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New York—The buy side continues to add analysts, but data from bigdough.com shows that, for most buy side firms, analytic staffing is modest.  For most asset managers, research is a challenge—small asset sizes preclude hiring in-house staff while low commissions make it increasingly difficult to purchase external research.  The problem will get worse before it gets better.

Contact management provider bigdough.com tracks just shy of 10,000 institutional investment firms globally.  The database coverage in Europe and Asia is growing, so the database, while representative, may not be as complete as for the US.  Nevertheless, the statistics are consistent across regions.  A few highlights:

·         Institutions offering hedge funds represent about one third of the total.

·         60% of the institutions are in North America, but the coverage in Europe is up 8% YTD and in Asia up 34% YTD (versus 2% in North America).  This reflects underlying growth in the number of asset managers outside the US, but is skewed by bigdough’s increasing coverage of existing managers as it focuses more on non-US markets.

·         The number of European hedge funds covered by bigdough is up 15% YTD from 484 to 554 while the number of Asian hedge funds is up 67%, from 162 to 270.

·         The number of analysts covered by bigdough is also growing.  European hedge fund sponsors, for example, have increased the number of analysts by 22% versus a total staff increase of 12%.

·         In contrast, the number of sell side institutions in North America have declined by 5% (27 firms) YTD, and the number of analysts are shrinking in both the US and UK.

What grabbed our attention, however, is meager staffing of buy side analysts for the larger universe of buy side firms.  On average, buy side firms have five professional employees (bigdough doesn’t track administrative staff), one of which is an analyst.  The table below tells the story, which is pretty consistent across regions.

The paltry numbers are explained by the “long tail” of asset managers—over 70% of institutional investors manage less than $500 million in assets.  Unbundling of commissions will exacerbate the research problem for the smaller asset managers.  Sell side firms are becoming more rigorous about tiering their research services, reserving the best service for the asset managers that direct the most trading to the firms.  Alternative research, which is generally lower cost, can help fill the void for small asset managers, but is constrained by limited budgets for external research, whether paid by cash or commissions.   The increasing constraints on research will favor quantitative approaches, asset allocation, and other investment styles that reduce the requirements for research.