutual funds are asset-based profit-makers, not performance based, so they should worry less about costs.

Hedge funds are compensated by assets and performance, so they are looking for research value. Would mutuals prefer bundled research? Michael Mayhew: The audience member asks analysts how they judge good research.

They say, "I’ll know it when I see it." This means, many buy-side people don’t know what makes good research to them.

That only has a chance of working if they get research for free, use it, then decide later on if they liked it, but its still subjective.

David Teten: There are 3 reasons why hedge funds are desirable clients.

They have a lot of money compared to cash/overhead requirements, they don't usually have an easy way to measure the value of your unique product (compared with tools available to measure ROI if you are selling, e.g., bottled water to them), and they are paying with soft dollars, i.e., other peoples' money. I have problems with how soft dollars are used when applied too broadly, but the system works to the benefit of research firms.

Eric Alexander: It’s a lot harder for a research firm to penetrate/develop business with large mutual fund. "I’m sitting with a fire hose of info" says one large-fund portfolio manager.

 They need barriers to access, not more info. Question: What are new models on how to pay for research: Is it arbitrary or still predominantly through trades? Paul Spillane: 85-90% is still via soft dollar.

 It will take a lot longer to wean off than anyone thinks.

 If a large mutual fund company wanted to separate costs, it could be 3% of their management fee.

 For a smaller firm, its entire management fee could be allocated to research cost. Richard Lipstein Question: Last question.

For someone looking to get in the research business, what does this business mean for the up-and-coming professional? Eric Alexander: Paul Spillane and I say same thing.

Be good, and be entrepreneurial.

If you have been a salesperson, bone up on analytics.

If you are an analyst, participate in selling.

Michael Mayhew: Ample opportunities for good and great analysts.

A lot of analysts have spun off with high expectations.

Paul Spillane: If you love it and are passionate about it, there’s never been a better time.

 If you don’t love it, join a bulge bracket firm.

You get real motivated when you wake up thinking "how am I going to make money for my family?" David Teten: Be focused to add value. There is a story, true I believe, of one analyst making over 2 million covering one stock (McDonald's).

 Pick a domain you can own, then become the recognized expert in that domain. David Weild IV:

1) Being a research analyst is a wonderful thing, whether starting independent and or bulge bracket.

You learn a real discipline in a dynamic market (securities).

You can switch to private equity or corporate side. It’s a great training ground.

I’d like my kid to do this.

2) Just to mention separately, this is anniversary of 9/11.

 There is a wonderful organization on that was on 60 Minutes called Tuesday’s Children, which provides services to kids who lost parents.

Helps them get through college. Annual event at Cipriani’s 9/27.

They placed kids on take-your-child-to-work day. I’m on the board of directors.

Please consider supporting them.

Key concepts include: * European policymakers, particularly the French, created regulations and enforcement that govern the majority of the world's capital flows. * The U.S. has followed an ad hoc approach to capital liberalization, with no evidence it supported a liberal international financial regime. * The trend toward liberalization and a lessening of capital controls on worldwide finance appears to be on the wane.

Straight from the Horse's Mouth: How Professional Investors Elicit Maximum Information in Minimum Time from Industry Sources

Sponsored by the Harvard Business School Club of London Thursday, September 7, 6:30pm Offices of McKinsey & Co., 1 Jermyn Street near Piccadilly Circus, London RSVP and prepayment: http://www.hbsa.org.uk/cgi/hbs?do=index&page=event&event=222

"Interviewing industry sources requires a broad range of skills which I didn't learn in business school: rapport-building; how to open a conversation to start off on the right foot; how to close a conversation and keep the door still open. Nitron Advisors has helped me to interact with experts more effectively, learn more from them, and make better trading decisions. Nitron showed me how to ask the right questions... And how to help an expert teach me how to ask the right questions! Any investor without this skill set is at a significant disadvantage in the war for alpha." - Partner, Multistrategy/Convertible/Credit Arb $500M fund, New York, NY

As a professional investor, you speak every day with corporate management, with industry sources, and with other knowledgeable experts. However, are you getting as much information as possible? Do your sources pro-actively contact you with new investment ideas? Do you have access to the right sources for your business?

David Teten, CEO of research firm Nitron Advisors, will fill the gap. Come learn:

There are countless books on how to read a balance sheet or an income statement. However, when you actually measure how professional investors spend their time, they spend perhaps half of it talking with management, attending conferences, and in other ways learning from industry sources. Yet, there's not a single book on Amazon or course in business schools on how to do that effectively. We fill this gap.

Who is Nitron Advisors?

