I can understand why a large financial institution would invest in FX to gain favorable exchange rates. But why would large institutions invest in the ES?

In order to hedge their positions in other securities.

tulanch 

I can understand why a large financial institution would invest in FX to gain favorable exchange rates. But why would large institutions invest in the ES?

Darvish 

In order to hedge their positions in other securities.

I get that in say in FOREX where there is a currency directly related to the FOREX instrument

That's not the case with the S&P 500 as its made up of different stocks

Do these big guys own some S&P 500 unit?

That's what I don't understand

As I said, with FOREX They could be trying to get a discounted exchange rate required for what ever reason

Same would apply for Oil, Gold, etc...

Is there tangible item with the S&P 500 ES ?

Darvish 

In order to hedge their positions in other securities.

Exactly right.

tulanch 

I get that in say in FOREX where there is a currency directly related to the FOREX instrument That's not the case with the S&P 500 as its made up of different stocks Do these big guys own some S&P 500 unit? That's what I don't understand As I said, with FOREX They could be trying to get a discounted exchange rate required for what ever reason Same would apply for Oil, Gold, etc... Is there tangible item with the S&P 500 ES ?

Yes. Think of any financial institution that holds a large portfolio of stocks that is similar in makeup to the S&P index. Many funds attempt to stay very close to the total action of the S&P, for example. The general concept is of a "basket of stocks" that resembles the index in its overall market price movement. Large, diversified holdings will tend to do that (or, depending on the holdings, they may be similar to one of the other indexes.) Even if the holdings are different from the S&P's makeup, in many cases they will move similarly to the index much of the time.

An institution that wants to hedge its risk in stock positions that move similarly to the S&P can take an offsetting position in the ES, short ES where they are long in their stock holdings, and neutralize or control their risk in their stock portfolio, to the extent that it is similar to the S&P. If the value of their stock portfolio declines, the short in ES will make it up.

This is the general reason that there is a futures market, to offload market risk from those who don't want to take it (hedged positions) to those who do (unhedged.)

It's the same as with oil, gold, bonds, currencies or anything else.

Bob.