Expensive Research and Cheap Hedge Funds

Expensive research.

The basic way that sell-side research works is, investors place trades with a bank, and they pay commissions, and in exchange they get access to research analysts. If they place a few trades (say, in a retail account), they get a little access: They can read written research reports, and that's it. If they place a lot of trades (say, they're a giant asset-management firm), they get a lot of access: Analysts take them to visit company managers, and whenever the investors call, the analysts pick up immediately. This is pretty straightforward -- the more you pay, the more you get -- but it is rendered a bit opaque by the fact that no one pays directly for the research. Everyone just understands that some portion of the trading commissions are paying for research.