Nitron Advisors provides professional investors with precise answers to their questions about specific companies and industries, by tapping our exclusive Circle of Experts of thousands of knowledgeable industry insiders. You can learn directly from the Experts through private telephone consultations, in-person customized surveys, and interactive events. We provide access to senior executives, local managers, technologists, suppliers, customers, and regulatory observers. We specialize in connecting you with executives in transition.

Biography of Speaker

David Teten is CEO of Nitron Advisors.

 David is also the lead author of The Virtual Handshake: Opening Doors and Closing Deals Online, the first business book about how to use online networks to accelerate sales and raise capital.

He runs TheVirtualHandshake.com resource site and blog and co-writes a monthly column for FastCompany.com. David recently was named a "2005 Future HR Leader" by Human Capital magazine for Nitron Advisors' unique use of social software for recruiting.

 David serves on the Advisory Board of the Word of Mouth Marketing Association and of Accolo, a recruitment process outsourcer.

David is a frequent keynote speaker at finance and technology industry conferences and at such universities as Wharton, Columbia Business School, Yale, and Princeton.

He formerly was CEO of GoldNames, an investment bank focusing on serving the internet domain name asset class.

 He has worked with Bear Stearns' Investment Banking division as a member of their technology/defense mergers and acquisitions team, and was a strategy consultant with Mars & Co. David holds a Harvard MBA and a Yale BA.

Yahoo Finance (http://finance.yahoo.com/) has a link on each summary page that allows the user to download the stock information in CSV format.

What is less well known is that there is a URL which allows direct access to stock information without having to parse any HTML or even XML.

The format is http://finance.yahoo.com/d/quotes.csv?s=STOCK_SYMBOL&f=FORMAT_STRINGso to get Vodafone's ask price the URL would be http://finance.yahoo.com/d/quotes.csv?s=VOD.L&f=aA full description is available at http://www.gummy-stuff.org/Yahoo-data.htm You can then import this data automatically into Excel. More... Via Frans King

Event on June 21, 2006

Notes by Margie Yuan and Eric Shahinian

Event sponsored by the Structured Products Association

What are Structured Products (SP)?

• A contract between investor and issuer, large investment banking firms

• A combination of financial instrument: 0% Coupon + Derivatives

• Minimum Investment of $1000

• Payout period ranges from 1-7 years

• Upfront fee (1-6%) or commission

Targeted Clients:

• Advanced technologies have enabled Baby-Boomers to live longer and to take on riskier investments.

• Baby-Boomers and investors nearing retirement, who are looking for a steady income stream but with higher returns than traditional bonds.

Types:

Risks:

Several lawyers I spoke with voiced their concerns for the current legal platform, which has not been updated since 1930s and does not acknowledge the different degrees of risk between Structured Products and Mutual Funds.

Global Environment:

Traditional instruments are misleading. Many believe that structured products represent an industry that composes financial instruments that simply do not work, yet note the following.

 Options often defy logic, i.e. and put and a call option will both rise when the corresponding stock drops 20%. Warrants, as many of us know, often move in very odd patterns, often not determined by the underlying issue.

Short selling in recent years has become not only a major source of scrutiny in the financial market industry, but also a major source of influence in the marketplace.

 Many claim that short selling ‘stabilizes prices’ and allows them to reach equilibrium, making the market more efficient. However stock lending was only made possible last year by the SEC, and so this has been going on without concern for many years, unlawfully.

 Short selling is even occurring in the T-bond market, with people benefiting on the rate drops, although now it looks unlikely to occur.

The SEC is rightfully cautious of the repo mechanism in short selling, essentially the short squeeze. Thus the brokers on the street are doing their best to prevent short drawdown, as it prompts many shorts to cover the positions.

The SEC law still needs to be refined in terms of the t-bond and index futures markets. What I am trying to establish is that the financial markets with regard to traditional instruments are not that valid and secure that people should naturally rely upon them for asset allocation. The structured products space has a lot to offer.

The Canadian economy is another place to look at in discussion of Global Structured products. Canada has tremendous resources to do phenomenally, and their economy is developing quite substantially.

What is the best thing about Canada is their income trusts. Now I am sure many people are saying that they know what an income trust is, but they are different in Canada.

They are generally for 3, 4, or 5 years in duration, and are meant as an ideal taxing structure for mature companies.

It allows the companies to pay all gross income without corporate tax. Therefore, in Canada no issue exists of double taxation, thus helping boost the economy.

We will be able to find a lot of value in Canadian products. 50% of the equity IPOs in 2005 were in the retail structured products space. To be more exact, 19 out of the 40 top offerings.

