Hedge fund traders far less important than analysts and PMs, says study
How important and talented are traders working on the buy-side? If you've between to eFinancialCareers before, you will know that there are people who say that buy-side traders are not important and talented at all. Now, a new study of communication patterns at a leading hedge fund confirms traders' comparative insignificance in the hedge fund pantheon.
Undertaken by Daniel Romero at the University of Michigan, Brian Uzzi at Northwestern and Jon Kleinberg at Cornell, the study looked at the interaction of 63 portfolio managers, 26 traders and 95 analysts on a large hedge fund's instant messaging system between January 2010 and December 2011. The academics found that the traders weren't really included in the excitement that ensues from changes in the price of a stock. - The initial discussions mostly took place between portfolio managers and analysts; traders only got involved later after the portfolio managers and analysts had worked out what to do.
Traders in hedge funds are the, 'actors in the firm who execute trading orders,' observed the academics. Portfolio managers oversee the, 'full decision making pipeline,' including planning and executing. And analysts are mostly about planning and strategy (which they help the traders with).
When the price of a stock changes, therefore, traders are initially left out of the loop. As people who simply act on the advice of analysts and portfolio managers, they don't need to be included in early conversations about how to react. They only get involved later, when an action has been decided. - Hence allegations that they are little more than button pushers.
None of this means that traders themselves aren't excited about price changes. The academics also found that traders tended to communicate a lot more with other traders in times of price volatility. - It was just that they were frozen out of communications with analysts and portfolio managers, who tended to 'turtle up' and discuss things within their groups, or with people with whom they had particularly strong ties.
While the academics were mostly interested in the hunkering down of the hedge fund communications network in times of stress, their findings also suggest traders' lowly place in the hedge fund hierarchy. Interestingly, the study also showed that portfolio managers were more likely to talk in rational, cognitive language and that analysts were more likely to talk in emotional language. Traders used both rational and emotional language at the lowest rates. - If portfolio managers are from mars and analysts are from Venus, traders seem to be from the moon.
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