What is an Institutional Investor?
You might have noticed by now that there are two main ways to invest your money - either do it yourself, or give it to someone else to manage on your behalf.
An institutional investor represents that “someone” who you might be able to give your money to, in the hope that they might do a better job of growing it over time than you can (although this is a hotly debated topic - see Active vs. Passive Investing). Simply put, it’s an institution that is essentially a pool of money, which invests money. 🤙
There are many different types of institutional investors, which you might recognise by some more familiar names (see below). As you’ll also see below, of the many different types of institutional investor, asset managers and pension funds are usually the ones which are most relevant for you as an individual investor.
Who are they? These are your household investment names - think Blackrock, Vanguard, Fidelity, Schroders, and many others.
How do they manage money? In lots of different ways, for lots of different clients. Some examples include managing pension fund money, infrastructure related projects, money for high net worth individuals as well as offering funds for us regular people. The way they manage money will usually be tailored to the needs of each set of clients, and asset managers usually have access to more complicated financial instruments such as derivatives.
How can they help you? These asset managers offer certain funds which you can invest in through the Evarvest app - a mix of passive ETFs as well as more actively managed mutual funds or investment trusts with specific strategies which you can find outlined in the fund’s KID.
Who are they? Pension funds are pools of money set up to provide your retirement income. These pools of money come from employers, employees or both. Companies and governments usually contribute money for each employee’s pension, which an employee can add to. Self-employed individuals also usually save their own money into a pension plan to ensure they aren’t left behind when it comes to retirement.
How do they manage money? Pension funds are usually limited to taking low levels of risk, as their key objective is to be able to provide retirement incomes for people in the future and safeguarding the money in the meantime - more risk can lead to more losses over time, which they definitely want to avoid! They do, however, take some risk when managing the fund in order to earn a return which grows a little bit over the years, to compensate for inflation (a word we use to describe prices rising over time).
How can they help you? Investing your money into a pension is a smart way to secure your financial future later in life. Depending on the type of pension you have, you can often choose whether you want to give it to someone else to manage on your behalf, or take control of the investment decision making yourself. Added bonus: there are often tax benefits to invest into your pension as governments tend to be focused on ensuring we have saved enough for our twilight years!
Who are they? We hope you know this one…!
How do they manage money? Banks typically manage any extra cash they have by investing it in very safe, money market instruments such as government bonds. They do this to make sure they don’t take any more risk than they are allowed to by regulators.
How can they help you? As institutional investors, banks wouldn’t be much use to you because they only manage any extra cash they have. That said, they obviously can help with your finances in many other ways!
Who are they? These are pools of money which are usually owned by a foundation (such as a university, hospital or non-profit foundation)
How do they manage money? An endowment fund looks to use its existing pool of money to earn a yearly return which can fund the operations of the foundation that owns it. For example, the Harvard University endowment fund is a pool of c. $40bn which is invested in various securities, with the aim of earning a yearly return which can help fund the university’s ongoing operations, such as funding research, paying lecturers and looking after its buildings.
How can they help you? These funds are usually set up to help pay for a foundation’s expenses - less relevant for you as an individual.
Who are they? Family offices manage money for wealthy individuals / families. Bill Gates, Richard Branson are 2 well known wealthy individuals who have family offices which help manage their wealth.
How do they manage money? Family offices manage money in order to achieve various objectives for the individuals / families they serve. This can range from investing in stocks and bonds to provide a regular income and capital growth over time, to investing in start-ups to support causes they believe in or industries which they think will do really well over the long run.
How can they help you? These are specific vehicles set up to service the financial needs of wealthy individuals / families - so unless you belong to that category, it is unlikely they will be able to do much!
Who are they? These are similar to asset managers, but often operate in smaller scale, taking higher risk in order to earn a higher return, with the aim of helping a smaller set of clients. These clients usually include high net worth individuals, pension funds or other large institutional investors.
How do they manage money? Hedge funds usually invest in stocks, bonds, derivatives, commodities and other financial assets. They take a view on the market and take specific risks in the hope of being correct and earning large returns. Whereas asset managers usually buy and hold investments for relatively long time horizons, hedge funds usually trade more frequently to take advantage of short term market opportunities as well as using tools such as shorting and leverage which carry more risk than a simple buy and hold strategy.
How can they help you? Because of the riskier strategies which hedge funds use, they are usually limited to offering their services to “sophisticated investors” (other institutional investors and some high net worth individuals) by the regulators. Unless you fall into this category, it is unlikely they will be able to do much for you!
Who are they? Just like a bank - we hope you know this one too…!
How do they manage money? Insurance companies usually collect a pool of money (your insurance premiums) and look to invest that while times are good / while they don’t have too many insurance claims, in the hope that they earn some extra return which could help when times are not as good / when there are lots of insurance claims to pay out. Similar to banks, they are usually limited to investing in short term securities - they might need the money very suddenly, for example if there is a natural disaster which destroys homes and other insured property.
How can they help you? From an investing perspective, insurance companies invest their own money (premiums) as part of their business strategy - they don’t usually offer to invest your money for you!
Sovereign Wealth Funds
Who are they? These are pools of money which belong to a country, managed with the purpose of providing financial stability over the long term. These pools of money can be enormous - China’s sovereign wealth funds are the largest in the world and manage over $1.5 trillion combined!
How do they manage money? Sovereign wealth funds usually have a broad range of investments which can include financial securities (stocks, bonds, derivatives), real estate, private companies and commodities such as oil & gas - they can pretty much invest in anything they like! They take calculated risks to provide a return for the purpose of long term financial stability as well as to finance other commitments such as government pensions or investment spending to improve the country’s infrastructure.
How can they help you? While sovereign wealth funds wouldn’t typically help individuals when investing (with some scandalous exceptions), they might help you indirectly by providing a government pension in some countries or helping build new roads in others.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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