Principal protected notes, a big part of the structured products industry, are becoming a bigger product, with yield by the main banks.

They employ a CPPI structure, with 1:1 gearing, and up to 200% exposure to a commodity or pool of commodities.

This is a desirable structure because we have to remain cognizant of the fact that in Canada only 50% of all capital gains is taxed, creating a very favorable environment.

Equity forward overlays are also important to be reminded of in terms of products with yield, as the distribution is not taxed until the capital investment is recovered, then the excess return is taxed.

Products can now have split share capability, where you either have 2:1 capital distribution, or 2:1 capital appreciation.

In Europe, there has been a rational shift to thematic, simple payoffs. There is a commodities focus, which has traditionally been simply overweight.

 Water companies are emerging as a means of investment, as they have yet to be seen as a true source of stable revenues and solid returns. Spain is known for simple payoff structures, with strike prices out of the money in many, or almost all of the products.

They also have cheap options relative to their neighboring countries, and so the environment is conducive to structured product growth.

Scandinavia has been, and continues to be a ‘vanilla’ country so I will not discuss it further. Some products to note are the fund/ index linked hybrid structure.

They are essentially a ten year rainbow, and convergence has been occurring in terms of derivative basis into asset management companies.

Structured products in many ways have been compared to mutual funds, especially relative to the fee structure in terms of load and such.

 On to questions, innovation in the industry will continue to occur, driven mainly by the exotic structures products becoming more prevalent, as they have traditionally been much less regulated than their brothers and sisters, they offer much value.

 In terms of accounting for the products, that is a dilemma. Decomposition is required.

The future seems to hold many things, but what is likely is that what will occur, in addition to the change in use of exotic products, more so the traditional products will be optimized and hopefully be used to a greater extent.

A drawback to this is regulatory concerns. I am frightened by what India has and continues to do; requiring derivative holders to disclose their holdings.

This is ok for mainstream equity issues, but the derivative industry is very sensitive for this information, and it would be detrimental to achieve substantial returns.

The Middle East has many hedge funds entering, especially multi-strategy and fund of funds.

The local equity markets are rising to enormous highs, and continue to rise, and real estate is also faring well. Money was invested locally until recently, but foreign investment expansion will be the key to develop the market there.

 More shareholder friendly products could help, as derivative option products are not allowed, with typically option + zero coupon bond structure.

However interesting to note is that products still exist in similar forms, allowing us to conclude that the products are simply restructured in a way as to facilitate the product being offered pursuant to regulations.

A product that should be looked upon further in the mandatory exchange bond in terms of its use and the Time Warner/ Icahn deal.

The offshore entity to accomplish its goal of returns can find usefulness in the product. In the general marketplace, the structured products world impacts very little.

 There are an estimated 200+ products, with $20 billion of purchasing power. This industry particularly impacts the emerging markets as a very viable means to gain access. Exchange traded notes are essentially a complex bundle of exchange traded funds.

In general, it would be safe to say that we can consider structured products bundled instruments, often of debt and equity notes. Fees are something that this industry, much like the mutual fund, and especially hedge fund industry, is being scrutinized.

 Fees will likely go down substantially in the future. Hedge funds do not invest in structured products; they may use them to gain access to niche markets that are not typically available to them.

 Often times, however, swaps can be simply used to lever the returns. What needs to be clarified is that correlation swaps are OTC derivatives, not at all structured products.

HBS Professor Andrei Hagiu is an expert on multi-sided markets, and recently interviewed me on that topic:

Market Platform Dynamics--Catalyst Conversation: Conversation with David Teten. His site requires that you submit an email address to read the article (but I should note that he doesn't actually test if the email address is functional.)

Following up on my draft post on 'Business Models for User-Generated Media', I wrote some notes on this morning's iBreakfast.

Shawn Gold, SVP, MySpace: Marketing in a Networked Culture

MySpace has 100m users projected by july

84m registered users, 2m new registered users per week (size of Houston), 48m unique visitors per month in US

2^nd most popular site for content consumption on the Internet, as defined by page views. 29000 indie film profiles. 1.8m music profiles.

#1 video viewing site

#1 referrer to Google—8.19% of Google's traffic

42% of YouTube viewing is happening on MySpace.

Goal:

MySpace will become THE full service community portal

Introduce innovative advertising solutions while being at forefront of pop culture

DNA of Myspace Generation : MySpace is their place. Where youth culture gathers to express themselves, connect with friends, and discover popular culture.

Big differentiator from competition is the way MySpace is used to discover popular culture, i.e., bands/TV shows.

All the growth is viral---they market to influencers not to audience members.

