Institutional Investment Management Shifting Gears

October 24, 2006 ( - Due to more directly accessible liquidity, less human interaction and fewer commission dollars changing hands, traditional investment management may be a thing of the past, according to TABB Group's latest annual research study.

According to a press release on the findings of “Institutional Equity Trading in America 2006:The Return on Relationship,” even though traditional long-only investment management commissions are falling, total brokerage revenue is increasing as a growing number of traditional investment managers are looking to other sources for alpha and launching hedge funds.

The move of traditional managers to hedge funds, overseas opportunities and alternative-investment vehicles is increasing their need for a global, multi-asset broker. In addition, increased regulatory scrutiny, a migration to lower, commissionable no- and low-touch investment channels, and a realignment of sell-side services make it harder for brokers to know their clients and inspire loyalty, TABB Group claimed.

These factors also forced a drop in overall equity commission dollars paid, and, as a result, TABB Group forecasts that US institutional cash equity commission revenues will decrease by approximately $1.7 billion dollars, or 6%, by 2008.

Due to the move to non-traditional investment vehicles, the success of the buy-side is becoming more dependent on its access to other brokerage services such as global equity trading and research, derivatives, financing and deal flow, the study found. This indicates a change in the buy-side/broker relationship over the next two years as the buy-side realigns commission dollars, the number of engaged brokers, and the percentage of order flow allocated to these brokers, TABB Group claimed.

Additional findings and predictions from the TABB Group, according to the press release, include:

  • More than 50% of large, traditional, long-only investment managers have developed hedge fund products. In addition, 17% of all interviewed long-only managers that have not launched a hedge fund plan on doing so during the next two years.
  • While 65% of long-only funds have no expansion plans, 31% plan to expand into Asia, 29% into Europe and 11% into emerging markets.
  • Institutional investors are aggressively moving into equity derivatives as 67% of funds used futures, 64% options and 33% equity swaps.
  • Full-service firms dominate buy-side commission flows, as 13 of top 18 brokers (ranked by commission flows) are full-service firms offering clients access to liquidity, research, corporate management meetings, capital commitment, new issues and more.
  • 60% of institutional investors are covered by a commission recapture agreement. Over 20% of buy-side funds saw a decrease in commission recapture business while nearly double expect to see recapture decline further in the next two years.
  • Buy-side traders are challenged by commission management with nearly one third of funds planning to add or upgrade their commission management software in 2007.
  • Growth of trading algorithms is slowing as buy-side traders are only leveraging algorithms for 11% of their order flow compared with last year’s rate of 10%. Crossing network usage and growth, however, is more aggressive than projected in 2005.
  • While the adoption rate of algorithms by the investment management community is leveling at around 80%, implementation-shortfall algorithms are now the most widely used category on Wall Street.

TABB Group interviewed head traders at 61 traditional asset managers handling aggregate assets under management (AUM) of nearly $10 trillion for the study. Copies of the study may be purchased at .