Hoenig Group Inc.

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Hoenig Group Inc.

Reckson Executive Park
4 International Drive
Rye Brook, New York 10573
U.S.A.
Telephone: (914)935-9000
Toll Free: (800)999-9558
Fax: (914)935-9146
Web site: http://www.hoenig.com

Public Company
Incorporated: 1970 as Hoenig & Strock Inc.
Employees: 104
Sales: $100.11 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: HOEN
NAIC: 52131 Investment Banking and Securities Dealing; 52132 Securities Brokerage; 52392 Portfolio Management; 52393 Investment Advice; 551112 Offices of Other Holding Companies

Hoenig Group Inc., through its brokerage subsidiaries, provides global securities brokerage, marketing and distribution of proprietary and independent research, and other services to institutional investors. Through its asset management subsidiary, the company provides professional investment management services to public and corporate employee benefit plans, investment partnerships, and other institutional clients. Its customers are mainly investment advisers, hedge funds, investment partnerships, banks, insurance companies, corporations, employee benefit plans, mutual funds, and other investment professionals. The Hoenig Group conducts business from its headquarters in Rye Brook, New York—a suburb of New York City—its international offices in London and Hong Kong, and its branch offices in Boston and New York. Through its subsidiaries, the group is a member of the New York Stock Exchange, all major regional U.S. exchanges, the London Stock Exchange, and the Stock Exchange of Hong Kong. The company was executing trades in equity securities in 34 countries.

Soft-Dollar Specialist: 1970–92

The firm was founded in 1970 as Hoenig & Strock Inc. by Ronald H. Hoenig, Max H. Levine, and Paul Strock, but Strock soon left the firm. Hoenig functioned as chief executive officer, and Levine was head of trading. Its first home was a single-room Manhattan office near Wall Street. The company found its niche in soft-dollar brokerage, which involves the acquisition of independent third-party research by a brokerage firm and the delivery of this research to a client. In return for this research, the client consents to conduct an agreed-upon amount of securities trading through the brokerage firm. According to industry analysts, in the early 1990s nearly 40 percent of all U.S. institutional trading was being done on a soft-dollar basis.

Hoenig Group’s revenues increased from $26.87 million in 1987 to $48.65 million in 1991, the year the company made its initial public offering of stock, netting $15 million. Shortly before this offering, Hoenig Group was incorporated as a holding company operating through three wholly owned subsidiaries: Hoenig & Co., Inc., Hoenig & Company, Limited, and Vortex Management, Inc. It had about 500 institutional clients and offices in Boston; Denver; Greenwich, Connecticut; Hong Kong; London; and Tokyo, in addition to its New York headquarters. It was a member of all of the major U.S. stock exchanges as well as the London Stock Exchange.

Soft-dollar brokerage accounted for about 75 percent of Hoenig’s commission revenues in 1991. The firm declared in its first annual filing with the U.S. Securities and Exchange Commission that “research prepared in a conventional manner by brokerage firms is often imitative and redundant. Therefore, the range of opinions among Wall Street analysts can tend to be narrow.” Rather than build an in-house staff of research analysts, the company was meeting its clients’ particular portfolio needs for focused data from more than 200 vendors, including private research groups, computer service organizations, and other business entities. Its general practice was to require $2 in commissions for every $1 in research services provided under a soft-dollar arrangement. The remainder of its business came from trades on a competitive commission-rate basis. About 95 percent of its income was coming from commissions and the rest from asset management.

Hoenig Group moved its headquarters from downtown Manhattan to the Westchester County suburb of Rye Brook in 1992, taking a ten-year lease in an office park. It maintained a presence in the city through a much smaller office. The company closed its Denver and Greenwich offices that year. (In 1993 it opened another one in Woodland Hills, California, but closed it in 1995.)Hoenig introduced, in 1992, an institutional bond capability to go along with its equities brokering. It also established an independent research summary service available by means of Bloomberg Inc.’s Bloomberg Financial Markets, a provider of computerized financial information and securities quotations. This service allowed Bloomberg’s 20,000 worldwide clients access to research reports and updates at no cost.

Growing Revenue: 1993–99

Hoenig’s net income reached a peak of $5.35 million in 1993 on revenues of $58.37 million. That year, the company purchased Axe-Houghton Associates Inc. of Tarry town, New York, a money management firm with about $1.4 billion under management. This firm, which replaced Vortex, specialized in active equity and fixed income management, indexing, and international investment with American Depositary Receipts. Axe-Houghton’s investment team remained in place with five-year employment contracts. Hoenig’s clients at this time included Aetna Life Insurance & Annuity Co., Bank of Bermuda Ltd., Bankers Trust Co., Dreyfus Corp., General Electric Co., Tokyo Fire & Life Insurance Co., UBS Asset Management, and Value Line Inc. The firm now was employing 300 global research vendors and, through its domestic and international markets, executing trading orders on a worldwide basis around the clock in any currency. Global equities now accounted for about 18 percent of the firm’s business.