Nielsen: Myspace reaches 51% of 13-17 year olds online (which is 85% of all 13-17 year olds).

79% of the site is 18+, and 25M users who are 30+.

Why so successful:

-A user's profile is a metaphor for their room or apt.

- The Internet generation has grown up sharing their lives

- The profile is a characterization of who they are

- They want to express themselves creatively.

Children lack a 'their space'. 7-11 doesn’t let them hang out in front; the mall security guards kick them out. They're used to being in public. MySpace is a form of identity production.

Everyone takes pride in their medium. It's 'vested media' because they created it.

When people say the pages are unwieldy, just think of a teenager's room.

Social networks/blogs serve as a publishing platform for early adopters. Word of Mouth has turned into 'citizen journalism', which people trust more than traditional media.

MySpace allows brands to become living, breathing entities that consumers can interact with.

Best brand programs tie into self-expression, facilitate connections between people, or is centered around the discovery of popular culture.

87m stories in the database, and a lot of that content is professional. Every nightclub, every major Christian band, every celebrity brand, is in the database. They're now slicing the database by professional type, e.g., if you want to reach all the comedians.

Basic idea of marketing: "Tell a Friend"

Average page is visited 30 times a day. If you're in the top 8, your exposure is exponential. XMen has 3.2m friends. If you friend them, you can have top 16 friends, instead of top 8.

Core: identification and individuality. Don’t separate them---that's Geocities. Understand core needs (identification and individuality), and address their core needs: recognition, knowledge, self-expression, belonging, access, discovery, appreciation, and confidence.

We facilitate this on a social networking platform.

Next speaker----Shelly Palmer, author, Television Disrupted

Five buzzwords you can use right now. You will sound like a genius if you use these.

- Mobile video: clipcasts or streamcasts. He dislikes the term 'cellphone video', because not all mobile video (e.g., ipod video) is via a cell tower. Why does ESPN Mobile have only 2400 subscribers—because it's $30-$400/month. It's a MVNO—they own the handset and customer experience. They're $30M in the hole. All the vanity cell services will meet the same fate. ESPN invested a lot of money into the technology. Behaviors change glacially. In the last century, fastest time to market for an electronic tool was Xerox machine. It killed carbon paper extremely quickly. Instantly successful. Normally new tools take 5-100 years---fax machine took 100 years.

- IPTV—Internet Protocol Television

- Broadband Video—call it 'IP Video'. 'Streaming Video' is a silly term.

- Podcasting---he hates this word. A use of the RSS spec---it has nothing to do with IPods or broadcasting. Coined by Adam Curry. Based on XML spec. Blogging is the most popular use of RSS.

- Mesh Networks—each node connects or two or more nodes. No central server. Self-healing. Hard to shut down. Napster was a file-sharing network, therefore easy to shut down. If they're wireless they're a swarm. BitTorrent is best example of a mesh network. Cant be used in real-time streaming.

Oct. 12, 2005: the date that Steve Jobs and Eiger unilaterally decided to put TV shows on ipod—Desperate HouseWives. Very controversial with affiliates. The day the TV world changed.

"Contact is King!"

Different words for all of you in the audience:

Cable companies call customers 'subscribers'

Phone companies call them 'access lines'

TV cos. Call them 'Viewers'

Computer cos. Call them 'users'

2/17/2009: all analog TV spectrum will go digital. Your old analog TV won't work. The good news: all the old analog frequencies will be reclaimed by the gov't and auctioned off. Most likely it will be used to create a large broadband cloud—WiMAX? No longer will you use a little local wifi network—you'll use the large broadband cloud. Hermistown, OR has largest broadband cloud in America: 700 sq miles, 5 megabits. It's like living in Star Trek. Cant handle lots of streaming video/VOIP, but it's enough for email. Intel is banking heavily on WiMAX.

Every cell phone call ends with 'hello', instead of 'goodbye', because of connectivity problems

Q&A

Shawn: They review every photo/video uploaded to myspace

Any member can report objectionable content

25000 volunteers police school site

Algorithms that search for underage kids---e.g., mentioning 12 candles on a birthday cake. They kick off 5000 underage kids/day.

Myspace is the size of two Californias—and the crime on the site is equivalent to 5 blocks in NYC

My colleague Scott Lichtman took some detailed notes on the TieCONEast panel last week on "Trends in Investment Research and Due Diligence".

 Podcast is here.

CONFIRMED SPEAKERS

He was editor of Asiamoney and of the International Tax Review, as well as presenting business programmes on BBC radio and television.

