The financial institutions of a free-market economy include a crucial segment called the buy-side: firms that purchase investment securities. These include insurance firms, mutual funds, hedge funds, and pension funds, acquiring securities for their own accounts or on behalf of investors with the goal of generating returns.
Opposite to the buy-side is the sell-side. While the buy-side focuses on making direct investments, the sell-side assists the investing market by handling activities related to the sale of securities, such as underwriting for initial public offerings (IPOs), providing clearing services, and generating research material and analysis.
Together, these two sides form the lifeblood of financial markets.
Key Takeaways
- The buy-side consists of institutions that purchase securities for money-management purposes.
- The sell-side provides investment recommendations and services to facilitate buy-side’s purchase of securities.
- Buy-side activities involve buying stocks, bonds, and other financial products based on a company’s or client’s portfolio strategy.
- Common buy-side institutions include hedge funds, pension funds, and mutual funds.
Understanding the Buy-Side
Businesses involved in buy-side activities purchase stocks, bonds, and other financial products tailored to their company’s or client’s portfolio needs and strategy. Not limited to the previously mentioned financial institutions, these also include trusts, equity funds, and high-net-worth individuals.
The primary goal of buy-side investing is to create value for a firm’s clients by identifying underpriced assets expected to appreciate over time. This often involves purchasing large blocks of market securities, granting prestigious firms considerable market power. As these market titans make significant investments, their decisions are closely observed by investors and media.
$8.68 trillion: The value of BlackRock’s assets under management (AUM) as of Dec. 31, 2020. BlackRock is the largest investment manager globally in terms of assets.
Firms like BlackRock and Vanguard can greatly influence market prices with large-scale investments. However, these investments are typically not publicly disclosed in real-time. The Securities and Exchange Commission’s (SEC) 13F filing requires public disclosure of all holdings bought and sold by buy-side managers every quarter.
Following Buy-Side Investing
The quarterly 13F filing is a valuable resource for all types of investors to track some of the market’s top investments and investors. Following buy-side investors like Warren Buffett and his firm, Berkshire Hathaway (BRK.A/B), can inform your investment strategies.
Many investors will consider holdings of larger investors and changes in those holdings when making their own transactions. This data is readily available through various online resources.
Benefits of the Buy-Side
Buy-side investors enjoy several advantages over other market participants. They can execute large-lot transactions to minimize trading costs and access extensive internal trading resources to effectively analyze and act on investment opportunities in real-time.
Due to competition and privacy concerns, buy-side analysts generally keep their investment research proprietary. This confidentiality ensures optimal trading advantages and avoids premature price movement.
Duties of a Buy-Side Analyst
Buy-side analysts play a critical role, often employed by non-brokerage firms, including pension and mutual fund providers. Their research and recommendations are typically proprietary, aimed at benefiting large fund providers rather than individual investors who usually rely on sell-side advice.
These analysts engage in in-depth financial research, financial modeling, and may directly consult with companies in which they have investment interests. Their primary objective is to identify companies that align with a portfolio’s investment strategy and have the potential to yield the highest returns over time.
To maintain integrity, some firms implement “Chinese Walls” to segregate buy-side analysts from sell-side analysts, ensuring no interaction or knowledge exchange between the two.
An Inspirational Case of Buy-Side Investing
John Smith worked for a leading investment bank, seamlessly growing his firm’s portfolio with a proprietary strategy that outperformed the market by 10% over 10 years. Ambitious, he established his own investment management firm focused on high-net-worth individuals, effectively creating a hedge fund.
Smith marketed the firm using his proven strategy, raising $10 million in capital. He strategically invested this capital into securities like stocks, bonds, futures, and options, adhering to his robust strategies. John’s transition and his firm’s investment activities exemplify the operational essence of the buy-side.
Related Terms: sell-side, underwriting, initial public offerings, market securities, asset management
References
- Pensions & Investments. “BlackRock sets record with $8.7 trillion in AUM”.
