Liability-driven investing (LDI) is an investment strategy that aims to align the investments of a pension fund or other institutional investor with the liabilities or obligations it is expected to meet. In other words, LDI seeks to match the assets held by the investor with the timing and characteristics of the cash flows it is expected to pay out.

The goal of LDI is to manage risk by ensuring that the investor has the necessary assets to meet its future obligations, rather than trying to maximize returns through higher-risk investments. This can be particularly important for pension funds and other investors that have long-term obligations to pay out benefits to beneficiaries over a period of many years. In essence, these obligations are long term liabilities that are very sensitive to the interest and growth rate deviations of the particular markets. By adopting an LDI approach, these investors can help to ensure that they have the necessary assets to meet their future obligations and avoid the risk of running out of money.

LDI typically involves investing in a mix of fixed income securities, that are designed to generate returns that are sufficient to meet the investor’s future cash flow needs. The instruments can include both bonds and various interest rate derivatives that match the needed risk / return profiles and aim to equalise the sensitivities of portfolio investments (assets) to pension funds’ obligations (liabilities).

Please note, none of the information on this blog represents the opinion of my employer and all information does not represent a financial advice.