Graham’s books include Economic Growth and Political Change in Asia (1995), Japan’s Financial System: Restoration and Reform (1998) and Euroland: The Future of Europe’s Capital Markets (2000). He is a graduate of Cambridge and London Universities in the UK

Susan Oh, Director & Senior Analyst, Merrill Lynch Susan's responsibilities include manager research and the analysis of hedge funds.

 She is also the portfolio manager of the Merrill Lynch Event Driven Fund. Her focus is on invested managers as well as identifying new funds.

 Prior to joining MLIM, Susan was a Senior Analyst at Tremont Capital Management.

At Tremont, she conducted due diligence on hedge funds and strategies to make strategic recommendations to the Investment Committee.

Her other experience includes Citco Group Ltd. and Smith Barney, Inc. Susan was a hedge fund analyst for Citco and an Institutional Sales Assistant at Smith Barney in the hedge fund group.

Dave Furneaux, Founder & Managing General Partner, Kodiak Venture Partners Prior to Kodiak, in 1996, he co-founded Furneaux & Company, LLC, a seed stage high technology venture investment company.

He was the founding investor and active Chairman of the Board of Extreme Packet Devices (acquired by PMC-Sierra) and Philsar (acquired by Conexant).

He also was a founding investor, Vice President of Business Development, and member of the board of Skystone Systems (acquired by Cisco Systems), a founding investor in Solidum Systems (acquired by IDT) and an early investor in Telica Systems (acquired by Lucent).

 At Kodiak, he was an active early investor in AuroraNetics (acquired by Cisco Systems), Watchfire and Raza Microelectronics.

Gregory Locraft, Vice President, MFS Investment Management Gregory Locraft is the Vice President of MFS Investment Management and a Portfolio Manager of the $2billion MFS Capital Opportunities Fund and related portfolios. Mr. Locraft joined MFS in 1998 as a research analyst.

 He became a member of the Large Cap Growth Portfolio Management team in October 2003 and was named Portfolio Manager of MFS Capital Opportunities Fund in December 2005.

Previously, he was a Senior Consultant for Kaiser Associates, Inc. Prior to that, he was a Financial Consultant for Smith, Barney, Inc. He received a Bachelor of Arts degree in Political Science and History from Williams College and an M.B.A. from Harvard University.

David Teten, CEO, Nitron Advisors Bio...

Scott Lichtman's notes: Furneaux: $700M under management. 8 partners. investing throughout the northeast, and also some emerging markets. 50% of investments are with people we invested in before.

As a Private Equity firm, we are constantly communicating to our managers to find depth in companies.

The average time from startup to IPO is 8 years, from IPO to acquisition is 6 years.

To pick the right companies, combine analyst inteligence (awareness and insight) with due diligence. Locraft: Good researchers are leaving sell-side and traditional buy-side & going where there’s a piece of the action.

Teten: Gave overview of Nitron Advisors' business model. Quoted prominent industry CEO, who said, "If you’ve been in research > 5 years, you’re not a good stock picker." Locraft has 45 analysts.

Average hold on a stock in the market is 11 months. 40% of trading volume is from proprietary desks.

They compensate staff to think long-term, which they define as 3 years.

They usually only invest in companies with >$500M in assets. MFS is a $170B firm with $2B in Greg's fund.

"The level of scrutiny we've undergone at MFS has made us take a whiteboard approach to the P&L." MFS is concerned about raw trading costs.

Susan Oh: Our area invests in all major strategies: long-short equity, relative value driven, CTAs, global macro.

She focuses on event-driven.

 Due diligence starts with an on-site visit. We look at management, firm, infrastructure, risk management, operations. red flag: concentrated investor base.

Such investors may have preferential rights...which could hurt smaller investors.

 Field: What is the quality of sellside analysis information? Do you compare internal analysts with sell-side? Locraft: Yes – analyst compensation is based on stock picking results vs. sell-side recommendations.

 We use AQ's competitor, Starmine. Field: What if your analysts aren’t that good? Locraft says there are certainly cases where some analysts are better than others, and therefore some of our analysts by definition aren’t top of field.

MFS will pay accordingly for specific sell-side analysis in these cases.

 But we recognize the disadvantage of information being disseminated to all parties at the same time via FD. David Teten: How do you measure ROI of research? Oh: One hedge trader I knowwill only buy research when it’s contrarian to the general street consensus.

 Locraft: ROI on a good analyst's picks is enormous – so massive it’s not worth measuring.

Dave Furneaux: the early stage challenge for PE/VC investors these days is that there is more money than opportunities.

This means for any evident investing opportunity the returns are lower due to increased competition for investment dollars.

So the key is to find an investment idea others don’t know about or appreciate.

