Institutional Investors

 

An institutional investor is an investor whose capital investments are so high and / or occur so frequently that they require a commercially organized business operation. The opposite is the Private Investor.

 

Generally

 

In securities law and investor protection, a distinction is made between private investors and institutional investors. Private investors are predominantly natural persons, while institutional investors are among the companies. This classification has legal consequences with regard to investment advice.

 

Legal issues

 

Institutional investors are regarded as “professional customers” within the meaning of Section 67 (2) WpHG, for whom investment services companies can assume that they have sufficient experience, knowledge and expertise to make their own investment decisions and to adequately assess the associated risks can. A financial instrument is suitable for professional clients if it corresponds to the investment objectives (born professional clients) or the investment objectives and financial circumstances (born professional clients). Institutional investors include credit institutions, investment companies, insurance companies, funds, hedge funds, pension funds, foundations, Churches or other non-banks such as large companies or shadow banks as well as the federal government and the states as national governments or regional governments within the meaning of Section 67 (2) sentence 2 no. 3 WpHG.

 

In some jurisdictions, such institutional investors are also referred to as Qualified Institutional Investors.

In the Financial Market Directive valid in all EU member states, institutional investors are further subdivided into professional investors and suitable counterparties. Suitable counterparties are investors who are themselves qualified to issue investments, i.e. banks and corresponding government agencies. They enjoy almost no investor protection under the Financial Market Directive. It is limited to securing trust in the integrity and fairness of the capital market.

 

The remaining institutional investors are the professional investors. Your level of protection lies between that of private investors and the appropriate counterparties. The banks must draw up guidelines according to which they treat investors as professional investors, and these criteria must meet the minimum legal standard under Section 67 (7) of the WpHG. Specific prerequisites typical of practice are that the investor has sufficiently high securities assets (more than EUR 500.000), typical professional knowledge (at least one year of work in a relevant profession or equivalent skills) and sufficient practical trading experience (over the immediately preceding 12 months at least 10 transactions per Quarter, each of which had a turnover of at least EUR 25.000).

 

The law knows born and born professional investors. The former are considered professional from the outset and must expressly ask the bank for the higher level of protection offered by private investors if they want to take advantage of this. The latter, on the other hand, first have to expressly consent to the classification before the bank can withdraw the level of protection of a private investor. In particular, private individuals can only lose their private investor protection if they have given their express prior consent.

 

Investment objectives

 

For institutional investors, too, there are three investment goals with mutual conflicting goals, namely return, security (risk) and liquidity (fungibility). This magic triangle of investment is characterized by the fact that not all three goals can be achieved equally and to the same extent. The return signals the earning power of an investment property to the investor, while the risk consists of the risk of whether and to what extent the investor has to reckon with the loss of the capital invested. A high return is usually associated with a high risk.

 

Liquidity says something about how quickly an investor can convert the investment back into money without capital losses. If the return is high and the risk is high at the same time, liquidity is limited.

The investment objects can be divided into risk classes depending on the feasibility of the investment objectives. Risk-averse investors prefer security and liquidity, while those willing to take risks prefer the return and consciously accept risks. Institutional investors do not form a homogeneous group because they have different investment objectives.

 

While hedge funds are prepared to take on very large investment risks, insurance companies tend to pursue low-risk investment strategies. Institutional investors usually do not pursue short-term, but rather medium-term or mostly long-term investment goals.