Laila Keith
Institutional investors are large organisations that invest money on behalf of clients or members. They include mutual funds, pension funds, insurance companies, hedge funds, credit unions, banks, venture capital funds, and real estate investment trusts. Institutional investors are considered more sophisticated than the average investor and are often subject to less regulatory oversight. They have access to a variety of investment opportunities not available to private investors, such as foreign securities, government business loans, and interest rates. Institutional investors are also able to invest in financial instruments such as leverage and derivatives, as long as they disclose how these instruments will be used. They are important sources of capital in financial markets and play a major role in reducing the cost of capital for entrepreneurs and diversifying constituents' portfolios.
| Characteristics | Values |
|---|---|
| Type of entity | Legal entity |
| Investment activity | Professional |
| Investment scope | Significant number of funds |
| Investment orientation | Long-term investing |
| Investment instruments | Securities, real property, and other investment assets |
| Investment sources | Funds from several investors |
| Investment research | Access to investment research that retail investors do not |
| Investment regulations | Subject to less restrictive regulations than retail investors |
Securities
Institutional investment funds deal in securities by creating comprehensive portfolios for their clients, catering to diverse market objectives, and investing for various purposes, including educational endowments, nonprofit foundations, and retirement plans. The institutions investing in these funds include companies, charities, and governments.
One of the critical aspects of institutional investment funds is their ability to invest in a wide range of securities. They can access and explore a variety of investment instruments that are not available to individual or private investors. This privileged access is due to their status as qualified traders and their larger investment capabilities. Institutional investors can provide their clients with opportunities to invest in securities with large minimum buy-ins, which smaller investors might not be able to access.
The types of securities that institutional investment funds deal in include stocks, bonds, mutual funds, exchange-traded funds (ETFs), and hedge funds. These funds usually have specific requirements, such as large minimum investments, which can be around $100,000 or even higher. Institutional investors also tend to have longer time horizons, allowing them to invest in illiquid assets that can generate higher returns over time.
Furthermore, institutional investment funds can offer separate institutional accounts, providing customized investment management for their clients. These separate accounts are often used when an institutional client wants to manage assets outside of the established investment funds offered by the fund manager. The fees for these separate accounts may be higher due to the greater customization involved.
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Real property
Institutional investment funds employ various investment vehicles and strategies when it comes to real property. They invest in both equity and debt, participating in public and private markets. In public markets, they may invest in Real Estate Investment Trusts (REITs) and Commercial Mortgage-Backed Securities (CMBS). On the other hand, private market investments include direct property investments and mortgage loans.
When investing in real property, institutional investment funds consider core assets, value-add investments, and opportunistic investments. Core assets are high-quality, well-located, multi-tenanted, income-producing properties with lower risks and tend to generate lower returns. Value-add investments focus on underperforming or undermanaged assets with the potential for growth through improved operations or renovations. Opportunistic investments involve higher risk and target properties needing significant changes, such as redevelopment or repositioning, in exchange for higher expected returns.
The benefits of investing in real estate funds include diversification, lower initial investment thresholds, and passive investing. Diversification reduces risk by investing in various property types or REITs. The initial investment requirements are typically lower than purchasing individual properties, making real estate funds more accessible. Additionally, real estate funds offer passive investing, where investors can generate income without the active management required by direct property ownership.
Overall, institutional investment funds play a significant role in the real estate market, particularly in diversifying their portfolios and seeking attractive investment opportunities in both traditional and niche property sectors.
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Venture capital funds
From there, the venture capital fund seeks private equity investments that have the potential to generate large positive returns for its investors. This normally means the fund's manager or managers review hundreds of business plans in search of potentially high-growth companies. The fund managers make investment decisions based on the prospectus' mandates and the expectations of the fund's investors. After an investment is made, the fund charges an annual management fee, usually around 2% of assets under management (AUM).
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Mutual funds
By 2023, over half of American households had investments in mutual funds, collectively owning 88% of all mutual fund assets. This marks a significant increase from 1980, when less than 6% of U.S. households were invested in mutual funds. Today, mutual funds are often the investment of choice for middle-class Americans, providing a broad swath of middle-income workers with professionally managed portfolios of equities, bonds, and other asset classes.
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Sovereign wealth funds
SWFs are typically created when governments have budgetary surpluses and little to no international debt. They are designed to benefit a country's economy and citizens, and can be used to stabilise government revenues and reduce the adverse effects of boom-bust cycles on government spending and the national economy.
SWFs invest in a wide range of asset classes, including stocks, bonds, real estate, private equity, and hedge funds. They can also invest in alternative investments such as precious metals, private equity funds, and startups. These funds are usually held by a central bank, which accumulates the funds through its management of a nation's banking system.
The acceptable investments included in each SWF vary from fund to fund and country to country. Some funds may focus on liquidity, while others may prioritise returns. Some funds may be more conservative in their risk management, while others may have a higher tolerance for risk.
The largest SWFs by assets as of June 2024 included:
- Norway Government Pension Fund Global
- China Investment Corporation
- SAFE Investment Company
- Abu Dhabi Investment Authority
- Public Investment Fund of Saudi Arabia
- Kuwait Investment Authority
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Frequently asked questions
An institutional investment fund is a collective investment vehicle available only to large institutional investors. These funds build comprehensive portfolios for their clients, offering varying market objectives and investment purposes.
Institutional investors include commercial banks, central banks, credit unions, government-linked companies, insurers, pension funds, sovereign wealth funds, charities, hedge funds, real estate investment trusts, investment advisors, endowments, and mutual funds.
Institutional investment funds offer remarkably low expense ratios, making them particularly appealing investments. They also have access to a wider range of investment opportunities, including foreign securities, government business loans, and interest rates.
Institutions may face more limitations than retail investors. Many non-profits may not be able to invest in companies that profit from activities that are perceived as immoral or harmful. For example, a religious charity might avoid investing in alcohol companies, while an environmental group might stay away from paper production.