Seeking E-Commerce / Internet Experts for Boston Hedge Fund Dinner, June 22, 2006

We are organizing a hedge fund dinner for E-Commerce / Internet Experts in Boston on June 22, 6:30pm.

This is a chance for you to talk with and learn from some of the major hedge fund investors in this sector.

 We're looking for people with the following backgrounds, preferably with strong international background:

 + Search-engine-optimization expert (e.g., Reprise Media, competitors)

+ Large eBay power-seller, or someone knowledgeable about the eBay drop-off franchise business (e.g., Auctiondrop, iSoldit, QuickDrop, etc.)

+ Voice-over-IP executive/expert (e.g., Skype, Vonage, etc.)

+ Online travel industry – possibly with experience at a meta-search travel site (e.g., SideStep, Farechase, Kayak, Mobissimo, etc.)

 + Executive or expert familiar with the job search or jobs classified business (e.g., Monster.com, Craigslist.org, HotJobs.com, Careerbuilder.com, Dice.com, Indeed.com)

+ Paid search (or general online) marketing from the perspective of an ecommerce business

+ People familiar with the competitive environments of the following companies: Audible.com, Amazon, Ebay, Monster, Netflix, Blockbuster Online, Overstock, Red Envelope, Bluenile, CNet, Google, Infospace, iVillage, Microsoft online, Yahoo, Orbitz, Ctrip, Expedia, Travelzoo, Skype, etc…

Qualifications: As an expert, you have at least four years senior experience in the Internet/e-commerce space. You have a “big picture" perspective on different firms in the space.

If you are not already a member of our Circle of Experts, please visit http://www.circleofexperts.com/apply-form.html?i=11 and apply to be a member of the Nitron Advisors Circle of Experts.

Otherwise, please contact Mr. Avi Mally, [1] (212) 682-5874, amally(@)nitronadvisors.com, with any further questions. Please note that we must review your biography and talk with you before we can accept you for the dinner.

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Introduction Yale BA. He has $2.9b under mgmt. And there's only $3.3b in institutional shorts overall. So has >90% of the market.

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James Chanos:

It's best for me to speak after lunch because my talks are "unsettling but not nauseating."

Independent research is a cottage industry, with low barriers to entry. Flexible.

*issuer intimidation

*litigation

*soft dollar concerns

*customer concentration

1985: he's had private detectives go thru his garbage.

1983: critiqued Waste Management Inc. Said it was accounting spam. The (size extra-large) CFO told him, 'This is a small town, OK?' Fortunately, nothing came of it.

2 current cases:

- Overstock

- Biovail

Organized plaintiff's bar is now looking into the short selling business, which is bad news for independents.

Keep your business in federal not state courts...they're much friendlier to free speech than state courts.

Hedge funds are only 5 -10 percent of equity value worldwide, but could be 20-40 percent of trading volume.

Problem you in this audience should be concerned with: 50% of total hedge fund dollars are from fund of funds, and as much as 80% to 90% of inflow in last 2 years.

Given the 2 layers of fees, Fund of Funds will soon pull back.

*sell side backsliding

*customer growth

*recent history

Some notes from June 8's Investorside Independent Research Provider Conference. Integrity Research also blogged about this event. 8:45am-9:00am Welcoming Remarks from Investorside

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Investorside founded with 2 firms (Argus and Precursor), and now has 73 members.

He thanks board, including: Stanton Green Lisa Shalett Mike Mayhew Doug Atkin Howard Shilett Scott Cleland 9:00am-9:50am Panel 1: Soft Dollars: Guidance on New Rules and New Trends Featuring leading industry representatives and regulators discussing the new framework of client commission usage in the US and UK John Meserve (Moderator), Director, BNY Jaywalk & Westminster Research Associates/BNY Securities Group, new board member of Investorside.

Member of SIA's Institutional Brokerage Committee & Alliance in Support of Independent Research.

Worked with Bush transition team on behalf of Mossbacher; worked in US Dep't of Commerce during Reagan administration.

Jon Giblin, Lehman Brothers, responsible for electronic marketing efforts and US soft dollar efforts David Quinlan, President, Eze Castle Software, and investor in Code Red Alex Vasilescu, Securities & Exchange Commission, trial committee

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 That's not happening either in the US or UK.

 Regulatory authorities have repeatedly said that independent & proprietary research should be treated equally.

Also good news for indies: - trend towards unbundling - reduction in coverage by large firms To the audience: Don’t miss your time to perform in this space! Transparency & disclosure train has left the station.

UK market has made bold strides on how commissions will be managed going forward. UK approach is bleeding into US market.

Billed as 'Big Bang 2' by Paul Miner, of Miner's Report on Investment Practices. Managers will need new tools, new systems, & new approaches .

 A new financial services sector is growing, just like TCA sector (Transaction Cost Analysis).

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11/25/2005: Commission responding to a decade of evolution of soft dollar practices Gave guidance on what will be appropriate practices for obtaining safe harbor.

 Clarify scope of both brokerage & research services.

 28e is about providing advice regarding investing/selling/availability/purchasing of securities.

 Not qualified: Overhead, travel, phone lines, furniture, rent, accounting services, salaries.

As money managers and B/Ds are required to give full disclosure, it benefits the independents.

 Service has to relate to subject matter of the trade. Another area of discussion: mixed-use items, e.g., a tool for both analysis & marketing.

 Burden is on money manager to break out those two categories.

Many advisors are urging buy-side clients to make this disclosure because they have legal exposure otherwise.

3rd party research can't be completely divorced from the trade.

Legally, broker-dealer (B/D) must be on the hook for payment to 3rd party.

This won't compromise all 3rd party business. B/d must also in some way be affecting the transaction.

=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=--=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-= Jon Giblin, Lehman Brothers, responsible for electronic marketing efforts and US soft dollar efforts Lehman has had conversations with other clients about unbundling.

This is a market structure conversation. Look at what happened in Europe: split between execution & research is disclosed.

This has shrunk the # of brokerage parties in the UK, subject to best execution.

Much more flow in a smaller number of execution providers. SEC is tackling the disclosure issue.

 Our def'n:

1) Big-U unbundling, or economic unbundling, e.g., Fidelity –Lehman deal.

Fidelity is paying for research out of their profits.

2) Little-u unbundling: See-through of allocation of execution costs and research costs.

Most clients choose little-u. Buy-side often has to trade illiquid securities with 2nd-tier, 3rd-tier providers. Transparency is key.

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They specialize in commission management tools.

 Classical process is email & Excel driven---very informal, proprietary, and insecure Research Content providers-->Research Management Software-->Commission Optimizer< -->Order Management System They want to provide a scoring/quantitative tool for this whole order process.

This process can and should be automated, and it's happening today.

 Q&A

Giblin: Clients sometimes determine execution level for a trade (DMA, algorithmic, etc.), and then tack on a cost for research.

There will never be one-size-fits-all pricing for the industry.

Audience question: How would commission-sharing arranagements take off here as they have in UK? 2 problems with that analogy: - how do you define provider of research? - NYSE ruling: broker cannot share a commission with a non-broker-dealer.

 There will be liberalization. Sununu and Schumer have both been supportive of indie reseach.

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=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=--=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=Georgette Jasen, Wall Street Journal Has run poll for 14 yrs.

 Data is entirely from Thomson. Strictly quant---we rank top 5 analysts in each industry group, using Dow Jones' industry classification approach & FTSE.

Industry classifications sometimes controversial.

Give equal credit to buy & sell recommendations.

Extensive verification period.

We post data on Statcheck website.

Verify data based on interviews with analysts.

Biggest change is we no longer include earnings estimates, because we could not be internally consistent.

 Analysts and companies were not measuring earnings in the same way.

 WSJ now exclusively reports GAAP earnings unless specified otherwise.

 Industry groups do change periodically.

We moved to simple buy/hold/sell form of analyzing recs.

A hold is a neutral rating.

To track data, they use market close from day prior to recommendation, because they can verify the price. WSJ often gets questions about this issue.

Most recommendations are made early in the day, so that's reasonable.

=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=--=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=Evan Cooper, Institutional Investor Magazine 'a beauty contest'. A measure of what clients think product is worth to them. Published in Dec. issue.

 We start early in year.

Ask buy-side what results were.

Last year had 71 categories.

3400 PMs at 700 institutions get the survey.

Had 690 voters. In 49/71 categories we had enough votes to pick winners.

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I follow the three Rs: Reading, Riting, Rithmetic Pay a lot of attention to: - 'rithmetic (how well recommendations perform).

 He uses larry bloston at Columbia Biz School and Rajiv Jagarnathan at Kellogg to analyze this. They strictly measure alpha - reponsiveness.

 As of 1/06, he told firms he expected them to issue reports within 48 hrs. of a relevant event.

I was surprised by long delays between times when co. reported earnings and when indie would issue report.

 Many indies still don't understand that vast bulk of investors have been pavlovianized to expect a report within 24 hrs. of an event, so that their clients have some idea of what that event means. - readability. reports' written quality He represents the non-professional clients of the brokers.

