Liability Driven Investments..

[sarsi]

This must be what an anxiety attack feels like. Judging from reactions and silence and likes on other posts, maybe it's me telling you there's a problem that's causing the doubt so don't let me get in the way. I never said anything about brink of collapse solvency issue liquidity problem - that's all from thebrit's commentary to what I'm saying so at least for now pls don't read into this issue as it's some argument or exchange of opinions. what I'm saying isn't a response to someone else it's just my message and dull old financial advice, Your pension fund should not be managed like a hedge fund because hedge fund takes a lot of market and trading risk that is far higher than you are used to. I think your fund manager is being a little cavalier from the recent news and no harm giving some heat to them. What I really think uk should be doing is to completely depart from the hedge fund model or cap it up to you. But don't take ur eye off it because ur fund is now eligible collateral and if all goes well, nothing happens.

[shri]

@sarsi - is there a reason that pensions need to hedge.. Needing to hedge some bets does not mean acting like you are in the set of billions.

By its very definition isn't 60/40 a hedge of sorts? Instead of going balls in on equities.. You are hedging by using fixed income instruments.

I am curious what it is about UK pensions that need to be hedged and how much do funds need to borrow to fimund these hedges.

One thing I can think of is unlike MPF type savings plans, pensions are guaranteed (or are they not in the UK?).

How widespread is this LDI structure across global pensions? Or is this a UK only issue?
@TheBrit let me find Matt's newsletter.. I think I get it. Don't worry.. Will find it.

[shri]

Very interesting read... Closer to understanding the very basics.

Pay walled.. Perhaps someone can find this published for free somewhere.

https://www.bloomberg.com/opinion/ar...t-margin-calls


https://www.bloomberg.com/account/ne...rs/money-stuff

[hullexile]

This must be what an anxiety attack feels like. Judging from reactions and silence and likes on other posts, maybe it's me telling you there's a problem that's causing the doubt so don't let me get in the way. I never said anything about brink of collapse solvency issue liquidity problem - that's all from thebrit's commentary to what I'm saying so at least for now pls don't read into this issue as it's some argument or exchange of opinions. what I'm saying isn't a response to someone else it's just my message and dull old financial advice, Your pension fund should not be managed like a hedge fund because hedge fund takes a lot of market and trading risk that is far higher than you are used to. I think your fund manager is being a little cavalier from the recent news and no harm giving some heat to them. What I really think uk should be doing is to completely depart from the hedge fund model or cap it up to you. But don't take ur eye off it because ur fund is now eligible collateral and if all goes well, nothing happens.

You are clearly passionate about this whereas everyone else seems to see no issue. I am not criticising you just trying to understand the gulf.

I don't have a private pension.

[sarsi]

Test. Full post just doesn't show up past my last cut off even w browser change. I try later

[Tom_UK]

As others have pointed out LDI is not an issue (and of course is good risk management).

My experience is the issues are caused by fund manager innovation marketed without appropriate accounting of the liquidity risk.

just like interest rates have a term structure (e.g. different rates for 5 year bond than for a 30 year), so do the credit spread on bonds (the interest paid above a government bond that companies pay for the greater risk they represent). In general the rate (and spread) is lower for longer term vs shorter term.

Some clever person said whilst LDI requires us to match the interest rate risk, why don’t we still capture the higher spread at say 5 years by buying a 5 year bond from say Unilever and then use a ‘swap’ to change the interest rate duration to that of my liability say 30 years.

All sounds clever until you think about how you pay your margin call on the swap. So like we saw if interest rates fall a great amount maybe the value of the bond can fall 50% or more, this is fine under LDI as the liability will also fall 50% and if I just held a 30 year bond no worries.

However as I used a swap I now need to pay cash of 50% of all my fund right now, this requires me to sell my assets under a fire sale eroding value, I may even have very illiquid assets and can’t sell them, I may go broke or will have to loan money at very poor terms.

Clearly Solvency regimes haven’t correctly calibrated the liquidity risk which would normally make floating this type of risk unviable.

