Institutional Investors and Equity Markets: On mutual fund liquidity management, performance of private equity funds, and the value premium

A new type of investor has emerged recently. These so-called institutional investors have the particularity to be professional money managers. Today, they represent the majority of the money flowing on financial markets. A benefit is that markets should become more efficient. I investigate whether a prominent anomaly – the “value premium” – is related to the presence of institutional investors. I show that the more these investors own a stock, the lesser that anomaly. A downside is that liquidity management becomes a core issue. I show that these investors need to restrict themselves to a sub-set of liquid stocks. This in turn has important consequences for the performance they obtain for their clients. Finally, these new investors have distinct investment preferences. Their large investments in private equity moved this asset class from nowhere to a $1 trillion industry in just two decades. I show that the performance obtained in private equity is actually very low and discusses mistakes these investors may be making there.