Risk management of liability-driven investments challenges asset managers
By David Bullen and Gavin Dixon,
Interest rate (IR) markets have changed
substantially since the financial crisis, both visibly and also
less obviously in their market structure. These differences
challenge asset management firms attempting to operate on
behalf of their clients, especially in liability-driven
investing (LDI), where the rules and market are continuing to
change around them. The risk management requirements of
liability-driven investments challenge asset managers who turn
to banks for solutions and liquidity in their desire to
transfer risk on behalf of their clients.
New factors that have yet to impact fully,
such as the greater flexibility surrounding pensions, prompting
elevated transfer-out requests, increases the appetite for LDI
fund flexibility. However, this desire for flexibility is at
odds with reduced market liquidity and the structural changes
that will make flexibility more costly. The reduced market
liquidity is largely a result of a reduction in bank balance
sheet levels deployed behind IR market-making functions in the
bond, repo and swap sectors and the general profitability of
investment bank franchises.
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