Institutional Investors

Key Types of Institutional Investors?

The common types of institutional investors include:

Banks

These are financial institutions that accept deposits and grant loans to those in need of it. When a bank receives deposits and the deposits have not been loaned out, this creates excess reserves. The excess reserves are invested in fixed income securities and money market instruments to earn a return on the excess reserves that will exceed the interest rate paid on the deposits.

Insurance Companies

These invest premiums collected from policyholders on securities or assets that will produce a good return to meet claim settlements. They focus mainly on stable, long-term, and low-risk returns. This kind of investments must be relatively conservative and liquid to meet claim settlements when the need arises.

Pension Funds

This is a scheme established by employers to invest retirement funds contributed by the employee and employer to provide a stable income during retirement. The employer is statutorily required to manage the retirement plan. The employer needs to invest in assets or securities that will provide cash flows that match the timing of the future pension payments (i.e. liabilities).   

Mutual Funds

This is an investment vehicle that collects funds from diverse investors, including retail and institutional, and invest same in different asset class such as:

• Equities
• Bonds
• Real Estate (REITs)
• Money Market Instruments e.g. treasury bills
• Alternatives e.g. commodities, energy, etc

Mutual funds assist investors to benefit from professional management, low entry cost, and diversification. Under mutual funds, investors make money through capital gain, dividends (interest) income, reinvestment growth, and periodic distribution.

Endowment Funds

These are established to provide continuing and consistent financial support to a university, NGO, hospital, religious organization. The endowment assets are invested in securities that will produce real return in the long-term and consistent with the objective of the endowment. This is necessary to protect the value of endowment assets against inflation. Usually, the donations received by the institution such as a university, hospital, NGO, are invested in equities, bonds, real estate, etc and a specific percentage of the annual returns are used for funding scholarships, infrastructure, or research activities.

Sovereign Wealth Funds (SWFs)

These are government-owned investment funds established to provide economic stabilization, infrastructure & development, diversification of national wealth, strategic investments and savings for future generation of citizens. SWFs are funded mainly from oil & natural resources revenue, budget surpluses, trade surpluses, foreign exchange reserves, proceeds from privatization, etc. The acceptable amount of investments in each SWF varies from country to country.

Sovereign Wealth Funds are invested in diversified portfolios, including government & corporate bonds, domestic & foreign equities, real estate, infrastructure projects, commodities & natural resources, hedge funds & alternative investments to earn capital gains, dividends & interest income, rental income, business profits, and long-term asset appreciation.

Hedge Funds

These are well-managed investment funds pooled from high-net-worth individuals and other institutional investors to invest in a wide range of assets using sophisticated, aggressive, and high-risk strategies to earn high returns. Hedge funds invest in complex instruments taking high-risk/ high-reward positions. The money collected from clients are invested to earn investment income, management fee, and performance fee.

Investors in hedge funds include high-net-worth individuals, pension funds, family offices, insurance companies, sovereign wealth funds, endowment funds. They are designed for sophisticated investors seeking high returns.