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Institutional investment management is an organization’s financial plan to meet specific goals through securities and assets. Investment management is essential, but improper investment management on a large scale could create risk distortions in the market.
What Creates Risk Distortions
Risk distortions occur when improper institutional investment management saturates the market. Two reasons risk distortions occur are:
- Issuing Debt – The subprime mortgage market crash was an example of risk distortions caused by issuing debt. An institution’s worth is calculated with the assumption that credit lent out will be repaid or regained.
- Excess Liquidity – The market includes excess liquidity—financial assets that can be “liquidated” (sold off quickly)—in a company’s worth. When these assets cannot be sold at the price assumed or as quickly as assumed, there are risk distortions.
Some financial experts point to size and scale as the reason why institutional investment management can cause risk distortions. Size and scale affect:
- Balance of Power in the Market– When large scale institutions and groups invest on a large scale, that’s a large portion of the market that’s serving the needs of just one institution. If the entire group pulls out or fails at once, that distorts the market.
- Influencing Market Trends – When one organization’s profits seemed to soar by gambling on subprime mortgages, similar financial institutions followed suit. With no proper investment management success, too many institutions gambled on a huge risk, causing a devastating downturn in the market.