[sarsi]

So I think my phone is haunted or some content tripped a secret galaxy zero sum rule. There's a part that just doesn't show and not at fixed points however I cut and paste or redraft. Have to abandon

Pls pls pls just rem to chat with all ur friends and relatives about having your pensions used as brokerage funds and not sitting in bank with usual bank protection confines. I am not suggesting any misconduct or insider scam - they probably discussed this for months with accountants lawyers etc. But it is bad financial management and even worse, done primarily for ease of preparing filing obligations. All it takes is for enough emails to govt addy asking for more details like so where are our pensions actually held? Are they in a bank? What was the actual derivatives trade? Reply or no, they will get the vibe ppl want more info and are concerned. This is really important. Now might be the best time because of timing with other issues and politicians are sensitive to public opinion atm.

It is the construct that is the problem and the playground it is happening at. Margin trading alone should have sent ppl scurrying for the hills so the decision makers at the pension fund are clearly forgetting their role in the big picture. This is a full combination of margin trading with derivative contracts as a financial institution in a hedge trading framework. I wish we knew the actual derivatives trade so it's easier to use as example. In any case, the potential loss is >100% so long as whatever they were betting on is still a live figure in the market. Do not forget about this and keep your eye on it unless and until someone announces your pension is deposited in a custodian account or at least no longer being traded like this. It has nothing to do with healthy funding ratios or leverage ratios or how nice and robust and overfunded they look right now. Can I remind that if the figures look real nice now, the credit is that of BOE saving the day and not really the strategy that worked out so well?

[Sith]

So I think my phone is haunted or some content tripped a secret galaxy zero sum rule. There's a part that just doesn't show and not at fixed points however I cut and paste or redraft. Have to abandon

Pls pls pls just rem to chat with all ur friends and relatives about having your pensions used as brokerage funds and not sitting in bank with usual bank protection confines. I am not suggesting any misconduct or insider scam - they probably discussed this for months with accountants lawyers etc. But it is bad financial management and even worse, done primarily for ease of preparing filing obligations. All it takes is for enough emails to govt addy asking for more details like so where are our pensions actually held? Are they in a bank? What was the actual derivatives trade? Reply or no, they will get the vibe ppl want more info and are concerned. This is really important. Now might be the best time because of timing with other issues and politicians are sensitive to public opinion atm.

It is the construct that is the problem and the playground it is happening at. Margin trading alone should have sent ppl scurrying for the hills so the decision makers at the pension fund are clearly forgetting their role in the big picture. This is a full combination of margin trading with derivative contracts as a financial institution in a hedge trading framework. I wish we knew the actual derivatives trade so it's easier to use as example. In any case, the potential loss is >100% so long as whatever they were betting on is still a live figure in the market. Do not forget about this and keep your eye on it unless and until someone announces your pension is deposited in a custodian account or at least no longer being traded like this. It has nothing to do with healthy funding ratios or leverage ratios or how nice and robust and overfunded they look right now. Can I remind that if the figures look real nice now, the credit is that of BOE saving the day and not really the strategy that worked out so well?

You really have no idea what you are talking about.

Just about your comment about deposit it in a bank: You want your pension deposited in a bank account? So that is one way to make sure that by the time you should receive your pension that you can't buy anything with that money (inflation??) and not to mention that most places have only a guarantee of 100k.

Just a few facts:
A pension fund is usually either managed by (multiple) asset managers or if they are big enough they will have their own investment arm.
The asset manager is only allowed to invest in securities that are stipulated in the agreement with the client (this includes derivatives, hedging, margin etc...)
Securities are always held with a custodian.
And pension funds (at least in the west) have very strict reporting rules to the regulator.

[sarsi]

Omg why are ppl considering this issue by nitpicking over the words I'm using? Or even have the impression that I'm really suggesting the pension funds need to be locked in a time deposit growing mold. Your fund reporting requirements is one thing. The trading and strategy they are doing that helps with preparing for the requirements isn't the actual requirement. How can ppl still be looking at this issue like its just a forum discussion and reviewing the issue strictly on my words. I don't understand How can anyone still be on this at all after what I've pointed out. The derivatives contract that is at the heart of this is probably still live and ongoing. How high the fund is leveraged isn't the same as potential derivative liabilities. I don't understand this complete blind faith in the system. Whatever, for what it's worth, anyone else who may still be wondering what to make of this, it doesn't take much to send that email like I suggested.

[jgl]

@sarsi, paragraphs would make your posts much, much easier to read. And appear less like shrill panicking.

Are you typing all of these post on a phone or a tablet? That might explain the formatting and other eccentricities.