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Niche Brokerages Add Research Capabilities

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NEW YORK (–As funds increasingly use soft dollar-funded outside research and the independent research sector grows, smaller or more specialized brokerages are offering their own version, with an emphasis on added service.

Joseph Kalinowski, an independent provider, recently started doing equity research for Grace Financial Group LLC in South Hampton, N.Y. Grace is a broker-dealer that primarily serves high-net-worth individuals and smaller hedge funds, clearing through Spear Leeds & Kellogg LP, part of Goldman Sachs (see ).

Mr. Kalinowski uses a model based on pricing and volume data to gauge market sentiment on a company, assigning a score between 1 and 99. He said a portfolio consisting of long positions of stocks that are ranked 90 or better by this system and shorts of those with a score below 10 produces an average annual return of about 21%, back-tested over 15 years.

One way to use such information is to search for situations where a company’s stock price is going up even as sentiment on it is deteriorating. In addition, Mr. Kalinowski ranks earnings quality, looking for companies where free cash flow is rising faster than earnings, which in turn are rising faster than price.

Red Flags

Besides sending out weekly reports on market trends, shorter-term trading ideas, and names of companies that offer compelling value, Mr. Kalinowski will talk with clients to go over the finer points of the analysis. He can score a client’s portfolio and note any red flags among the holdings.

The analyst is available to customers, said Grace chief Brian Villante. Moreover, all costs are unbundled, and the brokerage works on getting the cheapest execution, he said.

Growth of the hedge fund industry in recent years has been accompanied by a surge in the variety of services aimed at managers, of which research is one segment. Many different types of research, typically paid for through trading, now are available (see ).

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Contact Bob Keane with questions or comments at [email protected].