What Does Buy Side Mean?
Buy side is a segment of Wall Street made up of investing institutions such as mutual funds, pension funds, and insurance firms that tend to buy large portions of securities for money-management purposes. The buy side is the opposite of the sell side. The sell side does not make direct investments but rather provides the investing market with investment recommendations for upgrades, downgrades, target prices, and other opinions. Together, the buy side and sell side make up both sides of Wall Street.
Buy Side Explained
Buy-side firms are companies that purchase securities and other assets for their own needs or the mandates of their clients’ portfolios. In addition to the institutions listed above, other buy-side firms can include private equity funds, hedge funds, trusts, and proprietary traders.
- Buy side is a segment of Wall Street made up of investing institutions that buy securities for money-management purposes.
- The sell side is opposite of the buy side, providing only investment recommendations.
- BlackRock is the world’s largest buy side, investment manager by assets under management at $6.29 trillion as of September 2018.
Real World Examples
In the investment industry, the leading mutual fund and exchange-traded fund managers that investors rely on to manage popular investments are some of the most well-known buy side firms. According to Statista, data through September 2018 identifies the following as the world’s largest buy side firms by assets under management.
- BlackRock $6.29 trillion
- Vanguard Group $4.94 trillion
- State Street Global Advisors $2.78 trillion
- Fidelity $2.45 trillion
- BNY Mellon Investment Management $1.89 trillion
Following Buy-Side Investing
The whole point of buy-side investing is to create value for a firm or firm's clients by identifying and purchasing underpriced assets that appreciate over time. The most prestigious buy-side firms often have a great deal of market power and are also closely watched by investors and the media. Firms like BlackRock and Vanguard can significantly sway market prices when making large scale investments in single names. These investments are typically not disclosed in real time and can be somewhat ghost-like for market traders. However, the Securities and Exchange Commission’s 13-F filing requires public disclosure by buy-side managers for all holdings bought and sold on a quarterly basis.
The 13-F is a popular source for all types of investors in following some of the market’s top investments and investors. Warren Buffett and Berkshire Hathaway are one example of how following buy-side investors can be a popular way for guiding some investment strategies. Many investors also look to a buy-side investor’s stake in a holding as a consideration for making a transaction. This type of data is available through several online resources and shows that Apple is one of the largest holdings in the Berkshire Hathaway equity portfolio at 21.5% as of December 2018. Berkshire Hathaway also holds 5.29% of Apple’s total outstanding shares.
Buy-side investors have many advantages over other traders. They can place large lot transactions which minimize trading costs. They also have access to a very broad array of internal trading resources which helps them to analyze, identify, and act on investment opportunities in real time.
While buy-side investors are required to disclose their holdings in a 13-F, this information is only available on a quarterly basis. Overall it can generally be advantageous for buy-side analysts and investing firms to keep their investment research and watch lists proprietary. The high level of competition in the buy-side market and the nature of its business typically results in privacy around all trading ideas for the most optimal trading advantages.
Duties of a Buy-Side Analyst
The buy-side analyst plays a key role in the buy-side market. Buy-side analysts often work in a non-brokerage environment, such as a mutual fund or pension fund, and provide research and recommendations exclusively for the benefit of the company's own money managers as opposed to individual investors. Unlike sell-side recommendations, buy-side recommendations are not available to anyone outside the firm. In fact, if the buy-side analyst discovers a formula, vision or approach that works, it is usually kept secret.
Analysts employed on the buy side engage in financial research of companies and investment strategy development, which typically involves deep research and financial modeling. They may also talk directly to companies in which they have investment interest. Buy-side analysts primarily are looking for companies that are a good fit for a portfolio’s strategy based on certain investing parameters and company’s that will generate the highest returns over time.
Since the roles of buy-side and sell-side analysts are distinctly different, some firms may deploy certain policies to ensure that research efforts are divided. This is why, at firms with both buy-side and sell-side analysts, a "Chinese Wall" can be constructed to separate the two departments. This usually entails procedures and security policies that prevent interactions between the two units.