Last Updated on March 4, 2025
Overview – Following the Major Players
It’s no mystery that not all investors are equal; as we’ve discussed before, investors are generally split into the following groups: retail, accredited, and institutional. While most investors fall into the first two categories, only a select few count themselves among the ranks of “institutional”.
Whether it’s a hedge fund, university endowment, or sovereign wealth fund, these “investors” almost always manage other individuals’ capital, granting them considerable financial resources to work with.
Due to this, it’s only natural that these major players will inevitably capture the attention of other investors, but is it sensible to follow whatever these major players are doing such as the strategies they deploy and the investments they pursue? Let’s find out.
Institutional Investors Garner Lots of Attention, and Understandably So
Owing to their size, influence, and amount of capital they wield, institutional investors are closely followed and reported on. This isn’t to say they dominate the front pages of every financial newspaper, but their moves certainly don’t go unnoticed.
Because of their unique status among investors, the actions they take may hint toward a larger trend or economic/investment shift that smaller investors may not be privy to. Like any other competent investor, institutional players don’t make any moves without having a reason behind them: this is one of the reasons why they’re closely followed.
For example, imagine a sovereign wealth fund that has decided to invest billions of dollars into Asian-based renewable energy companies. Is this a sign of confidence in renewable energy, Asia as an investment destination, or some combination of both? It would be foolish to ignore such a move and would certainly warrant further investigation.
Similarly, if a major hedge fund has decided to increasingly divest from EU-based tech companies, it would be best to find out the rationale behind their decision, and if this move can be interpreted as a vote of no confidence in specific tech companies or the EU at large.
No investor is an island: the decisions an individual investor makes are, in part, influenced by what others are doing and by what’s going on around them. Investors who ” turn away” from the world are doing themselves a major disservice by not staying up to date with the latest developments and relevant information.
Therefore, when some of the largest players make a move, it would be naive for other investors to believe that these moves were made in isolation. Sometimes, figuring out the thought processes of institutional investors may lead to new information or insights.
What Makes Sense for Institutional Investors Doesn’t Necessarily Apply to Everyone Else
How many times in your life have you attempted to copy something that appears to be successful with other people, only for it not to produce the same results when you do it? This is, for most people, a very frustrating experience, yet it teaches an invaluable lesson: what works well for others may not necessarily be the case for you.
The same lesson applies in the context of our discussion: a move that makes sense for an institutional investor may prove to be unorthodox, or outright foolish, when copied by other investors.
To help understand why, let’s go over some differences between institutional investors and everyone else.
As we know, most institutional investors are responsible for managing the capital of other people. Hedge funds manage their clients’ money, university endowments look after a university’s financial resources, while sovereign wealth funds act at the behest of a national government.
Because of this, many institutional investors are bound to follow specific principles and philosophies as outlined by their owners/managers/clients. For example, some institutional investors are only allowed to invest in certain countries/industries that have robust climate-related policies, while others may only invest in areas they believe will grant the most long-term stability.
Therefore, when institutional investors act, they do so while following overarching principles they are bound to, principles that not all investors will share or agree with. This may explain why the moves made by institutional investors may seem odd to retail and accredited investors, but to them, they’re just sticking to the principles they’re bound to.
It can be argued that some of the moves institutional investors make have an undertone of ideology, and aren’t always based entirely on logical analysis and rationality.
Next, most retail and accredited investors are the sole decision-makers when it comes to managing their portfolios, and have free reign to decide which strategies to pursue and how to analyze any prospects that interest them. Institutional investors, on the other hand, usually don’t enjoy this same level of freedom.
Institutional investors are usually comprised of an executive team, a board of directors, countless staff, and varying degrees of bureaucracy. Due to this, the decisions they make are an aggregate of other people’s work, ideas, and beliefs, not just one person’s.
Finally, the investment strategies that institutional investors follow may vary greatly from the ones usually followed by smaller investors.
Owing to their size and the vast capital to work with, the strategies that institutional investors deploy are usually very detailed. For example, here are the strategies outlined by the Government Pension Fund of Norway and the Abu Dhabi Investment Authority.
This isn’t to say that smaller investors only deploy “basic” strategies, but the strategies needed to manage millions, or in many cases, billions, of dollars worth of capital and assets will most likely differ from what’s needed to manage several thousands of dollars.
With all of this in mind, we can see why institutional investors’ actions and decisions can’t always be copied by everyone else – they operate on a completely different scale than everyone else.
This doesn’t mean that some elements of what institutional investors do can’t be emulated or used as a source of inspiration. Rather, blindly copying what the major players are doing usually won’t end well due to the world of differences.
Keeping an Eye on Institutional Investors Is Worthwhile, but Don’t Look Too Closely
Institutional investors play a major role in global financial markets, and this will continue to be the case well into the future. Because the moves they make may hint toward larger economic trends or potential investment opportunities, it may be worthwhile to observe what they’re doing and try to understand the rationale behind their actions.
While observing the moves of institutional investors is important, it’s easy to fall into the trap of believing that what they’re doing can be copied by any other investor, which we know based on our previous discussion isn’t always the case.
Therefore, investors are left with a delicate balancing act: knowing how to observe what institutional investors are currently up to, while simultaneously knowing not to look too closely and make the mistake of trying to copy what they’re doing and expecting similar results.
Wrapping Up
Whether it’s a mutual fund, pension fund, university endowment, or sovereign wealth fund, institutional investors are a common sight in the investment world. Because of their size, influence, and capital to work with, it’s no surprise that the moves they make rarely go unnoticed.
While it’s tempting to think that copying what these big players are doing will immediately lead to the same level of success, this is a very naive line of thought. Institutional investors operate on a completely different level than their retail and accredited counterparts, so what works for them won’t always apply to everyone else.
Trying to understand the rationale behind an institutional investor’s moves is understandable, and may even prove to be beneficial when trying to uncover new information or insights. However, it’s important not to look too closely and inadvertently fall into the trap of trying to copy whatever it is they’re doing.
