Can you please elaborate a little when you said, institutions can't because of the law... what does the law say and when you say institutions...are you talking about fund managers, commericals, licensed brokers etc? I'm assuming you're saying that they can't jump in and out of the market, but they can use futures to hedge.... just trying to clear things up...
If stock prices decrease then clients might redeem their investment in a mutual fund. A fund manager might be following a well tested mechanical trading system. The trading system might not generate a sell signal but client fund withdrawal can force a fund to sell. Net result can be a decrease in fund performance. I recall examining volatility of various funds and indexes. Some funds might underperform a general market average in terms of % value increase. Volatility might show a decrease compared to the volatility of a general market average. In other words, a managed mutual fund might be more comfortable to hold than an index fund. Some investments might show less profit than other investments but are easier to hold for a long time, say 30 years because the volatility is more acceptable.
Laws passed since the 1929 crash, state that all financial institutions like banks, mutual funds, pension funds, insurance, etc., can't sell all their securities, this is made to prevent a crash like 1929, If all people sold and sold just because the market is going down, an ordinary swing would become the largest crash in history, so that's why selling/shorting isn't allowed. Only hedge funds may sell/short, therefore their big advantage during bear markets. As for puts options and futures, just there aren't enough of them to protect all the -massive- quantities of shares held by institutions.