What is an Institutional Investor and Hedge Fund? A Clear Explanation

When you’re trading FX,

• “There was buying from hedge funds”
• “Profits booked by fund players”
• “Institutions setting the traders’ moves”

you may hear phrases like these, right?

But in reality,

“What exactly is a hedge fund?”

is what many people are thinking.

This time, I’ll summarize as clearly as possible the hedge funds, which are an incredibly important presence in the FX market.

What is a hedge fund?

In simple terms,

“A professional group that manages enormous money to seek profits”

is what it is.

It feels similar to ordinary mutual funds, but while mutual funds are advised to invest diversely in stocks, bonds, etc., hedge funds

• from wealthy individuals
• from institutional investors
• from ultra-rich people

raise and manage funds with that in mind.

Japanese funds

So, are there actually corporations like that? I looked into Japanese funds.

• Older Murakami fund family (Lenno, City Index Eleven, etc.)
  • : A investing group that follows the well-known “vocal shareholder” movement in the Japanese market. Known for investing in undervalued listed companies and demanding corporate value enhancement and shareholder return.
• Ichigo Asset Management
  • : An independent asset management company focusing on Japan’s small-to-mid caps. Supports company growth through long-term engagement (dialogue).

Domestic independent asset managers

• Sporks Asset Management
  • : Founded by Shuhei Abe, one of Japan’s leading independent asset managers. Strength lies in bottom-up research; also manages hedge-style funds that target absolute returns while controlling market risk.

In reality, there are countless such players both domestically and overseas.

Differences from ordinary mutual funds

Ordinary mutual funds typically emphasize

• long-term investing
• diversification
• relatively safe management

and are structured so that even beginners can start.

On the other hand, hedge funds are quite 자유롭다 (free).

• short selling
• leverage
• derivatives
• ultra-short-term trading

and more are used.

In other words,

“aiming for profits whether prices go up or down”

is their hallmark.

Why “hedge”?

Actually, in the old days,

“to avoid risk (hedge)”

is where hedge funds originated.

For example,

• holding both long and short positions
• hedging currencies while buying stocks

things like that.

But today,

“a huge investment group that relentlessly pursues profits”

is the closer image.

What do hedge funds do in FX?

This is the interesting part.

Hedge funds analyze

• interest rates
• inflation
• central banks
• the economy
• war
• politics

and think about

“which currency will strengthen?”

They consider.

For example,

• US rate hikes
  ↓
• the dollar seems to strengthen
  ↓
• buying dollars

something like that.

Why can they move the market?

The reason is simple: money is on a different scale.

While individual traders trade

• 1 lot
• 5 lots
• 10 lots

at a time, hedge funds move at

levels of hundreds, thousands, or tens of thousands of lots.

In other words,

“prices tend to move toward the direction where big money flows”

that’s the idea.

But you cannot place orders all at once

This is quite important.

Hedge funds

• place split orders
• use algorithms
• search for liquidity

do these things.

The reason is

to find “where large orders can be executed.”

Because of that,

stops hunting movements occur.

For example,

• above a high
• below a low

there are large stop-loss orders.

Once that is broken,

• stop orders
• breakout orders

are unleashed at once.

Then liquidity increases,

making it easier for hedge funds to execute large orders.

Therefore,

• wicks
• rapid rise
• rapid fall
• fake breaks

tend to occur.

Are hedge funds the enemies?

When I started trading FX,

I often heard that “institutions chase individual traders.”

But in reality,

“Rather than targeting individuals, they’re looking for places that can handle large orders”

is closer to the truth.

From the hedge funds’ point of view,

the loss of a single individual is too small.

However,

places where a lot of individual losses accumulate

are important.

What hedge funds pay attention to

What’s especially important are,

• interest rate differentials
• central banks
• employment data
• CPI
• the economy
• bond yields

and so on.

In other words,

“the flows of money around the world”

is what they watch closely.

That’s why, the higher the time frame you look at,

• fundamental
• monetary policy

has a stronger influence.

What should individual traders do?

This is the most important part.

Rather than expecting to beat hedge funds,

the closer approach is to

“follow the big money flow.”

So,

• watch the higher time frames
• watch interest rates
• don’t go too much against the trend

this mindset is key.

Summary

Hedge funds are

a team of professionals managing enormous funds

and in the FX market,

• interest rates
• the economy
• central banks
• liquidity

are watched to move large sums of money.

So in FX,

• rapid rises
• rapid falls
• wicks
• fake breaks

occur.

The market isn’t just a game of candlesticks; it’s

“a clash of enormous money from around the world”

that’s what it is.