Institutional investors can be categorized into four main groups, pension funds, insurance companies, endowments, and sovereign wealth funds. Let's look at each one in more detail. Pension funds, a pension funds investment strategy is driven by the nature of their obligations to the underlying pension owners. Pension funds estimate their obligations using the present value of future payments, which stretch far into the future. The calculation of these obligations is complex and involves assumptions about discount rates, inflation and mortality. However, the fund also needs some immediate liquidity to reflect payments to current retirees.

Matching the maturity of the asset portfolio with the maturity of the liabilities is known as asset and liability management. Pension funds will mostly invest in assets with a long-term investment horizon to capture higher returns and meet the long-term obligations to the policy holders. However, they will also invest in some shorter term assets to meet payments to current retirees.

A key challenge for pension funds is creating a portfolio of assets which match their obligations. Most of their obligations are long-term, and the immediate need for liquidity is limited. Often the returns on the portfolio are exempt from tax, so they are indifference between tax free and taxable returns.