The soft-dollar share of Hoenig Group’s commission revenues rose to 83 percent in 1993 and reached a peak of 87 percent in 1994 and 1995. Hoenig’s net income slumped to $2.6 million in 1994 on revenues of $59.91 million. The following year its revenues dropped to $53.53 million, and it lost money during the first quarter of the year for its first quarterly loss since going public. It attributed the loss to lagging global finance markets and a decline in commissions following the departure of six brokers. The company ended the year, however, by posting net income of $4.92 million. Axe-Houghton, whose clients included AT&T Corp. and the state of Arizona, increased the amount of assets under its management to some $3.5 billion by the end of the year.

Ronald Hoenig died in 1995 and was succeeded as chief executive officer by Joseph A. D’Andrea, an investment banker who had overseen oil and gas real estate investment activities at Lazard Freres & Co. and its partners. He was succeeded the following year by Frederic P. Sapirstein, an investment banker who had been overseeing trading in Asian equities for Bear, Stearns & Co., Inc.

The firm hired its own four-member proprietary research team in 1996. Among them was Robert J. Barbera, formerly an analyst for Lehman Brothers Holdings Inc., who became chief economist for the U.S. subsidiary, Hoenig & Co. “I get paid for looking out for what might change the conventional view,” Barbera told Jonathan Fuerbringer of the New York Times in 1999. “There is a small list of portfolio managers who think I have something to deliver, and we talk.” Barbera correctly forecast that the Asian financial crisis of 1998 would result in lower inflation, lower interest rates, and greater growth in the United States—a contrarian view at the time.

Hoenig had net income of $2.89 million on revenues of $70.43 million in 1996. Its revenues and net income continued to grow in every remaining year of the decade, with the 1993 record for net income surpassed in 1999.

Hoenig Group in 2000

Hoenig Group again set records for revenues and net income in 2000, earning $11.43 million on operating revenues of $100.11 million. Some 76 percent of its brokerage commissions came through soft-dollar arrangements, with the rest from execution-only brokerage and in-house research—Hoenig’s most profitable brokerage activities. Domestic brokerage comprised 85 percent of the company’s brokerage revenues. Asset management accounted for 12 percent of the company’s revenues.

Hoenig’s principal activity continued to be that of providing high-quality trade execution services in global equities and domestic fixed income securities to institutional customers. It also earned commissions by providing independent research and other services (such as proprietary research) to investment managers; providing execution-only services; and paying expenses of, or commission refunds to, customers under directed-brokerage or commission-recapture arrangements.

Hoenig Group now was obtaining research products and services from more than 400 independent sources. These products and services included fundamental research, economic research and forecasting, quantitative analysis, global research, quotation, news and database systems, fixed income research, software for securities analysis, portfolio management, and performance measurement services. Almost all of the company’s research relationships were nonexclusive.

Company Perspectives:

For thirty years, Hoenig Group Inc. has provided high quality trade execution, independent research and premier client service to professional money managers and alternative investment funds throughout the world. Hoenig Group Inc. operates through its brokerage subsidiaries in the United States, the United Kingdom and Hong Kong. Hoenig Group’s U.S. asset management subsidiary, Axe-Houghton Associates, Inc., provides investment management services to public and corporate employee benefit plans, investment partnerships and other institutional investors.

Hoenig Group’s Axe-Houghton subsidiary was providing professional investment management for employee benefit plans, investment partnerships, and other institutional clients in the United States and also was acting as the general partner of two investment limited partnerships. It was specializing in active small-capitalization growth equity management, small- and mid-capitalization value management, and international indexing using American Depositary Receipts. Axe-Houghton had $4.43 billion in assets under management at the end of the year. This was, however, below the figure of $4.96 billion at the end of 1999, which the company attributed primarily to decreased investment performance. Particularly hard hit were the Focused Growth and Technology Growth disciplines, with assets under management decreasing from $181.1 million to $103.4 million during the year. The Technology Growth discipline ceased to have any assets under management at year’s end. Revenue from asset management came to $12 million.

Hoenig (Far East)Limited closed its Tokyo office in 2000. Hoenig Group invested $7.5 million during the year in InstiPro Group, Inc., the parent company of a new business-to-business on-line brokerage firm. Hoenig Group’s ten executive officers and directors collectively owned about 52 percent of the company’s common stock in early 2001. The company had no long-term debt.

Principal Subsidiaries

Axe-Houghton Associates Inc.; Hoenig & Co., Inc.; Hoenig & Company Limited (U.K.); Hoenig (Far East)Limited (Hong Kong).

Principal Competitors

Bear Stearns Cos. Inc.; Lehman Brothers Holdings Inc.; Merrill Lynch & Co. Inc.

Key Dates:

1970:: The firm is founded by Ronald H. Hoenig, Max H. Levine, and Paul Strock.
1991:: Hoenig Group makes its initial public offering of common stock.
1993:: Hoenig purchases Axe-Houghton Associates Inc., an asset management firm.
1995:: Ronald Hoenig, chairman, president, and chief executive officer of the firm, dies.
1999:: Hoenig Group breaks a six-year-old record for annual net income.