SINGAPORE/HONG KONG Expert networks - a matchmaking service linking investors such as hedge funds with company insiders - are under scrutiny from regulators in the United States, but are expanding across Asia, where the market for corporate intelligence is less transparent.
The U.S. Securities and Exchange Commission has charged over three dozen people and firms as part of a broad investigation into ties between investors and expert networks that has uncovered insider trading and helped trigger the high-profile fall of Raj Rajaratnamrun's Galleon hedge fund.
Those cases have bruised confidence in expert networks in the United States, and some clients have stopped using the service for fear of falling foul of regulators. But in Asia, where regulators have yet to pay the industry much attention, the service is thriving - fertile ground where emerging market investors are willing to pay for inside knowledge on company supply chains, key personnel moves or regulatory shifts.
"The fastest sales process has been in Asia," said David Legg, managing director of Asia and Europe for Gerson Lehrman Group (GLG), the biggest player in the industry. GLG says it has tripled its Asia revenue in the past three years. Several local firms have also entered the market.
Legg says a relative lack of transparency in Asian markets means investors are much less willing to rely solely on research from investment banks and brokerages. "In London and New York, you get a lot of people who say: 'Look, I can rely on some banking analyst on the sell-side to help me figure out something'; In Asia, nobody believes that".
The growth of expert networks across Asia equips the region's struggling hedge fund industry with a key information service, while presenting regulators and companies with a new challenge - how to police this paid-for exchange of information.
According to people interviewed by Reuters, few companies in Asia are aware that their employees may be speaking to investors through a middle-man, and being paid for it.
Capvision, the biggest expert network group in China, said it has tripled in size over the past 3-4 years and now employs close to 200 people. It says it can connect clients with more than 60,000 "knowledge consultants" across all major industries.
"We have been fortunate enough to be in one of the fastest growing markets in the world and were able to capitalize on the fact that information flow in China has always been fairly un-transparent," said Kai Hong, a former Bain & Co consultant who co-founded the business in 2006.
Expert networks are similar to dating agencies that match couples based on their compatibility criteria. They build a database of company executives, policy experts and academics, whose services are offered to investors interested in tapping this expertise. They make money by taking a slice of the fee the clients pay for talking to the expert.
Expert networks and hedge funds that Reuters spoke to said experts are paid anywhere from $300 to more than $3,000 an hour, depending on their area of expertise.
The networks don't say how much revenue they are generating. GLG said it has around 400 institutional investor clients across Asia, as well as clients at strategy consultancies, hedge funds, banks, companies and private equity firms.
The primary research industry, which is mainly expert networks but also includes some market research firms, was worth $466 million last year, according to Integrity Research, which monitors the independent research industry. The networks don't offer any regional revenue breakdown, though GLG's Legg said investors tend to spend more on their services per dollar invested in the region compared to the United States.
Vick Aggarwala is an 'expert'.
He is president of Supreme Components International, a Singapore-based distributor of high-end electronics to Samsung Electronics, Sony Corp and other big technology companies, and he speaks several times a month to investors and bank analysts he was introduced to through GLG.
"We know what the trends are, we know what manufacturers are doing in terms of pricing, the inventory channel, whether their lead times are stretching out or coming down," he said, adding people in his position know which emerging markets are doing well, and what is anticipated in the coming quarters.
That's the kind of intelligence investors hope will give them a steer as to which companies will sell more smartphones or TVs in the next few months. That helps them position themselves in the market, betting on which way share prices may go.
Aggarwala says he follows strict protocol when talking to investors so as not to let slip any confidential information. Expert networks say their rules of engagement mean they help prevent, rather than encourage, insider trading.
"The last place you'd want to be if you want to get into insider trading is on an expert network platform where it's obvious to the regulator or anybody else who wants to inquire exactly who you spoke with, when, and what the topic was," said GLG's Legg.
Others, however, question why investors would spend so much money for an hour of a senior executive's time if the information doesn't give them an inside edge.
Paul Sheehan, former CEO of hedge fund Thaddeus Capital in Hong Kong, said he blocked all networks when they tried contacting his firm. "I did not want to be associated with them because it was very clear to me that what they were offering was a major compliance risk," he said.
Another hedge fund manager in Hong Kong, who didn't want to be named, said he had regularly used the networks, but does so less nowadays. "What you think is your special adviser is not yours," the fund manager said. "He's someone many people are calling and he's generally answering the same questions."
GENERALS, MINISTERS ...
Philippa Allen, CEO of ComplianceAsia, a regulation consulting firm, said that since the insider dealing scandals in the United States, expert networks themselves and their large institutional clients had become more selective in the experts they sought, with many investors avoiding those working at public listed companies, due to the heightened regulatory risks.
"They are trying to sort of put some distance between very current information and the information they receive. That's become a lot more common. It's actually being driven by the expert networks themselves," she said.
Insight Alpha, a network focused on India and Southeast Asia, says on its website how it can put investors in touch with CEOs, army generals, cabinet ministers, bureaucrats and market regulators, among others. It says it has firm rules on avoiding conflicts of interest.
Regulators in Asia have yet to get to grips in dealing with any such conflicts.
"It's just not an area that Asian governments have really wanted to prosecute and look into. A lot of countries don't even have data privacy rules in place yet," said ComplianceAsia's Allen.
Sanford Bragg, CEO of Integrity Research, said some local law enforcement agencies are now paying more attention. "I've heard of a small China-based expert network, which is no longer around, setting up consultations with government officials," he said, adding the network ran into trouble when it was found the officials received perks in exchange for information.
For the networks' experts, the growth in these platforms can mean a significant income supplement.
An academic at a China business school, who also has links to the financial services industry, said he was paid more than $100,000 last year for work he got through GLG. "In the old days, a lot of expert networks involved company insiders leaking information ahead of earnings releases," said the academic, declining to be named. "That's illegal, and it seems to me it would be very difficult to do today."
For some investors, though, the risks of using the networks outweigh the potential rewards.
"Do they (networks) listen to the actual calls between the experts and manager? Do they report it for compliance purposes? This would be a technologically simple thing to do," said Sheehan, the former Thaddeus Capital CEO.
"So, ask yourself: Why don't they do it? They don't want to find out what's really going on."