A Guide To Investing In Institutional Funds

Institutional investors are large firms or organisations that invest money on behalf of others. They include pensions, mutual funds, banks, hedge funds, insurance companies and more. They are considered more sophisticated than individual investors, and their trades can have a powerful impact on the market.

Institutional investors pool money from individual investors or organisations, allowing them to buy large blocks of securities. They tend to have more knowledge and experience in the market and may have access to investment research and financial resources that individual investors do not.

Institutional investors are often subject to less regulatory oversight than individual investors because they are assumed to be more knowledgeable and better able to protect themselves.

With their significant influence on the market, institutional investors are sometimes referred to as whales or market makers. They control a substantial amount of all financial assets globally and their decisions can move markets.

This introduction outlines the key characteristics and impact of institutional investors. Now, let's delve into the specifics of how to invest in institutional funds.

Understanding institutional investing

Institutional investors are large market actors that pool money from various sources to invest in securities, real property, and other investment assets. They are considered the "big fish" or "whales" on Wall Street, and their trades can have a powerful impact on the market. These investors include investment funds like mutual funds and ETFs, insurance funds, pension plans, investment banks, and hedge funds. They are often large organisations with professional analysts and portfolio managers guiding their decisions.

Institutional investors are legal entities that participate in trading in the financial markets. They are always a legal entity, and it is important to understand that an institutional investor is an enterprise managing a fund, such as a mutual fund, but not the fund itself. They are considered more sophisticated than individual investors and are often subject to less regulatory oversight. This is because they are assumed to be more knowledgeable and better able to protect themselves.

Institutional investors have access to a variety of investment opportunities not available to individual investors. They can explore a range of investment instruments, including foreign securities, government business loans, and changed banking policies. They also have the resources and specialised knowledge to conduct extensive research. Due to their size, they can move markets with their large block trades, and they account for a significant percentage of all stock trading activity.

Institutional investors have specific requirements, including large minimum investments. They generally have much more money to invest than individual investors, and this greater access to capital can result in lower fees for them. They also tend to have longer time horizons, allowing them to invest in illiquid assets that can generate higher returns.

Institutional investors play a significant role in the investment world, controlling a large portion of all financial assets globally. They have a considerable impact on all markets and asset classes. Their presence in the market creates a positive effect on overall economic conditions, and their activism as shareholders is thought to improve corporate governance.

Mutual funds

There are two main types of mutual funds: active and passive. Active funds are managed by professional investors with the goal of outperforming a market index, such as the S&P 500. Passive funds are managed to track the performance of a market index and do not require an expensive investment team. Passive funds tend to have lower fees than active funds.

When investing in mutual funds, it is important to consider the fees involved. Mutual funds can charge various fees, including management fees, 12b-1 fees, and sales commissions. These fees can eat into your returns over time, so it is important to understand the cost structure before investing.

Exchange-traded funds (ETFs)

ETFs are a good option for investors looking to diversify their portfolio and save for short-term goals. They offer low expense ratios and fewer broker commissions than buying stocks individually. They are also more tax-efficient than mutual funds, as most buying and selling occur through an exchange, and the ETF sponsor does not need to redeem shares each time an investor wishes to sell or issue new shares.

There are several types of ETFs, including:

• Passive ETFs: These aim to replicate the performance of a broader index, such as a diversified index or a specific targeted sector or trend.
• Actively managed ETFs: These do not target an index of securities but rather have portfolio managers making decisions about which securities to include in the portfolio.
• Bond ETFs: These provide regular income to investors, with distribution depending on the performance of underlying bonds.
• Stock ETFs: These are a basket of stocks that track a single industry or sector, providing diversified exposure to a single industry.
• Industry or sector ETFs: These funds focus on a specific sector or industry, such as energy or technology.
• Commodity ETFs: These invest in commodities like crude oil or gold and can diversify a portfolio.
• Currency ETFs: These track the performance of currency pairs consisting of domestic and foreign currencies and can be used to diversify a portfolio or hedge against volatility.
• Bitcoin ETFs: These expose investors to bitcoin's price moves in their regular brokerage accounts.
• Inverse ETFs: These earn gains from stock declines by shorting stocks.
• Leveraged ETFs: These seek to return multiples on the return of the underlying investments.

ETFs can be purchased through online brokers, traditional broker-dealers, or in retirement accounts. Some sources suggest using a robo-advisor like Betterment or Wealthfront. When choosing an ETF, it is important to consider your investment goals, risk tolerance, and desired asset mix in your portfolio.

Hedge funds

To invest in hedge funds, you must be an accredited investor, which means having a minimum level of income or assets. In the US, this typically means having a net worth of over $1 million, excluding your primary residence, or an annual income of over $200,000 ($300,000 if married). Hedge funds also have high minimum investment amounts, typically ranging from $100,000 to upwards of $2 million.

Before investing in a hedge fund, it is important to conduct thorough research. This includes understanding the level of risk involved, the fund's investment strategies, and whether they align with your personal investment goals and risk tolerance. You should also review the fund manager's qualifications, disciplinary history, fees, and investment strategy by reviewing their Form ADV, which is available on their website or through the SEC's Investment Adviser Public Disclosure database.

Overall, investing in hedge funds may be a suitable option for accredited investors who are willing to take on higher levels of risk and have a significant amount of capital to invest. However, it is important to carefully consider all aspects of the investment before making a decision.

Insurance companies

There are two types of pension funds:

• Defined benefit funds: Employees contribute a fixed amount of pre-tax income, and upon retirement, the fund pays a fixed amount to the employee, regardless of the fund's performance.
• Defined contribution funds: The employee's retirement benefit depends on how well the fund performs. The most common defined contribution funds are the 401(k) and the 403(b).

Frequently asked questions