What Is an Institutional Fund?
An institutional fund is a collective investment vehicle available only to large institutional investors. These funds build comprehensive portfolios for their clients, offer varying market objectives, and can invest for a variety of purposes, including educational endowments, nonprofit foundations, and retirement plans. The types of institutions that invest in institutional funds include companies, charities, and governments.
Key Takeaways
- An institutional fund is an investment fund with assets held exclusively by institutional investors.
- Institutional funds exist because large institutions have different needs than smaller investors.
- Institutional fund offerings can include institutional shares of a mutual fund, commingled institutional funds, and separate institutional accounts.
Understanding Institutional Funds
Institutional funds have arisen to meet the unique demands and needs of larger institutions, which tend to differ from other types of investors. These funds have specific requirements, including large minimum investments.
Institutional clients generally have lots more money to invest than the average investor. This greater access to capital, among other things, can result in them being billed less. Institutional investors also tend to have longer time horizons, providing more scope to invest in illiquid assets that can generate higher returns. Funds aimed at institutional investors sometimes focus on this advantage.
Institutions often face more limits than retail investors, too. Many nonprofits cannot invest in companies that profit from perceived social ills. A religious charity, for example, might need to avoid investing in alcohol, while an environmental group might want to stay out of oil production. Such specific requirements rule out investing in an index fund tracking the S&P 500 Index.
Types of Institutional Funds
Investment managers offer a few types of fund structures specifically for institutional clients. These funds are usually part of a pooled fund managed comprehensively for efficient operations and transactional costs. Institutional fund offerings can include the following:
Institutional Mutual Fund Share Classes
Mutual funds offer institutional shares. These shares have their own investing requirements and fee structure—institutional shares usually carry the lowest expense ratios of all the share classes in a mutual fund. The minimum investment is generally around $100,000, although it can be much higher.
Institutional Commingled Funds
Outside of mutual fund offerings, an investment manager may also create institutional commingled funds. Institutional commingled funds will have similar investing and fund requirements as institutional mutual fund share classes. They also have their own fee structure and can offer low expense ratios due to economies of scale from more substantial investments.
Separate Accounts
Investment managers also offer separate account management for institutional investors. Separate accounts are most often used when an institutional client seeks to manage assets outside of established investment funds provided by the firm.
In some cases, investment managers may be responsible for managing all the assets for an institutional client in a broadly diversified separate account. Separate accounts will have their own fee structures determined by the investment manager, and these charges may be higher than other institutional fund fees because of the greater customization involved with managing the fund.
FAQs
An institutional fund is a type of collective investment option that is available to a variety of institutional investors. The list includes high-net-worth individuals, governments, charities, companies, or entities such as hedge funds, endowments, mutual funds, pension funds, etc.
What are institutional funds? ›
An institutional fund is an investment fund with assets held exclusively by institutional investors. Institutional funds exist because large institutions have different needs than smaller investors.
What are the different types of institutional investors? ›
Broadly speaking, there are six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds, and insurance companies.
What are institutional money funds? ›
Institutional prime and institutional municipal money market mutual funds are funds that do not qualify as retail funds—i.e., they may be held by institutional investors.
What are institutional funds vs. mutual funds? ›
Mutual funds are primarily retail products, which gather assets from vast numbers of individuals who have limited balances to invest. Institutional accounts gather assets from a limited number of clients who have millions or even billions of dollars to invest.
What is an example of an institutional account? ›
Institutional Account means the account of: (1) a bank, savings and loan association, insurance company or registered investment company; (2) an investment adviser registered either with the SEC under section 203 of the Investment Advisers Act or with a state securities commission (or any agency or office performing ...
Is an institutional fund a mutual fund? ›
The definition of institutional funds reads as “a mutual fund that offers low charges and a very high minimum investment.” An institutional fund is marketed to institutional investors like pension funds, hedge funds, and high net-worth individuals.
Who are the big three institutional investors? ›
The “Big Three” institutional investors, BlackRock, State Street Global Advisors and Vanguard, have significant influence on the environmental, social and governance (ESG) policies and related disclosure for public companies.
What is the difference between institutional and private investors? ›
A retail investor is an individual or nonprofessional investor who buys and sells securities through brokerage firms or retirement accounts like 401(k)s. Institutional investors do not use their own money—they invest the money of others on their behalf.
What is an institutional liquidity fund? ›
The ILFs are short-term money market funds and offered in three currency funds, The Sterling Fund, The Euro Fund, The United States Dollar Fund (LVNAV) and The United States Dollar Treasury Fund (PDCNAV).
Institutional investors tend to have a significant advantage over individual investors in investment knowledge and research. Institutional investors have more resources, allowing them to conduct more detailed research and therefore make more informed investment decisions.
What is an institutional hedge fund? ›
Hedge Funds pool capital from accredited or institutional investors and use various strategies to generate returns for their investors. These funds are managed more actively and aggressively than traditional investment funds, aiming to achieve positive returns regardless of the overall market conditions.
What are the four different institutional arrangements? ›
The institutional arrangements for implementation are formed by several local social actors who constitute social actors, and are categorized into the following sectors: 1) the public sector; 2) the private sector; 3) the academic/educational sector; and 4) civil society.
What are the 3 types of financial institutions? ›
Banks, Thrifts, and Credit Unions - What's the Difference? There are three major types of depository institutions in the United States. They are commercial banks, thrifts (which include savings and loan associations and savings banks) and credit unions.
What are the 4 main categories of financial institutions and their main purpose? ›
The most common types of financial institutions include banks, credit unions, insurance companies, and investment companies. These entities offer various products and services for individual and commercial clients, such as deposits, loans, investments, and currency exchange.
