Takeaways
- Institutional investors are organizations that invest and manage money.
- U.S. institutional investors have over $60 trillion in assets under management.
- Institutional investors include hedge funds, mutual funds, and pension funds.
- Institutional investors hire teams to optimize their investments and portfolios.
- Institutional investors have professionalized investment teams and resources beyond the average retail investor and are considered the "smart money" on Wall Street.
An institutional investor is a company or organization that pools funds to invest in assets on behalf of others. These types of organizations take on a range of structures based on their business purpose. Institutional investors comprise hedge funds, mutual funds, pension funds, endowments, and even insurance companies.[1]
Institutional investors represent a substantial part of the daily trading volume in stock markets, mainly due to the massive amount of capital they invest, control, and actively manage. According to recent market sizing, U.S.-based institutional investors oversee more than $60 trillion in assets under management.[2] As a result of the capital they can deploy into the capital and debt markets, they can significantly influence market trends, asset prices, and industry sentiment because of the sheer amount of money they have to execute trades daily.
Our Picks: Best Online Brokerage Accounts
Take the Next Step:
Member FDIC
Quontic High Yield Savings Account
Smart Money Rating: 5/5
APY: 4.50%
Required Minimum Balance: $100
Institutional investors' suite of investment opportunities tends to be larger, too. They have access to broader investment opportunities and vehicles, many of which are unavailable to the typical retail investor. These more specialized opportunities can include investments in venture capital, private equity, real estate, private investments in public entities, and other complex investment structures.
Read More: What Is a Real Estate Investment Trust (REIT)?
In addition, institutional investors leverage professional fund managers and highly experienced investment analysts to gain an edge on the market, boost returns, and minimize investment risks. Simply having professional money managers on their team helps institutional investors more effectively navigate bull markets, bear markets, and market turbulence. These funds tend to have a real-time pulse on the market and make significantly more informed investment decisions than the average investor.
Who Regulates Institutional Investors?
To qualify as an institutional investor, entities must meet specific criteria established by state and federal regulatory bodies.
From a federal perspective, the U.S. Securities and Exchange Commission (SEC) regulates certain institutional investors, like mutual funds and exchange-traded funds. For example, investment advisors with over $100 million in assets under management must register with the SEC.[3]
Take the Next Step:
Acorns Website
Acorns Investing App
Smart Money Rating: 5/5
Intro Offer: $20 Bonus Investment
Best For: Beginner Investors
Annual Fee: N/A
5 Types of Institutional Investors
Not all Institutional investors are the same. These entities vary tremendously in size, scale, scope, and industry focus. For example, some large institutional investors have thousands of investment professionals, while smaller shops have smaller, more agile investment teams. Here are six common types of institutional investors:
- Pension Funds: One of the main types of institutional investors is the pension fund. Pension funds manage the retirement savings for past and present employees of organizations that offer defined benefit retirement plans.
For example, the California State Teacher’s Retirement System is the second-largest U.S. pension fund, with over $341 billion in assets under management.[4] Pension funds invest in diversified portfolios, targeting long-term growth and investment stability.
Read Also: How to Plan for Retirement
- Insurance Companies: Insurance companies are institutional investors that the average investor usually doesn’t consider. They use insurance premiums policyholders pay to invest in stocks, bonds, real estate, and other securities.
The gains from these investments allow insurance companies to pay out future claims from policyholders more easily and mitigate against potential losses. Insurance companies optimize their portfolios with super-sophisticated investment risk calculations to enhance their returns.
Need Income for Life? Learn About How to Invest in an Annuity.
- Mutual Funds: One of the best investment strategies for beginner investors is to invest in mutual funds. Mutual Funds are pools of capital managed by a fund manager who invests based on the mutual fund’s specific investment strategy. Investors can buy and sell shares in mutual funds at the end of each trading day.
There are many kinds of mutual funds, including equity funds, bond funds, target date funds, and money market funds. Each fund has a portfolio manager who actively manages the fund. The good news is that you can take advantage of the professionalization of mutual funds by investing in them through an online brokerage account.
- Hedge Funds: A popular but opaque category of institutional investors is hedge funds. Hedge funds are entities that pool investors’ capital to invest to generate an investment return, typically with the expectation significantly above the average market return.
Hedge funds are considered the most aggressive type of institutional investor because they want to make money in any market by utilizing complex strategies, leverage, investing in cryoptcurrencies, derivatives, and short selling.[5] You generally have to be an accredited investor to invest in hedge funds.
Are you still waiting to be an accredited investor? Try our plug-and-play Net Worth Calculator.
- Endowment Funds: Endowment funds are pools of money invested to generate returns for charitable organizations. They are managed on behalf of nonprofit organizations, hospitals, churches, universities, or other community programs. Investment professionals manage the funds from donations to meet the investment philosophy adopted by the endowment.
