Institutional Investor: Who They Are and How They Invest (2024)

What Is an Institutional Investor?

An institutional investor is a company or organization that invests money on behalf of other people. Mutual funds, pensions, and insurance companies are examples. Institutional investors often buy and sell substantial blocks of stocks, bonds, or other securities and, for that reason, are considered to be the whales on Wall Street.

The group is also viewed as more sophisticated than the average retail investor and, in some instances, they are subject to less restrictive regulations.

Key Takeaways

  • An institutional investor is a company or organization that invests money on behalf of clients or members.
  • Hedge funds, mutual funds, and endowments are examples of institutional investors.
  • Institutional investors are considered savvier than the average investor and are often subject to less regulatory oversight.
  • The buying and selling of large positions by institutional investors can create supply and demand imbalances that result in sudden price moves in stocks, bonds, or other assets.
  • Institutional investors are the big fish on Wall Street.

The Role of Institutional Investors

An institutional investor buys, sells, and manages stocks, bonds, and other investment securities on behalf of its clients, customers, members, or shareholders.Broadly speaking, there are six types of institutional investors:endowment funds, commercial banks, mutual funds,hedge funds, pension funds, and insurance companies. Institutional investors face fewer protective regulations compared to average investors because it is assumed the institutional crowd is more knowledgeable and better able to protect themselves.

Institutional investors have the resources and specialized knowledge for extensively researching a variety of investment opportunities not open to retail investors. Because institutions are moving the biggest positions and are the largest force behind supply and demand in securities markets, they perform a high percentage of transactions on major exchanges and greatly influence the prices of securities. In fact, institutional investors today make up more than 90% of all stock trading activity.

80%

Institutional investors account for about 80% of the S&P 500 total market capitalization, according to data from Pensions & Investment Online.

Since institutional investors can move markets, retail investors often research institutional investors’ regulatory filings with the Securities and Exchange Commission (SEC) to determine which securities the retail investors should buy personally. In other words, some investors attempt to mimic the buying of the institutional crowd by taking the same positions as the so-called "smart money."

Retail Investors vs. Institutional Investors

Retail and institutional investors are active in a variety of markets like bonds, options, commodities, forex, futures contracts, and stocks. However, because of the nature of the securities and the manner in which transactions occur, some markets are primarily for institutional investors rather than retail investors. Examples of markets primarily for institutional investorsinclude the swaps and forward markets.

Retail investors typically buy and sell stocks in round lots of 100 shares or more; institutional investors are known to buy and sell in block trades of 10,000 shares or more. Because of the larger trade volumes and sizes, institutional investors sometimes avoid buying stocks of smaller companies for two reasons. First, the act of buying or selling large blocks of a small, thinly-traded stock can create sudden supply and demand imbalances that move share prices higher and lower.

In addition, institutional investors typically avoid acquiring a high percentage of company ownership because performing such an act may violate securities laws. For example, mutual funds, closed-end funds, and exchange-traded funds (ETFs) that are registered as diversified funds are restricted as to the percentage of a company’s voting securities that the funds can own.

What’s The Difference Between Institutional and Non-Institutional Investors?

What Is the World's Largest Asset Manager?

The largest private asset manager is BlackRock, which holds about $10 trillion in assets under management as of 2022. Note that most of these assets are held in the name of BlackRock's clients; they are not owned by BlackRock itself.

What Qualifies As an Institutional Investor?

An institutional investor is an entity that makes investments on behalf of someone else. They gather insight and analytical data from Institutional Shareholder Services (ISS) providers that help them make informed shareholder decisions. Institutional investor examples include pension funds, mutual funds, insurance companies, university endowments, and sovereign wealth funds.

How Do Institutional Investors Make Money?

Institutional investors make money by charging fees and commissions to their members or clients. For example, a hedge fund may charge a certain percentage of a client's investment gains or total assets. There may also be flat fees for holding an account or making trades or withdrawals.

What Is an Accredited Investor?

An accredited investor—usually described as a sophisticated investor. They are someone with enough experience or wealth to make certain risky investments that are not available or permitted to the general public. In the United States, an accredited investor must have a net worth of over $1 million, excluding the value of their primary residence.

