Liability Driven Investment
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Ultimately if an investor had no liabilities or other
similar requirement to build up an asset pool there would be no need for
investment management. This is the key observation underlying the trend towards
liability driven investment (‘LDI’). In essence, LDI involves
understanding the nature of the investor’s liabilities and designing an
appropriate investment strategy to suit these liabilities. Usually, investors
seek a balance between risk and reward, so this does not necessarily result in
adopting an investment strategy with economic sensitivities that closely match
the sensitivities inherent in the liabilities. Instead, investors may
deliberately seek to mis-match relative to their liabilities, because they
expect to achieve higher returns by doing so.
The aim of these pages is to explore this topic further.
They are based in part on material in an Appendix to Kemp (2005).
2. The ‘core’ element of such a
3. The swaps element of such a structure
4. Mitigating credit risk within swap
contracts using collateralisation
5. Monitoring such a structure
6. Alternative approaches
7. Other comments
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