Buy-side: a clear explainer
Definition
– Buy-side: investment organizations that purchase securities for their own accounts or on behalf of clients to generate returns. Typical buy-side entities include mutual funds, hedge funds, pension funds, insurance-company portfolios, family offices, and some trusts and high-net-worth investors.
– Sell-side: firms that do not invest client capital directly but provide services that support transactions and market activity (for example, underwriting, brokerage, and published research).
Why the distinction matters
– Buy-side firms decide what to buy and hold; their trading choices move real capital into markets.
– Sell-side firms provide liquidity, research, and execution services but generally aren’t the principal investor in trades.
– Together they form the core working relationship in financial markets.
Key concepts and jargon (brief)
– Assets under management (AUM): the total market value of assets a firm manages on behalf of clients.
– 13F filing: a quarterly disclosure required by the U.S. Securities and Exchange Commission (SEC) that lists certain equity holdings of institutional investment managers above a reporting threshold.
– Chinese Wall: information barriers within firms to prevent conflict of interest between departments (for example, between buy-side and sell-side functions).
– Buy-side analyst: an analyst employed by an investing firm whose research and recommendations are intended for internal portfolio managers rather than for public distribution.
What buy-side professionals do
– Identify investments that fit a mandate (e.g., income, growth, liability matching).
– Run financial research and build financial models to estimate value and risk.
– Execute large trades, often in block sizes, and manage portfolio risk and allocation.
– Keep much research and trading approach private to preserve competitive advantage.
– Comply with regulations, including periodic public disclosures like 13Fs in the U.S.
Advantages typically enjoyed by buy-side investors
– Economies of scale: lower per-unit trading costs on large orders.
– Access to internal research, trading desks, and execution technology.
– Ability to hold long-term positions without needing to generate public research.
– Market influence: very large managers can move prices when they buy or sell significant stakes.
Limits and caveats
– 13F filings are lagged (quarterly) and don’t show everything (they miss certain derivatives, short positions, and cash).
– Large managers seldom reveal real-time strategy; following their disclosed holdings is informative but incomplete.
– Market-moving trades by big funds can be hard to attribute in real time.
Practical checklist: how to track and learn from buy-side activity
1. Identify the managers you want to follow (large mutual funds, hedge funds, pension funds).
2. Pull their latest 13F filings on the SEC EDGAR system each quarter.
3. Compare successive 13Fs to spot increases, decreases, new positions, and full exits.
4. Cross-check holdings with provider tools (Morningstar, fund fact sheets, filings databases).
5. Note limitations: filings are delayed, exclude certain instruments, and may not reflect current positions.
6. Use buy-side moves as one input among many — combine holdings data with fundamentals, valuation, and risk analysis.
Small worked numeric example (illustrative)
Scenario: John Smith’s prior strategy returned more than the benchmark over the past decade. He raises $10 million of capital to start a fund.
Assumptions (explicit):
– Previous annualized return = 12% (historic; not guaranteed).
– Benchmark annualized return = 2% (historic; illustrative).
– John manages the newly raised $10 million and earns 12% the first year.
Year‑1 outcome:
– Starting capital: $10,000,000
– Return at 12%: 10,000,000 × 0.12 = $1,200,000
– Ending capital after Year 1: $11,200,000
Five‑year projection at a constant 12% annual growth (compounded):
– Ending capital = 10,000,000 × (1.12)^5 ≈ $17,623,000
Notes on the example:
– These are simple hypothetical calculations to show how returns compound. Past performance does not predict future results.
– The interpretation of “outperformance by 10%” varies: it can mean 10 percentage points per year (as above) or 10% total relative to a benchmark over a period; always clarify whether figures are annualized or cumulative.
Quick takeaways
– Buy-side firms are the buyers of securities and the principal stewards of client capital; their analysts and portfolio managers research, select, and hold investments privately.
– Public filings like 13Fs provide useful but incomplete snapshots of institutional holdings and
and therefore must be read with caution — they’re delayed, limited to certain security types, and omit many exposures (cash, most derivatives, short positions and private holdings). Below are practical steps, checks, and worked examples to use buy‑side information sensibly.
How 13F and other public records are limited (quick checklist)
– Filing delay: Form 13F is due 45 days after quarter end, so holdings reflect a past snapshot, not intraday positions.
– Coverage: 13F covers “Section 13(f) securities” (many exchange‑traded equities, some convertible and option instruments) but excludes most OTC securities, cash balances, and many derivatives.
– Long positions only: 13Fs typically report long exposures; short positions and hedges are often invisible.
– Filing threshold and universe: Only institutional managers with over $100 million in qualifying assets must file. Smaller buy‑side firms won’t appear.
– Position sizing ambiguity: 13F shows dollar value of a holding, but not the firm’s total assets in the filing — you need AUM to convert to portfolio percentages.
How to interpret a reported change — step‑by‑step
1. Note dates. Record the quarter‑end date (the positions apply as of that date) and the filing date (when it became public).
