In this deep dive series we will investigate the most important considerations for developing successful LDI strategies.
In this first article of the series on liability-driven investments, we look at the risk of changes in the general level of interest rates. Changes in interest rate levels can have a large impact on the valuation of assets and liabilities. Besides reducing volatility, an interest rate hedge also affects expected returns.
Investors with future liabilities are normally exposed to interest rate risk. A fall in interest rates will increase the value placed on future liabilities. By adopting a liability-driven investment (LDI) strategy, much of this interest rate risk can be mitigated. We will take a look at how a good LDI strategy should protect against the various interest rate risk components, and how much focus should be given to each. In this first article, we consider protecting against changes in the general level of interest rates.
