Institutional Investors and Hedge Funds Are Selling Their Stocks. Retail Is Buying.

Institutional investors rotated out of stocks in all sectors, including energy, financials, healthcare, technology, basic materials, consumer goods, and real estate.

David Paul Morris, Victor J. Blue/Bloomberg

David Paul Morris, Victor J. Blue/Bloomberg

Amid rising inflation, institutional investors are selling stocks at the highest levels seen this year. Not surprisingly, retail investors have generally been left holding the bag.

According to an S&P Global Market Intelligence analysis, in the five weeks ending September 7, long-only investors sold $51 billion worth of equities, offloading nearly 25 percent of the total they’ve sold year-to-date. Meanwhile, compared to both institutional investors and hedge funds, retail investors continued to scoop up stocks in select sectors and remained the biggest buyers during that period.

Christopher Blake, executive director of issuer solutions at S&P Global Market Intelligence, said that while large-scale selling of equities by institutional investors isn’t anything new (they’ve been selling en masse throughout 2022, although the actual amount sold has fluctuated throughout the year), the five-week period ending September 7 has seen the most aggressive selling so far.

“[There’s been a lot of] concern about whether or not we were going to be able to get inflation under control, what type of action the Federal Reserve was going to take, and whether or not those things would actually make a difference or not,” Blake told Institutional Investor.

The trend is consistent across most sectors. From the end of 2021 to the beginning of this September, institutional investors rotated out of stocks of all sectors (energy, financials, healthcare, consumer services, technology, basic materials, consumer goods, real estate, and industrials), remaining flat only in utilities. According to the analysis, the group’s “aggressive” move out of equities likely led to more “indiscriminate selling,” rather than selling out of specific industries.

In contrast, retail investors bought up stocks in basic materials, energy, consumer goods, consumer services, and healthcare over the same period. Nevertheless, retail investors weren’t immune to market factors, and this period was one of the very few this year in which retail investors were overall net sellers, the report said.

Blake said that the difference between institutional and retail investors generally lies in their willingness to take on risk. Because institutional investors are responsible for large amounts of money and are answerable to a board and beneficiaries, they’re generally more risk-averse. When markets begin to trend downward, as they have in 2022, institutional investors are more likely to dump risky assets.

Retail investors, on the other hand, are beholden only to themselves. As a result, Blake said that they’re more likely to follow riskier investment strategies, such as buying dips or keeping their equities in particularly volatile sectors.

Heading into the last three months of 2022, Blake said he doesn’t think institutional investors will return to buying. But he does believe that they’ll need to stop selling at such an aggressive rate if the market has any chance of bouncing back. “It’s really hard for a market to recover in the face of over $50 billion worth of net selling from the largest group in the market over that time frame,” he said, adding that whatever the institutional community does “from a net basis in equities” will be a strong indicator of how the market closes out the year.