2. Convert shares to dollars. Multiply reported shares by the security’s market price on the quarter‑end date.
3. Calculate position change. Percent change = (New value − Old value) / Old value × 100.
4. Convert to portfolio weight (if you have AUM). Weight = Position value / Total AUM × 100. If AUM is not disclosed, compare relative weights within the same filing.
5. Adjust for corporate events. Stock splits, mergers, or large index rebalances can cause mechanical changes in reported holdings. Check company corporate action dates.
Worked numeric example
– Quarter t−1 report: 500,000 shares of ABC at $20 on 2024‑03‑31 → value = 500,000 × $20 = $10,000,000.
– Quarter t report: 1,000,000 shares of ABC at $25 on 2024‑06‑30 → value = 1,000,000 × $25 = $25,000,000.
– Absolute change = $25,000,000 − $10,000,000 = $15,000,000.
– Percent change = $15,000,000 / $10,000,000 × 100 = 150% increase.
– If reported AUM = $500,000,000, then weight at t−1 = $10,000,000 / $500,000,000 = 2%; weight at t = $25,000,000 / $500,000,000 = 5%.
Practical tips for retail traders and
Practical tips for retail traders and analysts
1) Start with the basics — verify the filer and the filing
– Confirm the filer meets the Form 13F threshold: institutional investment managers with investment discretion over $100 million or more in 13(f) securities must file. This matters because smaller managers aren’t required to report.
– Note the filing date and which quarter it covers. A 13F is filed up to 45 days after quarter-end and reports holdings as of the quarter’s last day. Treat the data as stale, not real‑time.
2) Quick checklist when you open a 13F (step‑by‑step)
– Identify the security (CUSIP or ticker) and the number of shares reported.
– Note the “value” column and the price reported (if included).
– Record total reported AUM or the filer’s total value of 13(f) holdings (if provided); you’ll need this to calculate weights.
– Check filing amendments and footnotes — they often flag corporate actions, pooled funds, or errors.
– Cross‑check with the filer’s own investor reports or press releases for large changes.
3) How to compute basic signals (worked numeric examples)
– Example A — change in position value and weight (continuing from your prior numbers):
– Quarter t−1: 500,000 shares at $20 → value = $10,000,000.
– Quarter t: 1,000,000 shares at $25 → value = $25,000,000.
– Absolute change in value = $25,000,000 − $10,000,000 = $15,000,000.
– Percent change = $15,000,000 / $10,000,000 × 100 = 150% increase.
– If filer’s reported 13(f) total = $500,000,000:
– weight t−1 = $10,000,000 / $500,000,000 = 2%
– weight t = $25,000,000 / $500,000,000 = 5%
– Interpretation: filer materially increased exposure to the security relative to their reported book, but remember this is net of price moves and corporate actions.
– Example B — implied share change and a caution about price path:
– Shares increased by 500,000 (1,000,000 − 500,000). If you assume all shares were purchased at quarter‑end price $25 (an approximation), implied purchase value = 500,000 × $25 = $12,500,000.
– But actual traded dollar cost could differ because the price moved from $20 → $25 during the quarter. You cannot determine exact trade prices or intraperiod churn from 13F alone.
4) Adjust for corporate events (practical checklist)
– Check for splits: a 2‑for‑1 split doubles reported shares — divide reported shares by the split factor to compare pre‑ and post‑split holdings.
– Check for mergers/acquisitions: holdings can disappear or change symbol; read footnotes and company filings
– Check for spin‑offs and stock dividends: if a company distributed new shares to holders (spin‑off) or issued a stock dividend, reported holdings can include both parent and new‑company shares. Action: read the issuer’s press release or 8‑K to get the distribution ratio. Adjust by subtracting the distributed shares from the parent or adding the new company’s shares at the stated ratio. Formula: adjusted parent shares = reported shares / (1 + stock dividend rate) for a stock dividend; new company shares received = adjusted parent shares × spin‑off ratio.
– Check for ticker / CUSIP / share‑class changes: corporate reorganizations often change the identifier used on 13F. Action: map old CUSIPs/tickers to new ones (issuer press release, SEC filings, or CUSIP lookup) before comparing rows across quarters. If one class was consolidated (e.g., A and B class merged), sum both classes where appropriate.
– Check for share‑class conversions and exchanges: some corporate events convert preferreds or Class B shares into Class A common. Action: use the conversion ratio in the corporate filing to translate reported securities into common‑share equivalents. Formula: common‑equiv. shares = reported shares × conversion ratio.
– Check for tender offers, buybacks and large corporate purchases: these events change outstanding shares and can distort apparent manager activity. Action: normalize holdings to percentage of outstanding shares (position % = reported shares / shares outstanding) when comparing buying/selling intensity across periods.
5) Watch for derivatives, convertibles and synthetic exposures (practical checklist)
– Know what 13F does and does not show: Form 13F requires disclosure of certain equity securities (exchange‑listed stocks, ADRs, shares of registered investment companies and convertible debt that are treated as equity). Many derivatives (futures, most options, swaps) are not reported on 13F. Action: don’t assume a missing or small 13F stake means no economic exposure.
