When Sean J. Ryan started his own independent research firm in January, the phone in his tiny office in White Plains, N.Y., began to ring almost immediately.
Mr. Ryan's company, Byrne, Ryan & Co., which he launched with veteran trader Dan Byrne, had created a buzz among institutional investors because it offered what Mr. Ryan trumpeted as "unbiased" bank research.
But only three months later the former Bear Stearns & Co. analyst shut Byrne Ryan down, citing conflicts with his partner.
Personal conflicts are just one of the risks of entrepreneurship. But with bank stocks languishing and investment houses pressing analysts to tone down negative comments about companies that are also their clients, a growing number of bank analysts are willing to give it a try.
"The sell side wears on you," said Thomas K. Brown, a former bank analyst for Donaldson, Lufkin & Jenrette who now heads Second Curve Capital, a money management firm in New York. "There is a burnout factor. Another problem is that it is not about just doing the research. It's about supporting the corporate clients."
Mr. Ryan and Mr. Brown both started their businesses after their no-holds-barred reports strained relations between their Wall Street employers and the banks they covered. First Union Corp. threatened to pull its capital markets business from Bear Stearns after Mr. Ryan focused last year on the Charlotte, N.C., banking company's earnings shortfalls.
Mr. Brown, who verbally sparred with First Union's former chief executive officer, Edward Crutchfield, was asked to leave Donaldson Lufkin after he was labeled "anti-merger" by incoming investment bankers.
In the last three years at least seven prominent bank analysts, including Mr. Ryan and Mr. Brown, have left their jobs to start businesses - most of them hedge funds.
One of the most recent defectors from Wall Street is Carla D'Arista, a former bank analyst at Friedman Billings Ramsey & Co. of Arlington, Va. Ms. D'Arista, who left the firm in April, is starting Netplex Crossover Fund, which will invest in bank technology and telecommunication companies located in northern Virginia, parts of Maryland, and Washington.
Other defectors include: Raphael Soifer, who ended a 17-year stay at Brown Brothers Harriman & Co. in March to start a consulting firm focusing on the financial services industry; Carole S. Berger, who started the financial hedge fund Berger-Jackson Capital Management losing her job in the 1997 merger of Salomon Brothers and Smith Barney; and Robert B. Albertson, a onetime director of research at Goldman Sachs & Co. who started Pilot Financial, a global financial hedge fund, last year.
That bank analysts would be less in demand on Wall Street is not surprising. For the last two years bank stocks have lost their allure as consolidation has waned and stock prices have fallen.
"Bank stocks have been under pressure for a while," Mr. Brown aid. "And many of these large firms blame the analyst for that."
Indeed. Mr. Soifer remarked when he announced his departure from Brown Brothers Harriman: "Bank stocks are out of favor, which makes being a bank stock analyst much less fun. Here at Brown Brothers Harriman, we think that bank stocks will get cheaper before they get better. So if you are an analyst who is thinking of exploring other ventures, now is a good time to follow up on those thoughts."
Starting a business is easy, but keeping it going is not. Of the 2.3 million small businesses started between 1989 and 1992, two-thirds were still open after two and a half years but only half were still open after four, said Brian Headd, an economist at the Small Business Administration, who plans to publish a complete report in July.
Keeping a hedge fund going is even more difficult, said Jim Gillies, vice president and chief information officer of HedgeFund.Net, the only free database on hedge funds for accredited investors. "Hedge funds open and close all the time," because it is hard to raise capital.
Analysts will have a particularly rough time, Mr. Gillies said.
"Normally, people want to invest their money with someone who has a track record of running money and not just picking stocks," he said. "Analysts typically have 'buy' recommendations on everything; they never say 'sell.' Investors want people who can add value regardless of the environment."
Lee Hennessee, chairman and founder of the Hennessee Group LLC, a hedge fund advisor, said analysts tend to "fall in love with their research. But if you are going to survive, you can't fight the tape. You've got to protect your capital in falling markets."
Mr. Hennessee said that "falling in love with one's stocks" was the reason behind the scuttling of Tiger Management and some languishing hedge funds of George Soros. "Julian Robertson, the head of Tiger Management, was ultimately right about the airline U.S. Airways, which is about to be acquired by the parent company of United Airlines," Ms. Hennessee said. "But his timing was off, and that is what killed his fund."
Analysts have indeed had their troubles. Ms. Berger left Berger-Jackson in 1999 when capital-raising became too difficult. She now is an analyst at TIAA-CREF Investment Management in New York.
Jeffrey Miller, who left Keefe, Bruyette & Woods three years ago to start the successful Acadia Fund, acknowledged he had rough patches early on.
Mr. Albertson would not discuss the status of Pilot Financial.
Capital-raising problems, skittish investors, and a volatile market are just some of the hurdles that an owner of a hedge fund has to deal with, said Mr. Miller, whose Villanova, Pa.-based fund has $18 million under management.
Last year was especially trying because bank stocks were out of favor and a lot of "hot money" was going after the technology stocks, Mr. Miller said. "Then there are the emotional costs. We were making more money at our old jobs in New York. We have no salary here."
Despite the difficulties, the Acadia Fund has produced a 44% return every year. This year it has produced 20%, according to an investor in the fund.
Mr. Brown, who started his hedge fund in January, already has $150 million under management - most of which is committed over three years. Ms. D'Arista said she is undaunted by the pitfalls that entrepreneurism can bring.
"We think there are unique and not yet fully exploited geographic opportunities related to the technology companies in this region, which is the birthplace of the Internet," she said.
And Mr. Ryan, who plans to start a new job as bank analyst at Bank of America Securities this week, said he has "no regrets" about his start-up attempt.
"I learned quite bit as an entrepreneur," he said. "It made me a better analyst."
