Who Are These Clients and Why Are They Trying to Kill Me?



The periods of boredom have grown shorter and shorter – and the terrors last a bit longer.”
-Arthur Cashin, Floor Broker, New York Stock Exchange

When we talk about clients on the sell side we mean those which pay our bills, of course. Stockbrokers generally fall into two categories: retail and institutional. I am an institutional broker and all my experience comes from that.

Retail brokers need to build a client list of individuals in the community. Institutional brokers build a client list of individuals at different investment institutions. Their client is the guy at Fidelity. If he moves to Putnam usually the relationship will also carry over and the broker will deal with him at Putnam.

There are many different kinds of institutional clients. The most important are the following:

Long Only

Mutual funds – also known as “long only.” This is because they can only buy stocks (“go long”) but are not permitted by law to “short” stocks. Mutual funds invest the savings of your average Mom and Pop investor. After the stock market crash of 1929 and ensuing Great Depression, the SEC (Securities Exchange Commission) was created to protect unsophisticated, or retail, investors. Funds that invest retail money have a long list of restrictions because of this.

Long only clients tend to be very fundamental in their analyses and often adopt a “buy and hold” type strategy. Their time horizon for holding a stock can be measured in months or years.

Big Quiet Pools

Pension funds and insurance companies have large asset pools they are forced to invest. The money often keeps coming in and they continually buy stocks. Their time horizon needs to match that of their liabilities and often that means years.

This is not to say that a pension fund won’t trade a stock (buy and sell in a short period of time) but generally they are in the buy and hold business with an even longer time horizon than a mutual fund. Pension funds can be either private or public. The National Pension Fund in Korea, for example, is one of the largest investors in the stockmarket there.

Hedge Funds and Farmer John

Hedge funds are, in my opinion, very well misunderstood by the public and frequently demonized by those who can’t even define what they are. “Hedgies” are, simply put, pools of private capital that can be invested any damn way the people who own the money like. Hedge funds invest in every conceivable asset class under the sun, from managed futures, to private equity, to derivatives, to corporate or sovereign debt, to currencies, to farmland, to commodities and even stocks.

Not all hedge funds invest in all asset classes, far from it; they specialize. I deal with equity-focused hedge funds which might have some exposure to other asset classes at times but their bread and butter is stocks.

I try and explain what hedge funds are to my non-financial friends by telling them hedge funds are like agriculture. If I say, “He’s in agriculture,” it can mean he grows lemons, avocados, lettuce, or even cattle. It can also mean be buys agricultural goods and sells them. It can mean just about anything because the definition is so broad. Friends, hedge funds are like agriculture.

Hedge funds, because they do not permit retail investors, are allowed to short stocks or short the entire market. This makes most hedgies “long/short” funds in their approach. They will go long Toyota and short Chrysler if they think gas prices are going up, or if the yen will weaken. That way they can make money on both sides of the trade.

Hedge fund managers will often ask, “OK, you want me to buy this stock. Which one do I sell?” Or, what is the other side of the trade? Talking to long/short funds requires a different mindset than talking to a pension fund or other long only client.

Hedge funds often have shorter time horizons than most other clients. They may buy a stock in the morning and sell it by lunch. Or they may own a stock for years. When it comes to hedge funds it is dangerous to generalize.

Family Office

Family office money is money that comes from a wealthy individual, or related wealthy individuals. This could be the Vanderbilts but more likely is newer money either from industry (the Wal-Mart clan) or from China or the Middle East. The family will usually hire professional outside money managers to help them invest their capital to earn a return. Investment time horizons here will vary depending on the goals of the group.

The Sovereigns

Sovereign wealth funds such as those from the oil-rich Gulf, or the Norwegian central bank, tend to be investors with the longest time horizon. They are founded with the quintessential goal of preserving capital for that rainy day off in the future when the country runs out of oil. But it isn’t always oil money: Singapore has no oil but it does have two well known sovereign wealth funds; one focuses on private equity and the other on global equity markets.

Sovereigns tend to take very large positions in few stocks and sit on them forever. Because of this, they are often approached to become “cornerstone” investors in large IPOs.

What the above list all have in common, however, is they are important clients and should always be treated as such. On the sell side, when a client calls, you jump to attention. Also, never ever talk about one client with another. All clients value confidentiality and their trust in you will evaporate instantly if they think you are sharing information about their trades with another client.

In fact, they will cut off your firm entirely from all business for a period of time, or forever under this scenario. Never mention clients by name in meetings – and especially NEVER do it in writing. If you want to say Xxx client was a big buyer yesterday of Toyota (you see, I can’t even use a client’s name in an example) you say, “A large long only bought a ton of Toyota yesterday.” Say any more than that and you could find yourself back in an apron serving fries to your current colleagues at their lunch break.

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