The Bottom Line

Institutional investors are the big fish on Wall Street and can move markets with their large block trades. The group is generally considered more sophisticated than the retail crowd and often subject to less regulatory oversight. Institutional investors are usually not investing their own money, but making investment decisions on behalf of clients, shareholders, or customers.

Institutional Investor: Who They Are and How They Invest (2024)

FAQs

Institutional Investor: Who They Are and How They Invest? ›

An institutional investor is a company or organization that invests money on behalf of clients or members. Hedge funds, mutual funds, and endowments are examples of institutional investors. Institutional investors are considered savvier than the average investor and are often subject to less regulatory oversight.

How do institutional investors invest? ›

Institutional investors are organizations that pool together funds on behalf of others and invest those funds in a variety of different financial instruments and asset classes. They include investment funds like mutual funds and ETFs, insurance funds, and pension plans as well as investment banks and hedge funds.

What are examples of institutional investors? ›

Institutional investors include the following organizations: credit unions, banks, large funds such as a mutual or hedge fund, venture capital funds, insurance companies, and pension funds. Institutional investors exert a significant influence on the market, both in a positive and negative way.

What are institutional investors looking for? ›

Typically, institutional investors look for investments that are stable, predictable, and contain a reasonably compensated level of risk. They will use large teams to make decisions, identify opportunities, and carefully construct their portfolios.

What are the top 5 institutional investors? ›

Managers ranked by total worldwide institutional assets under management
#Name2021
1Vanguard Group$5,407,000
2BlackRock$5,694,077
3State Street Global$2,905,408
4Fidelity Investments$2,032,626
6 more rows

Who are institutional investors in simple words? ›

An institutional investor is a company or organization that invests money on behalf of clients or members. Hedge funds, mutual funds, and endowments are examples of institutional investors.

Why do institutional investors invest? ›

At a basic level, institutional and retail investors are similar in that they both buy, sell, and trade securities with the hope of making money. In practice, however, institutional investors have far more information, power, and options than ordinary individuals.

Who is considered an institutional investor? ›

A firm or organization that invests money on behalf of its clients or members is known as an institutional investor. Institutional investors include hedge funds, mutual funds, and endowments.

Who is called institutional investor? ›

Institutional investors are large entities such as pension funds, hedge funds, and insurance companies that hire finance and investment professionals to manage large sums of money on behalf of their clients or members.

What are key characteristics of institutional investors? ›

Common Characteristics
  • Scale: Refers to the relatively large amount of investable assets at an institution as compared to a retail or high-net-worth investor. ...
  • Long-term investment horizon: Some institutions, such as foundations, sovereign wealth funds, have unlimited time horizons.
Nov 9, 2023

Who are the three largest institutional investors? ›

Within the world of corporate governance, there has hardly been a more important recent development than the rise of the 'Big Three' asset managers—Vanguard, State Street Global Advisors, and BlackRock.

Is it good to have institutional investors? ›

Institutional investors have more resources, allowing them to conduct more detailed research and therefore make more informed investment decisions.

Who are the big three institutional investors? ›

The “Big Three” institutional investors, BlackRock, State Street Global Advisors and Vanguard, recently released proxy voting policies and related guidance for the 2023 proxy season.

Do institutional investors invest in index funds? ›

In addition, they might have access to investments individuals do not, such as institutional index funds with very high minimums. These large institutional funds often have lower fees than those available to individual investors.

Do institutional investors use ETFs? ›

“Institutionals, they use the tool as a hedging of their exposure,” Fajardo says. “In long, short strategies, they can short the ETFs, they pair trades or relative value trades. We've also seen ETFs being used as cash management tool, or as a way to manage the flows they get into their strategy.”

Do institutional investors invest in private equity? ›

The private equity industry comprises institutional investors, such as pension funds, and large private equity firms funded by accredited investors.

Do institutional investors invest in private companies? ›

A major concern for such investments is the higher agency costs associated with private equity. We show that institutions invest in private firms with governance mechanisms that tend to reduce the expected agency costs and risk of minority expropriation.

References

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