Institutional Investors

INSTITUTIONAL INVESTORS

Institutional investors are any non-banking organizations or persons that control a collection of share amounts to qualify for special treatment and less regulation.

Institutional investors are any non-banking organizations or persons that control a collection of share amounts to qualify for special treatment and less regulation. Examples of these institutional investors are insurance companies and pension funds.

Investment companies, endowment funds, mutual funds, investment banks, brokerages, pension funds and insurance companies are some examples of institutional investors. They face fewer regulations. Because of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable.

An institutional investor is an investing entity having a huge disposal of assets for investment.

An institutional investor’s role in the economy is to act as a highly specialized investor on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment. Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can engage in active roles in corporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent and which go under. Influencing the conduct of listed companies and providing them with capital are all part of the job of investment management.

Mutual funds have become popular over the last few decades. A mutual fund, often setup by a financial management services company to invest in securities, might have growth, income or other objectives. It might focus on securities that are either all or mostly domestic, foreign or international. Customers, including many small investors, buy shares of the funds and share in the funds profits or losses. Historical ownership patterns suggest that institutional investing has broadened the base of participation in markets.

By no means are institutional investors omniscient, but because they control large amounts of investment capital and have an assumed knowledge of the markets, they can provide a gauge on where your business can invest its capital. In essence, if you follow the institutional investment patterns, your business can collect mirrored returns of these investments. However, if the institutional investor makes incorrect investments your company could suffer. There is also the possibility of hiring an institutional investor to manage business retirement funds.

Before you decide to use these institutional investors as an investment blueprint or engage their services, there are few things to consider:

  • It is always better to obtain a directory of institutional investors and their ranking.
  • Consult the Council of Institutional Investors or subscribe to an institutional investor publication.
  • Evaluate the financial investment performance of the various institutional investment management companies 

The institutional investor is a force to reckon with in the financial market. 

Institutional investors exhibit immense proficiency in the financial markets and they are gaining in importance by the day. However institutional investors face a relatively relaxed protective regulatory structure. Since institutional investors invest in huge amounts, they are considered to be more adept and knowledgeable in these matters. It is thought that they can protect themselves well from the various risks.

The investment policies and trading strategies followed by the institutional investors affect financial markets and business activities round the globe.

The enormity of effects and the huge scale of operations raise a whole lot of regulatory issues.

  • The rationale involved in the imposition of investment restrictions
  • The adequate presence of financial infrastructure in OECD countries as well as in emerging market economies.
  • The role played by risk-management standards and concerned systems

These are the following types of Institutional Investors

  • HEDGE FUNDS

These are investment funds accessible to investors allowed to participate in a broad range of investments, such as shares, debt and commodities, and trading activities. 

  • MUTUAL FUNDS

A collective investment scheme that collects money to invest them in bonds, stocks, money market instruments and other securities. 

PENSION FUNDS

These are legal entities formed by pension money. The sole aim of these entities is to finance pension plan benefits.

INVESTMENT BANKS

Financial institutions that help corporations and the government to raise capital, trade in securities, and manage corporate mergers and acquisitions.

INVESTMENT TRUSTS

Close-ended funds that devote investor money, in forming a diversified portfolio focused on company stocks.

Investments through institutional investors have the following advantages

  • Ability to influence a company’s solvency
  • Lower risk than that faced by non-institutional investors owing to a broad and diversified investment portfolio.
  • Influencing the conduct and capital requirements of listed companies.
  • Active involvement and influence in corporate governance.
  • Safe investments owing to their vast domain knowledge. 

Institutional investors have invested more heavily in hedge funds over the tail end of 2009 and into 2010 following a difficult fund raising period after the credit crisis. The institutional sector of the hedge fund market has become more important in the wake of the market tumult, as these institutional investors have stuck to the asset class in much greater numbers than the high-net-worth sector. Marketing to institutional investors requires a different approach, and knowledge of an institution’s preferences and how they prefer to source funds is essential in gaining consideration for new vehicles

With investors monitoring anything from 10 to over 100 hedge funds, getting a fund on their radar is the first step in gaining institutional capital