Liability Driven Investment - LDI
Categories: Investing
When you invest, your goal might be something like, “make as much as possible,” or “score enough dough to live like a Bond villain.” Other entities have more precise goals.
Take a pension plan. It has certain promises it needs to keep. It needs to turn the money entrusted to it into enough cash to pay for every member’s retirement. The pension plan has obligations. Or, if you'd rather...liabilities.
The pension plan just needs enough of a return to pay these liabilities. That goal defines liability-driven investing.
The investment decisions the pension plan makes are colored by the fact that it's targeting its returns to reach a certain goal...enough to meet its liabilities. It has to match its risk/return expectations to that benchmark.