Westport Geek

A Financial Technologist's Blog

Liability-Driven Investing

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What is Liability-Driven Investing?

Many institutional investors have liabilities they must pay in the future, such as the retirement benefits that pension funds pay, or disability payments in the case of an insurance company. To meet these future obligations, pension funds, insurance companies and other institutions invest a pool of assets with the goal of paying their future liabilities from the returns on those assets. If returns are insufficient to cover the liabilities, the institution must contribute capital to fund the liabilities.

Historically, bonds were used as a partial hedge for these interest rate risks but the recent growth in LDI has focused on using swaps and other derivatives. These offer significant additional flexibility and capital efficiency compared to bonds.

Resources on PIMCO

LDI on wiki

Investment Strategies for an Insurance Company’s Capital Account


Written by walkinggeek

May 26, 2010 at 9:42 am

Posted in Investment

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