bobcat2 wrote:A definition of Liability Driven Investing (LDI)
LDI strategies are goal based investment strategies that seek to maximize the probability of reaching a financial goal. Often an LDI strategy is implemented by focusing on duration matching assets to future liabilities.gilgamesh wrote:Bob, in a LDI, once you start matching liabilities to assets, could those assets be part of the rebalancing and be sold? Or is it a floor, not to be sold?
I believe as you can see from the above an LDI is simply an investment strategy that is goal based, as compared to conventional strategies which focus on trading off returns against risks with little regard for meeting particular goals for the investor. So yes, you could rebalance safe assets out of the floor in an LDI strategy, but it sort of defeats the purpose of the strategy, which is to avoid having to do just that.
BobK thank you!
It is kind of confusing....it defeats it's purpose but is allowed.
It's hard to pin down what a strict LDI is...For, instance
"Dedicated portfolio theory focuses explicitly on cash flows and time horizons. If done properly, it allocates to fixed income no more than the minimum funds necessary to generate the desired cash flows, and all other funds can be invested elsewhere."
And this definition seems to contradict what you said later...
"Or is it some sort of Rube Goldberg contraption in which there are two investment strategies awkwardly compartmentalizing a large portfolio into two smaller portfolios - one driven by a traditional benchmark driven strategy and the other driven by some sort of LDI matching strategy? If so, that doesn't make much sense. For your portfolio you need a single strategy, not two non-overlapping, non coordinated, sub-strategies."
If LDI allows all other funds to be invested elsewhere, isn't it advocating a traditional benchmark driven strategy for all of these 'other funds'. It looks like LDI allows for this compartmentalization.