When you hear about endowment funds, most people think of universities, and for good reason. In 2023, university and college endowment funds had a market value of over $839 billion.[6] Endowment funds tend to focus on investment diversification, principal preservation, and income-generating investments.
Read More: 7 High Yield Dividend Stocks?
Take the Next Step:
How Do Institutional Investors Invest?
Institutional investors use many strategies and tools to manage their large portfolios successfully. These strategies are often sophisticated and highly tailored to their investment philosophy and fund objectives. Here are comment investment strategies adopted by institutional capital:
- Diversification: Investment Diversification is one of the most common investment philosophies adopted by large institutional investors and one that you, too, are likely to employ in your portfolio. Diversification is the practice of spreading your invested funds across various asset classes, industries, and sectors.
Institutional investors can lower or increase their chance of investment returns by dialing up or down their diversification. For example, industry-specific hedge funds might concentrate their holdings on only a handful of companies in the hopes of outsized returns. On the other hand, pension funds and insurance companies will invest in a broad mix of stocks (growth, dividend-yielding, etc.), bonds, real estate, and private equity to protect the portfolio from market volatility or sector-specific risk while growing their portfolio.
Related: 7 Types of Bonds. Here’s What to Know.
- Active Management: Another commonly used strategy among institutional investors is to adopt an active management approach. Most institutional investors hire professional fund managers who routinely buy, sell, or short various securities to outperform financial goals or market benchmarks.
This active management philosophy involves in-depth research, deep financial analysis, and considering incredibly accurate and insightful market forecasts when making investment decisions. Active managers must have a firm pulse on the markets and specific industries.
- Passive Management: Passive management is a strategic investing option for institutional investors. This approach can offset risk in a whole portfolio or slices of a portfolio. Passive management will usually involve investing in index funds or exchange-traded funds that are built to replicate the performance of a specific index or market sector.
Passive management is much more cost-effective than active management. Because of the lower fee structure, investors receive a higher percentage of their return. However, investors trade this more conservative fee approach for access to potentially much higher and above-industry returns that active management yields.
Institutional vs. Retail Investors
Institutional and retail investors differ significantly regarding investment capabilities, access to opportunities, capital deployment, and investment strategies. Here are the main differences between the two types of investors:
- Institutional Investors manage millions or billions of dollars on behalf of their clients. Depending on the year, institutional investors make up between 70% to 90% of all trading volume on major stock exchanges (think Nasdaq or NYSE). These investors have extremely sophisticated investment management teams with dedicated research, analytics, and portfolio optimization.
Institutional investors represent what “Wall Street” or “The Street” thinks about stocks and the stock market. Investment teams within these funds specialize in specific industries, geographies, market capitalizations, and company life cycles (e.g., pre-revenue or commercial companies).
Institutional funds can buy stock on the open market or through large trading orders, known as block stock purchases. The New York Stock Exchange defines block trades as orders of 10,000 shares of a stock or purchase at a market value of $200,000 or more.[7]
- Retail investors (like you) invest on a smaller scale, typically hundreds, thousands, or millions of dollars. They use online brokerage accounts to handle the bulk of their trading.
However, some high-net-worth individuals and accredited investors who invest on the higher end might have enough assets under management to enjoy an account with a sophisticated investment brokerage.
Take the Next Step:
Member FDIC
Primis Checking Account
Account Type: Free Checking Account
Required Minimum: $1 to Open
Bonus Offer: Earn 50 Cents for Every Purchase
Smart Summary
The market comprises institutional and retail investors, but institutional capital makes up most trades, investments, and dispositions. Knowing how institutional investors think, deploy capital, and analyze investments can give you a better sense of what the “smart money” is doing. Understanding this can increase your portfolio returns and boost your overall net worth. Get smart about managing your retirement accounts and take a holistic approach to your portfolio.
You Might Also Like:
(1) Nasdaq. Institutional Investor. Last Accessed January 14, 2025.
(2) Cerulli. The State of U.S. Retail and Institutional Asset Management 2023. Last Accessed January 14, 2025.
(3) U.S. Securities and Exchange Commission. Regulation of Investment Advisors by the U.S. Securities and Exchange Commission. Last Accessed January 14, 2025.
(4) California State Teacher’s Retirement System. Investments. Last Accessed January 14, 2025.
(5) U.S. Securities and Exchange Commission. Hedge Funds. Last Accessed January 14, 2025.
(6) Forbes. College Endowments Saw An Average 7.7% Gain In Fiscal Year 2023. Last Accessed January 14, 2025.
(7) Nasdaq. Block Trade. Last Accessed January 14, 2025.
