Liability Disinterested Investing
Investors concerned about the stability of equity-bond correlations can implement several approaches to mitigate or avoid any permanent loss of capital during a market drawdown when liquidity is needed. Depending on an institution’s specific objectives and preferences, we could implement one or a combination of:
- Cash flow matching a portion of their fixed income assets to expected spending needs.
- Creatively managing credit risk and interest rate duration risk to better balance total returns with diversifying or hedging benefits.
- Utilizing equity option structures to protect against outcomes where diversification within asset allocation may not sufficiently reduce risk.
It is not only the hard lessons of 2022 that may make these approaches appealing, but also instability in relationships underpinning optimized portfolios, the trend toward higher allocations to illiquid assets and the conundrum of maintaining a long-term view in the face of short-term disruptions. We outline our rationale and various implementations that we believe can help institutional investors meet the demands of their sponsoring organizations while potentially minimizing any trade-offs against long-term expectations for market risks and rewards
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