See main feature: "The Buy Side Learns to Survive in the Post-Credit Crisis Environment"
In the wake of the credit crisis, buy-side firms are hiring their own in-house credit analysts to assess the credit quality of issues.
Typically, the buy side would rely on Wall Street firms and rating agencies to provide them with research on credit markets. But following the debacle surrounding AAA-rated collateralized debt obligations (CDOs) and the precipitous drop in the value of complex structured products, coupled with concerns about conflicts of interest at the rating agencies, buy-side firms are hiring talent to peform their own independent analysis. "There's been a general decline in the trust and the faith that the investors have in the rating agencies — Standard & Poor's, Moody's Investor Services and Fitch," says Tim Sangston, a consultant at Greenwich Associates.
"The onus is on the investor to perform their own credit risk assessment rather than rely on the rating agencies," adds Eric Bass, senior managing director, business consulting, at SMART Business Advisory and Consulting. From a technology standpoint, Bass says, "Institutional investors realize they have to weigh in with their own intelligence and scrutiny of the underlying data to determine the riskiness of the issues, so they're spending money on the data and databases."
According to Bass, the buy side is using credit risk software to discover discounts or good prices on assets that are fairly illiquid at the moment. "They're calculating their own expected risk-adjusted rate of return they expect on these securities based on their analysis of the creditworthiness of the issuers," he says.
Companies such as S&P, Moody's and Fitch that were at the center of the credit storm are starting to make their credit tools commercially available as off-the-shelf software packages, notes Bass. In addition, SunGard offers a vast array of credit risk software and data, he relates. "It doesn't replace the need for a credit analyst," he says. "It's a question of what do you want to spend your money on. Do you want to spend your money on a room of expensive talent, or can you use their data and spend your money more efficiently?"
One head of fixed-income trading at a large asset management firm confirms the trend. "Clients, consultants, prospects are looking at a new paradigm. But the fact is that the rating agencies are dead and you have to do all original work," he says.
His firm, like others on the buy side, is scouting for talent given the layoffs on the street. "It's more on the analytic side as an analyst or as a quant person than it would be as a portfolio manager," he explains.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio