Europe Blew Up Financial Research -- Hedge Funds and U.S. Firms Won

(Bloomberg) -- Recent European rules concerning payment for research, known as MiFID II, may have benefited hedge funds and U.S.-based asset managers more than the European clients they were written to help, according to an analysis by Evercore ISI.

In what might possibly be “the most self-serving research note ever,” analyst Glenn Schorr wrote that companies paying for research out of their own pockets, or “P&L payers,” generally underperformed last year. That came after “being much closer to parity before” MiFID II was implemented, Schorr said.

Decisions to trim spending on research ultimately contributed to “several hundred basis points of underperformance,” he said. Schorr doubted that “giving a default info advantage” to hedge funds and investors outside of Europe was regulators’ intent; instead, he said, “we may be looking at the true definition of an unintended consequence.”

That unintended consequence may remain in place for “some time,” he added, as U.S. regulators “don’t seem eager to go down the MiFID II road and move managers towards P&L.”

For the analysis, Evercore ISI assessed mutual funds with greater than $100 million in assets under management. They then divided those into U.S.-domiciled -- where they assumed payment via traditional means, such as client commissions and checks -- and Europe/cross-border-domiciled, assuming payment via managers’ own P&L. Then Evercore matched across categories with multiple managers running the same strategies from both geographies.

The resulting set of 3,363 funds was split with 53 percent domiciled domestically, and 47 percent in Europe, with a mix of nearly $6 trillion of assets under management weighted heavily to the U.S. The analysis was performed in conjunction with Frost Consulting, Schorr wrote.

To contact the reporter on this story: Felice Maranz in New York at fmaranz@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Scott Schnipper

©2019 Bloomberg L.P.