 He uses 37 IRPs, monitors 59 firms, who cover 1350 stocks.

 He goes stock by stock.

 Overall annualized alpha is about 6% for all these firms---from -42% to +80%.

His system is only about 2 years old.

I am constantly amazed at the variety of ways in which people measure earnings.

 Also amazed that an analyst can say earnings will be $0.15 below street and still call the stock a buy.

 We decided we wanted to get the influence of the market out, and that's why we switched to an alpha.

He draws data only from Jaywalk.

 Settlement funds only cover research.

 All other expenses (e.g., Mark's salary and technology) are paid for by the firms outside of the settlement.

 So his methodology belongs to Lehman.

He won't be publishing it.

To track data, they use market close from day prior to recommendation, because they can verify the price.

 They measure cumulative daily alpha.

 Q&A Teten asked how to measure comparative research performance of expert network providers.

Evan Cooper: with votes Mark Fichtel: there's no way Georgette Jasen: there's no way For private clients, 20-50% of research used is from indies.

 Almost all of research that's being used is used by broker and then conveyed orally to client.

Very important to reach brokers and capture their enthusiasm and loyalty.

 This has been major source of revenues to some indies, but they need to be event-responsive.

If they fail to do so, they'll see $100M of revenues /year disappear Georgette: Bulge-bracket firms get more awards because of the # analysts they have.

 Evan: 3/4 of buy-side uses indie research Mark: performance drives performance of indie research. Indie firms don't take enough time to explain the reason for their recommendations.

 Clarity of ratings is very important. 10:40am-11:30am Panel 3: The Future of Institutional Investment Research Research firms discuss the seismic changes facing the institutional investment research industry Lisa Shalett (Moderator), Sanford Bernstein Stanton Green, Vista Research Rich Leggett, CFRA David Weild, The NRE

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Become part of the fabric of client's thought process.

They want to be go-to firm for hard-core number crunching.

Overall pie is shrinking.

 And it's not overly clear that it's favored the independents.

 Research world is overcrowded. Draws analogy to excess of vendors in the tech bubble.

Lots of noise out there. Each client is very different: communication preferences, etc. More people will take research to low-cost regions.

 Constant churn in the client base---who's changing sectors, who's changing firms.

 Buy side is going thru a professionalization of procurement function.

 Traditional sell-side changing rapidly.

 We should be a consultant/service partner, not a publisher. 'a trusted partner to our clients'.

 We need to mobilize for success in a meritocracy.

4 buckets: - risk mitigation/save money - opportunity creation—help them make money - saving time - saving money You must rise above the noise.

Get research to right people at right time.

 You must be: Differentiated, high-quality, original.

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 We're working on a white paper on distribution of research of indies vs. i-banks.

There's about 10x more investment banking reports than there are independent reports (as measured by # reports). At low end of market, there's not much research at all, because economics don't work.

This is a challenge to the goose that lay the golden egg, of capitalism.

We address this challenge by: Research community enters into contract with NRE, not with investment banks or with companies. We mitigate conflicts for a living.

There's an arms race going on, on the buy side.

 They're very interested in the quant firms.

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Clients will tell you what they want.

There's still much more $ in long-only than hedge funds.

 If hedge funds have $1Tr, that's only 2x what Fidelity does.

 Our product has the feel and look of a proprietary product.

 When we started our firm, we talked with 150-200 funds.

 All of our clients want, #1, better industry information.

That historically has come from an analyst who does really deep industry digging.

There's a lot of talk about sell-side research going away, but I don’t believe it.

He was recently on a panel in which overwhelming majority of CIOs of long-only shops all said that they wanted to spend more $ on building their in-house research capability.

 SIA poll: 3rd largest spend of buy-side is on compliance.

From day one, we've built a culture in our firm around compliance.

It's part of corporatization of hedge fund world. We're a service-oriented organization.

 In a recent Greenwich Associates poll, we have 95% customer loyalty.

 We're a partner, knowing what they want.

 We don’t divulge our client base, what we know, what we hear. Certainly a partner with regards to compliance.

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 Before we publish anything, it goes thru a strict vetting process.

With their combination of low fees, tax efficiency and simple, autopilot investing style, index funds seem to have captivated American investors. At the same time, however, many investors still hold trillions of dollars in high-fee funds despite well-publicized evidence that low-fee alternatives offer higher returns over the long run. "It struck us that most people just don't know what mutual fund fees are. So we set out to actually test that," says Brigitte C. Madrian, professor of business and public policy at Wharton. The result is a paper titled, "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," by Madrian, Yale professor James J. Choi and Harvard economics professor David Laibson.