Look at the investment research industry currently and you’ll see it’s pretty much dominated by sell-side research. Couple that with the massive amount of data gathered by various sources, and professional investors struggle to find the trusted and high-quality research necessary to develop their investment portfolios. But thanks to Divya Narendra, Co-Founder of SumZero, a private, reciprocity-based online community for vetted, buy-side investment analysts, professional investors have an essential alternative to the existing world of sell-side research.
Launched in 2008, Narendra, who previously worked as an associate at Sowood Capital Management LP in Boston, was inspired by the endless search possibilities of Wikipedia, as well as a need for further connectivity amongst investors, to create an indispensable resource for professional investors and buy-side analysts around the world.
“Before SumZero, no venue existed for professional investors to connect online. If I were covering a stock or other type of security where I didn’t know someone personally who knew that particular company, it would be virtually impossible for me to get a hold of the right person to discuss that name. SumZero helps to foster the right connections between professional investors,” said Narendra.
Members must be approved to join the community of buy-side professionals—hedge fund, mutual fund or private-equity fund analysts—who upload their backgrounds, resumes and sample investment theses to the site to be reviewed by the SumZero team.
“It’s focused on fundamentally-driven investment professionals who are doing deep research into companies. Sometimes, we’ll approve MBA students who aren’t working at a fund, but may have significant buy-side experience, or they’ve worked at a fund in the past or have locked in a buy-side job post-graduation, so we’ll make exceptions for some of those applicants.”
With over 8,500 members currently in SumZero’s core community of buy-side analysts, individuals can search for publicly traded companies or securities around the world and find investment theses through the Idea Database, which consists of detailed reports, typically 1,500-2,000 words long, that include discussions on valuation, catalyst risks and the business itself. There is also the Quick Idea Database, which includes elevator pitches limited to 190 characters. All reports come solely from the buy-side—a fundamental concept behind the site.
“The problem with research coming from the big Wall Street investment banks, or what’s known as sell-side research, is that it tends to be long-biased because of conflicts of interest. The banks are effectively writing about their own clients. Plus, they have no skin in the game because they’re not allowed to own the stocks they recommend. Regardless of whether their recommendation is right or not, the bank still earns its trade commission. To avoid those problems, we would argue that investors should seek insights from the buy-side, where an analyst’s compensation is directly tied to the performance of his or her investments.”
Membership is free, but analysts are required to post investment ideas at least every 6 months in order to maintain access to information on the site. Submission of one research idea into the Idea Database provides members with access to over 5,500 reports, while posting three quick ideas lets users view over 20,000 pitches in the Quick Idea Database.
An array of search filters streamlines the user experience and allows members to search for reports by long vs. short, market gap, volume, expected return, realized return, community ratings, the number of views a post receives and the number of comments, as well as sector and geography. Members can even search by specific catalysts.
“Most hedge fund analysts are looking for specific catalysts when they consider investing in a stock. Maybe they think the company is going to issue a special dividend, or maybe the company is going to be bought out. Whatever the catalyst may be, when people submit ideas, they can actually flag specific catalysts that may drive the value of the stock.”
Ideas posted are rated by fellow members on two, five-star rating metrics: the Expected Performance Rating, where readers rate how much they generally agree with the author’s directional view of an investment, and the Quality Rating, which grades how detailed of an analysis is written.
“There are cases where you may disagree with the person’s directional view, but you think he or she has done a rigorous analysis, so you might give the report a low expected performance review, but a high a quality rating. Everyone has a very strong incentive to put their best work forward because if you put up a weak idea, you’re just going to get a low rating, which reflects on your reputation on the site.”
And incentives are a driving force behind the reciprocity-based website. Aside from the natural desire for buy-side analysts and professional investors to bring awareness to companies where they already hold a position, SumZero consists of several features to encourage members to post research.
“It’s not like we’re saying, ‘Give us one idea and we’ll give you two ideas back.’ We’re saying, ‘Give us one idea and you’re going to get thousands in return.’”
SumZero’s Job Vault, which provides listings for buy-side jobs at different funds, spurs posting through an application process that includes submitting a research idea with your resume.
The site also recently held its second annual Value Investing Challenge in partnership with the Value Investing Congress. This year’s competition is sponsored by FactSet, which is funding the $65,000 in cash prizes for the top three winners. The 1st place winner will get to speak alongside other well-known speakers at the New York Value Investing Congress scheduled for September 16th and 17th. The two-week entry period ended August 1st with over 200 pitches submitted.
And as of mid-August, the site includes a compensation database, where members who post their previous compensations (i.e. their 2012 compensation), plus their 2013 expected compensations, can access other people’s compensation information for a 12-month period. This is the only section of the site where posts are made anonymously.
“There’s not a huge amount of transparency into the buy-side compensation universe in terms of how much people earn in regard to their base salaries, their piece of the incentive fee, their piece of the management fee the fund generates and other sort of discretionary cash bonuses. We try to collect that information.”
For individual investors who don’t qualify for the core buy-side community, there’s SumZero Elite, a retail product that targets individual investors, which provides a way for investors to gain direct access to rigorous hedge fund research. For $999 per year, SumZero Elite features two investments ideas per month and showcases the research of two SumZero members, at the authors’ discretion.
“It’s a very useful product for, let’s say, anyone who’s got an E-Trade account or a Schwab account. A lot of those folks have never actually seen this level of research before and we make it very easy for them to access it.”
A lighter version of Elite—the Quarterly Top Idea—is also available, which features one idea per quarter, for $199 per year.
A free, weekly newsletter, which includes a summary of an idea from the buy-side community, as well as news events from the industry is also available through SumZero Basic—a feature already enjoyed by over 32,000 people and available to anyone interested in learning more about buy-side investments and research. All that’s required is your name and email address.
The site was bootstrapped for the first year by Narendra and his co-founder, Aalap Mahadevia, before receiving a $175K investment from two site members, as well as $100K from a Northwestern University alum who Narendra had met while pursuing a JD-MBA at Northwestern. It was during his final semester at Northwestern in 2012 that SumZero received its most sizable investment when Tyler and Cameron Winklevoss—his former co-founders at ConnectU—invested $1.05 million into the company through Winklevoss Capital.
And having the site headquartered in New York was an easy decision for Narendra, who appreciates the angel community and organizations looking to support startups, and recognizes how essential the city is in order to connect with the hedge fund community.
“There are only a few cities in America where you find such high concentrations of hedge funds professionals or mutual fund professionals and I would say NYC probably has the most.”
As SumZero continues to grow its membership and databases, Narendra hopes to diversify the content collected through the site.
“If we can attract the credit, macro and currency investors just as much as we attract the fundamentally-driven equity guys, that’s a good thing for us.”
But there isn’t a steadfast timeline for the future.
“We want to build a significant brand and a long-term, self-sustaining profitable business that is an indispensable tool for all investors. If we achieve that then we’re where we need to be.”
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