– Convert reported convertibles to underlying shares when conversion is likely: if a convertible bond is listed in a filing and you know the conversion ratio, compute underlying common shares = number of convertible securities × conversion ratio. This gives a better picture of potential equity exposure.
– Treat options carefully: 13F typically does not show plain‑vanilla long or short options. If you find references to convertible or structured equity, check the issuer’s prospectus for conversion terms. To estimate option‑equivalent shares when you have exchange‑level option open interest, multiply open interest × contract size × delta (approximate) to get delta‑adjusted equivalent shares. Example: open interest = 10,000 contracts, contract size = 100 shares, assumed delta = 0.5 → delta‑adjusted shares ≈ 10,000 × 100 × 0.5 = 500,000 shares. Note: this is an approximation and requires up‑to‑date option greeks.
– Beware of total return swaps and synthetic positions: managers can gain exposure via swaps that do not appear on 13F. Look for references in footnotes or in the manager’s quarterly letters; cross‑check with other filings or public disclosures.
6) Timing, reporting delays and cross‑checks (practical checklist)
– Always remember the quarter‑end snapshot nature of 13F. Action: use Form 4 (insider trading) and Form 13D/13G (activist or large beneficial ownership) and press releases to reconstruct intraperiod activity. Form 4 and 13D/13G can provide transaction dates and motivations.
– Cross‑check with manager disclosures: many asset managers publish commentary, fact sheets or position lists that explain buys/sells, holdings by strategy, or significant changes. Action: compare 13F lines to the manager’s public materials to resolve discrepancies.
– Use multiple data sources: CUSIP mappings, consolidated quote services, and regulatory filings together reduce misinterpretation risk. Action: when you see a big change, search EDGAR for the issuer’s 8‑K, 10‑Q/10‑K, and press releases covering the quarter.
Worked numeric example — combining a split and a spin‑off
Situation: A manager’s latest 13F shows 2,400,000 shares of XYZ
. . . shares of XYZ (ticker XYZ). Here’s how to reconstruct what actually happened during the quarter and how to translate reported 13F lines into economic activity.
Assumptions and timeline (explicit)
– Assumption A: The manager held 800,000 shares of XYZ at the start of the quarter.
– Assumption B: On Feb 15 the issuer executed a 3‑for‑1 forward stock split (each pre‑split share became 3 post‑split shares).
– Assumption C: On Mar 20 the issuer completed a spin‑off of SUB, distributing 1 SUB share for every 4 pre‑split XYZ shares. SUB trades on its own CUSIP/ticker after the distribution.
– The 13F filed after quarter‑end reports 2,400,000 shares of XYZ (post‑split basis) and — depending on reporting timing — may or may not list SUB.
Step‑by‑step reconciliation
1) Translate reported shares to pre‑split basis (if you want to compare to earlier filings).
– Split factor = post / pre = 3.
– Pre‑split equivalent = reported_post_split_shares / split_factor.
– Example: pre_split_equiv = 2,400,000 / 3 = 800,000.
2) Calculate spin‑off entitlements from the pre‑split position.
– Spin‑off ratio = 1 SUB per 4 pre‑split XYZ shares.
– SUB_shares_received = pre_split_equiv / 4 = 800,000 / 4 = 200,000 SUB shares.
3) Map SUB to its own CUSIP/ticker and check filings.
– Action: search EDGAR and the issuer’s press release to confirm the record and distribution dates and the exact ratio (sometimes described as “1 share of SUB for every X shares of XYZ”).
– Action: find SUB’s CUSIP and the first trade date — 13F may show SUB only if the manager still holds it at quarter end and it meets 13F reporting thresholds.
4) Reconstruct economic exposure (market‑value example).
– Pick illustrative prices on quarter end:
– XYZ post‑split price = $30.00
– SUB price = $15.00
– Market value of XYZ position = 2,400,000 × $30 = $72,000,000.
– Market value of SUB position = 200,000 × $15 = $3,000,000.
– Combined economic exposure tied to original holding = $75,000,000 (ignoring cash received, taxes, or intra‑quarter trades).
5) Interpret apparent “change” between filings.
– If previous 13F showed 800,000
If previous 13F showed 800,000 shares of XYZ, the apparent change is likely a corporate‑action accounting effect rather than an active trade. Walk through the arithmetic and checks.
a) Reconstruct original‑equivalent shares
– Original reported shares = 800,000 (from previous 13F).
– Post‑action XYZ shares reported now = 2,400,000.
– Compute split factor = post_XYZ / original = 2,400,000 / 800,000 = 3.0 → implies a 3‑for‑1 split of XYZ.
b) Reconstruct spin‑off ratio
– SUB shares reported now = 200,000.
– SUB per original share = SUB_shares / original = 200,000 / 800,000 = 0.25 → implies 1 SUB for every 4 original XYZ shares (a 1:4 spin‑off ratio).
c) Recompute economic exposure per original share (use the quarter‑end prices you selected)
– Market value of XYZ position = 2,400,000 × $30.00 = $72,000,000.
– Market value of SUB position = 200,000 × $15.00 = $3,000,000.
– Combined market value tied to the original holding = $75,000,000.
– Implied value per original share = $75,000,000 /