Understanding Liability-Driven Investments: Strategies and Examples
What Is a Liability-Driven Investment?
A liability-driven investment (LDI) is designed to match financial obligations (liabilities) with appropriate income-generating assets. It’s primarily used by defined-benefit pension plans and insurance companies that guarantee payouts, now and in the future. Common LDIs are government bonds and inflation-linked bonds.
Liability-driven investing involves managing the risks of interest rate fluctuations and market volatility. The disadvantage of liability-driven investing is that it offers lower returns because of the low risk of the securities involved.
Key Takeaways
- Liability-driven investments (LDI) aim to generate income to meet long-term financial obligations, such as pension…
