Changing Institutional Preferences for Stocks: Direct and Indirect Evidence

Institutional investors have rapidly increased their percentage holdings of US equities in recent years. In this paper we update previous research on the nature of institutional stock ownership, extending the evidence by eleven years to the end of 2008. In contrast to previous research, we find that institutions, and particularly hedge funds, have increased their holdings of smaller stocks and decreased their holdings of larger stocks over this period. Institutions as a whole now underweight the largest stocks and overweight the smallest stocks relative to market weights. We then compare the direct evidence of changing institutional preferences to the indirect evidence from a four-factor model.