Institutional Ownership of Futures

December 7, 2022

If you have purchased a mutual fund or invested in a pension fund, you have added to institutional ownership of a security. For more complex and risky securities such as futures, institutional owners make up the majority of holdings. 

What is Institutional Ownership?

Institutional ownership, also called institutional holdings, refers to the amount of an investment product that institutional investors own.

In common stock trading, most ownership is held by institutions. Institutional holdings of public companies are available to the public — any interested investor can look at the Securities and Exchange Commission (SEC) Form 13-D filings to see the size of institutional investments and recent trades.

What Is an Institutional Investor?

Institutional investors are firms that collect money and make investment decisions on behalf of clients. Common institutional investors include:

  • Mutual funds
  • Pension funds
  • Hedge Funds
  • Endowment funds
  • Private foundations
  • Insurance companies
  • Investment banks

While there are many differences between types of institutional investors, every institution provides a sophisticated level of investment expertise and has access to a large amount of money.

Some institutional investments are mostly retail investors — mutual funds, ETFs and pensions — while others are mostly sophisticated or accredited investors, such as hedge funds.

Institutional Ownership Can Influence Prices

Institutions, compared to individual investors, typically make investment decisions based on an extensive financial research team. They also make much larger purchases than the average individual investor, because they are purchasing a block for an entire pool of investors.

Because of their size and the research behind them, many investors look to institutional investors for investment ideas. For example, fund managers often appear on financial television shows or podcasts to talk about investment strategy. 

When an institution purchases a large block of equity holdings, this can be an incentive for retail investors to also purchase the stock. In turn, this can raise the market value of the stock.

Many fund managers speak publicly on the securities they hold, both to educate and to promote the position. The goal of fund managers after purchasing a large position is to try to drive its share price up.

In the same vein, institutional owners that make a decision to quickly exit a large number of shares can be interpreted as speculation of the company’s future value and drive its stock price down.

Institutional Ownership of Futures

Futures contracts are a type of derivative contract that give investors the right to buy or sell an asset for a predetermined price and amount at a set future date.

Institutional investors make up the majority of the futures market because of volatility and leverage risks, as well as large contract sizes.

According to the Commodity Futures Trading Commission (CFTC), futures contracts are often valued at $100,000 or more, making even margin payments quite high.

Some institutions may also own and operate warehouses that allow them to accept physical delivery of commodities as opposed to selling futures before the expiration date.

Hedge Fund Ownership of Futures

Hedge funds generally require potential investors to be accredited or qualified, which means having a minimum level of income or assets and/or a high level of sophistication. 

This is because hedge funds typically have a more flexible investment methodology, take greater risks and are subject to fewer regulations meant to protect retail investors.

This flexibility allows hedge fund portfolio managers to use leverage and other speculative investment strategies such as short-selling and investing in derivatives such as options and futures that may not be suited for retail investors.

Can Mutual Funds Invest in Futures?

One of the most common institutional investors, mutual funds, are available to retail investors and require a low minimum investment. Because of this, mutual funds typically only invest in traditional asset classes such as stocks and bonds.

However, mutual funds do have the ability to invest in options and futures. These mutual funds would be considered specialty funds which are regulated slightly differently than standard funds.

For example, commodities mutual funds often buy futures contracts to gain exposure to commodities, as opposed to investing in the physical underlying asset.

What are Managed Futures?

Managed futures are a type of investment fund that manages a portfolio of futures contracts. Similar to how mutual funds allow investors to gain exposure to a wide variety of stocks with a lower initial investment and less monitoring, managed futures give investors portfolio diversification through futures contracts without the added stress of managing futures trades. 

The Bottom Line

Institutional ownership refers to the amount of total shares held by institutional investors compared to those purchased by individual investors on the stock market.

There are a variety of types of institutional investors which all have varying investment strategies, requirements and regulations. 

For example, some institutions trade almost exclusively stocks and bonds, while others employ more complex and risky investment strategies such as futures trading. In both the stock market and alternative markets, institutional investors make up a large portion of holdings. 

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