What is an institutional investor?
An institutional investor is an entity – usually a company – that invests a pooled group money on behalf of other people. Institutional investors include banks, pension funds, hedge funds, REITs, family funds, investment advisors, endowments, and mutual funds.
Retail investors, on the other hand, are individuals and non-professional investors who trade securities and invest their own money through brokerages, etc.
Why should I care about institutional investors?
Institutions control trillions of dollars of investments and make up the majority of stock trade volume, though the percentage of volume from retail investors is steadily increasing.
Because institutions buy and sell large positions in securities, they have a non-negligible impact on the price. If you can identify an undervalued company before the majority of institutions, you can benefit from the increase in price driven by institutional buying.
Institutions are considered "smart money", in that they have teams of trained people dedicated to researching securities, sifting through terabytes of data, talking with company management, and with access to thoroughly researched analyst reports. If you see multiple institutions buying into a company (or selling out of it), there's usually a good reason.
What institutional data and filings are available?
In the United States, the regulator (SEC) enforces certain disclosures from institutional investors, which you can use to get some idea about what institutions are buying and selling. However, there are limitations to these filings, which you need to be aware of.
Form 13F
- This contains a list of an institutions individual holdings, including security/company, number of shares and value.
- It's the primary filing you'll see from institutional investors, and is used by nearly all data providers (including Docoh) to calculate metrics like "institutional ownership" in a company. Here's a list of the most recently filed 13Fs.
- It is a quarterly report, that must be filed within 45 days of the end of each quarter, by institutions controlling more than $100 million in assets.
- While useful, you need to be aware of the shortcomings of 13Fs:
- Only institutions with more than $100m in assets need to file the report, so there are thousands of smaller institutions whose holdings are unknown.
- Most institutions file as late as possible, to not "give their hand away". So you'll find lots of 13F's are filed on the 45 day deadline after each quarter. This means that the data is potentially over 4 months old: they could have bought every security at the beginning of the previous quarter, and it would only just be included in this 13-F. You can never use a 13F as a trading signal that an institution has just bought the security; they are always retrospective for the previous quarter.
- If an institution holds less than $200,000 in a security, and it's also less than 10,000 shares, they don't need to report it.
- The 13F only includes long positions, puts and calls. It does not include shorts and other alternative investment types. In theory an institution could report a $1m holding in a company but actually be net-short in the company – e.g. if they own $2m in short positions – and there's no way of telling from the 13F.
- Institutions commonly make significant mistakes in their 13F. For example, the UBS 13F for Q4 2020 reports trillions of dollars in Tesla positions – larger than the market cap of the company – because they didn't divide the value of their holdings by 1000, as mandated by the Form 13F. Docoh adjusts for these mistakes on the Institutional data reports, but be aware of these potential issues when reading the original 13Fs.
Schedule 13D and Schedule 13G
- Both of these filings are concerned with investors who own more than 5% of a company, and apply to institutions and individuals.
- The 13G is the least interesting of the two, as it deals with "passive" investors; those who have no intention of taking action to change the company. It is also the least timely; an institution has until 45 days after the end of the calendar year to report more than 5% ownership in a company. If they acquire more than 10% of a company, they have until 10 days after the end of the calendar month. Either way, you're looking at a filing for event that is likely at least one month old.
- The 13D is more interesting. If the institutional investor intends to be "activist" (and hence must file a 13D rather than the passive 13G), then they only have until 10 days after they acquire the 5%+ ownership to report the 13D. Given the timeliness of this information, you could theoretically treat this as much more of a positive trading signal.
- It's worth noting that 13Ds are filed for many reasons, many of which are not an "activist investor" intent on disrupting the company and changing the management. For example, these are routinely filed after a merger or some other business combination, where an individual or entity acquires 5%+ ownership as part of the deal, but it's already well-known information prior to the filing.
- The most important section of the 13D is "Item 4. Purpose of Transaction". You'll want to look for language like "acquired the securities for investment purposes", along with words like "undervalued" and descriptions of actions they intend to take based on their ownership stake. If you believe that the activist can make a positive impact on the company and the share price hasn't significantly changed since their purchase, you could consider that a strong trading signal.
To get notified of all new Schedule 13Ds within minutes of them being filed, go to these Docoh search results and click the star in the top-right, above the results. If you want to include amendments (e.g. for when a 5%+ active owner changes their stake), use this search that includes amendments.
You can also see the latest 13D and 13G data on this beneficial dashboard, including any changes from the previous filing.
