nothin Hedge Fund Refugee’s Cash Cow: Transparency | New Haven Independent

Hedge Fund Refugee’s Cash Cow: Transparency

It’s October 2008, and the economy has just tanked. Layoffs are rampant. Meanwhile, 80 miles east of Wall Street, a small investment research firm in the William H. Taft Mansion on New Haven’s Whitney Avenue is about to double in size — on its way to becoming a quiet Elm City success story.

By March of 2009, the firm’s size doubles again. Today, Keith McCullough heads a team of 38 employees — less than two years after opening for business with only six.

What recession?

I had signed the 10-year lease [on the building] while the stock market was crashing,” said McCullough, a 1999 Yale graduate (he played hockey) and former hedge fund manager who founded the firm — called Hedgeye Risk Management—in April 2008 with over $1 million of his own money. But as the fateful month of October came and went, it didn’t feel like a Great Depression around this place.”

Now, as Wall Street’s biggest firms come under scrutiny for allegedly shady dealings, the Wall Street refugees at Hedgeye are peddling what might seem like a novel product: transparency.

McCullough (pictured here and shown above in above video) started Research Edge (renamed Hedgeye this past January) out of frustration for the mystery that he felt surrounded the workings of Wall Street. “What is it that you do? People want to know,” McCullough said. He envisioned a research firm that would be totally transparent with its clients: Show them every call you’re making in real time, tell them why you’re making that call, and tell them what your return on that call is, whether it’s good or bad.

Hedgeye might best be described as a virtual hedge fund: It acts like a hedge fund without actually managing any money. Sector heads —who were all hired with years of experience on Wall Street behind them—manage teams of three to five analysts each to make calls and publish research on six of the nine S&P sectors, including financials and health care. (The remaining three sectors, including energy, will be added soon as the firm continues hiring.) The company bundles all of that information into an online product that shares the company’s new name, Hedgeye. Depending on the depth of research needed, a client can pay anywhere from $75 per month to more than $500,000 a year.

So can an analyst make as much money for Hedgeye as he would have for Goldman Sachs? McCullough’s base salary was $27,500 a year up until six months ago; now it’s $115,000. Pretty modest—by Wall Street standards.

“We pay our young people before we pay ourselves,” McCullough said. He said pays his junior analysts a base salary on par with Goldman’s; Hedgeye’s entry-level employees might even make more than Goldman junior analysts in bonuses. The company started turning a profit six months after it opened its doors, he said.

“A lot of people on Wall Street said you can’t monetize research,” said Mick Malisic, who has worked on branding and product design for the firm since the beginning. “Part of the idea [for Hedgeye] was effectively challenging that.”

For his part, Malisic isn’t a Wall Street guy. He admitted, rather sheepishly, that he used to subscribe to thestreet.com (Jim Cramer’s financial news service on the web). He called it “just a dumb experience. I ended up just never opening the emails but I continued to pay for it, to be perfectly honest.”

The virtual portfolio on Hedgeye focuses on four basic, but essential, pieces of information: The position taken on a stock (designated by a red or green light); the date and time the position was taken; a brief comment explaining the reasons behind the position; and the return the position gives. While a lot of financial services web sites or brokers might give you some version of the first three, the fourth can be rare, Hedgeye claims. “Most people would hide this,” said Malisic, pointing to a dated portfolio item that listed a return of -5.2 percent. “We’re being transparent in ways that our competitors are not.”

The company recently launched the research product for individual consumers. It won’t disclose how many have signed up so far, but McCullough claimed the response has been tremendous, given that the product has hardly been advertised. On the institutional side, Hedgeye has about 200 clients, and that number is also steadily growing. Every time another Wall Street firm subscribes to the product, employees ring a gong on the office’s first floor.

Neena Satija Photo

It may not hurt that Hedgeye is housed in New Haven. McCullough decided on setting up shop here to get away from the Crackberry” culture (a combo of crack addict” and BlackBerry” more prevalent in New York than on Whitney Avenue). He said his clients who come here from Boston and New York revel in the more relaxed atmosphere. The tech operations are housed in a San Diego office with four employees; McCullough is looking into adding a bureau in Singapore.

Once all the research sectors are covered, the next step is to start aggressively getting the product out to the mass market: the 34 million people who hold online brokerage accounts. McCullough claimed Hedgeye is already making a dent in the traditional atmosphere of Wall Street wizardry” by giving clients unprecedented access to market research and building a relationship with them based on trust. To say otherwise, he said, would be like saying that YouTube didn’t have an effect on the 2008 elections.

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