Institutional Buys No Guarantee of Success.

SOMEBODY who wanted to stage a Broadway show about investing might call it "I Can Get It for You Institutional."

By long usage, "institutional" is to finance what "wholesale" is to the fashion trade - the antithesis of retail. When you invest on the institutional side of the Street, you use your clout to get in on better deals earlier than mere individual investors.

There's certainly truth in this image. Look at something as simple as the sliding scale of loads, or sales charges, collected from buyers of mutual funds sold by brokers. The retail investor putting up $5,000 might pay 5.75 percent; the heavy hitter coming in with $5 million incurs no charge at all.

But it's a mistake to think that retail investing is always for losers, or that institutional investors get nothing but easy money. LongTerm Capital Management LP, the hedge fund that failed so spectacularly in 1998, was a classic of the institutional genre - a sophisticated enterprise from which, as it turned out, retail investors were blessed to be excluded.

Of course Long-Term Capital wasn't typical of all hedge funds, private equity funds and other "alternative investments" that are hot topics in institutional investing nowadays.

There's a reason why regulations severely restrict access to these vehicles for small investors. "They're like prescription drugs," said Mark Hurley, chairman of the mutual fund firm Undiscovered Managers LLC, who has just done a study on the subject. "Used for the right purpose, they can do great things. Used incorrectly, they create disasters."

Consider risks

Perhaps this "Wild West" realm will get more hospitable to retail investors in the future. When it does, though, it isn't a sure thing that it will still offer the great returns, and extra diversification benefits, it can provide to today's institutional clientele.

As for mutual funds, competition has produced choices worth investigating there too. Maybe you need, for example, $10 million to buy into the Vanguard Institutional Index Fund (expense ratio. 0.06 percent, according to the Vanguard Group Web site at vanguard.com) instead of the Vanguard 500 Index Fund (expense ratio 0.18 percent).

Vanguard now also offers something between with its Vanguard 500 Admiral Shares (expense ratio 0.12 percent, minimum investments ranging from $50,000 to $250,000).

Even if you must pay fees at retail, funds have done much to bridge the moat that surrounds institutional investing. Before money market funds began to appear in the early 1970s, for example, small retail savers had to content themselves with passbook accounts or certificates of deposit offering yields set by banks.

Money funds gave them access to shortterm interest-bearing securities, such as commercial paper issued by corporations, offering market interest rates and normally traded in million-dollar lots. On Wall Street, this opening of previously closed doors is called disintermediation; on Main Street, it is known as eliminating the middleman.

Managed-account threat?

The same kind of thing happened with index investing, which began life as an institutional proposition. Vanguard, under founder John Bogle, spearheaded a drive to offer funds to individuals that took the low-cost approach of investing to mimic the behavior of a market index, rather than try to outdo it.

The latest financial product to migrate toward the retail market is the "separate account" or "managed account" - a sort of customized variation on fund investing. The minimum ante for such accounts used to be $500,000 or so. Now some firms offer them to clients with $100,000 or less.

"Managed accounts are perhaps the biggest single threat to mutual fund assets," said Neil Bathon, president of the Boston consulting firm Financial Research Corp.

In evaluating any retail managed account, don't let yourself be beguiled by its "cachet," to use Bathon's word. The worst reason to buy any institutional-style investment is an urge to feel like a big shot.

Chet Currier is a columnist for Bloomberg News.