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Pensions decimated

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  1. #91

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    Original Post Deleted
    I was not fully on the money, but close enough, this article was best so far to describe what happened:

    https://www.ft.com/content/f4a728a5-...2-f48e30f8603c

    "Generally, when a pension starts putting money into liability-driven investment strategies, it means that it isn’t interested in continuing to watch its pension’s funding ratio swing around with the market.Pensions generally don’t put all their money into LDI strategies at once. Beyond the uncertainty around what they will owe, many are underfunded, meaning they need to put cash into riskier assets to earn a return and make up for that difference.But even when they need to put cash into stocks or other risky markets, they can use leverage (swaps, repo, etc) to match their entire investment portfolio’s duration with the duration of their liabilities."

  2. #92

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    These strategies largely took off after the global financial crisis, so these positions had never been tested in a period of rapidly rising interest rates, Mr. Mackenzie added.

    In other words the chickens have come home to roost. Those who got addicted to zero interest rates are getting burnt.

    https://www.wsj.com/articles/pension...es-11664469188

  3. #93

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    According to the WSJ article one of the purposes of LDI is to hedge against falling interest rates:

    The LDI strategy is meant to help pensions more efficiently manage their assets to ensure they can pay future retirees. Pensions use an LDI manager, who buys interest-rate swaps and other financial instruments to hedge against the risk that falling interest rates and rising inflation will increase their future obligations.

    Oops!


  4. #94

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    The design flaw of the LDI seems to be how the LDI is linked to the same assets the pension funds need to sell off to meet collateral calls.

    It creates a pretty death spiral where increasing gilt yield increase collateral demands. After a while the pension fund does not have enough eligible collateral (apparently long duration gilts are not eligible, which I find strange), so they need to sell gilts. This increases the gilt yield, which further increases the collateral needed for posting. Death spiral in full roll..

    You could also say, if they didn't leverage the shit out of the LDI and kept more prudent levels, this would also not have happened. But like the article says, they probably did leverage the shit out of it, because they needed to free up a large portion of investments for higher yielding assets. The more allocated to other higher yielding assets, the more leverage in the LDI. Fascinating!

    Sage likes this.

  5. #95

  6. #96

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    Volumous man hair era.

    Sounds like the UK pension fund operate abit like mpf in HK except only pension fund gets to tinker with allocation and invest in the actual real world market to maximise returns (and not just value preservation)? I think it's risky business for pension funds but turned out to be a complete non issue for public and the problem was only because it was such a heavy loss.... But the only contribution the pension fund gets is in gbp and the only money it has to pay out will only ever be in gbp so there is no real need to hedge at all...

    The earlier articles say it was a market selloff, the later ones say the fund sold off so everyone working with imperfect info. BUT we do have an article spewing goddamn bullshit directly from Blackrock asshole so at least that we know definitely true.

    Counterparties demanded extra collateral as gilt yields rose sharply, risking a fire sale of assets as pension funds searched for cash to meet these margin calls.
    Very true and accurate goddamn bullshit. This is why I'm so pissed off. Because counterparties really just mean Blackrock and pension funds searching for cash and being "forced" to sell like they were running door to door sounds v different from saying the fund was betting to lock on a certain yield level for I guess the gilts. Yield level goes up, fund out of the money. If down, pension fund in the money. It went up so the funds position dropped in value and the fund ran out of margin buffer in their securities account and so Blackrock liquidated whatever amount of gilts they were holding to readjust.

    Gilts with increasing yields that if the funds just held onto normally means they have just become more valuable but no too bad. Gotta sell appreciating assets because we signed them up for some LDI bullshit to increase their value and they are unfortunate but justified collateral damage of an unexpected margin call. Fucking hell.

  7. #97

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    Am making no assumptions about how the UK pension fund structure is or must be that's why I had a ? - and also why I said I was surprised in the end that public didn't think it was a problem and that seems like it only made headlines because of the amount lost and BoE stepping. I did say I wasn't going to rant anymore so my bad. In case it wasn't clear, my drivel is because I'm pissed off at the BR article and the bullshitting within which is bs and arrogant af regardless of what LDI strategy in place. I guess this also explains why BR didn't think it a problem to appear in the news - not something the public finds as offensive as I do.


  8. #98

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    Here. https://archive.is/YX0ez - posted earlier in #70.

    I know they need to match up assets and liabilities and the matching up becomes infinitely more complex if you invested the contributions into complex assets in diff currency and maturity in the first place and then did somemore to hedge the risk of those complex assets la di da.


  9. #99

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    Quote Originally Posted by sarsi:
    Sounds like the UK pension fund operate abit like mpf in HK except only pension fund gets to tinker with allocation and invest in the actual real world market to maximise returns (and not just value preservation)? I
    I'm a total noob when it comes to this stuff, but even I would not say that the MPF is anything like British pension schemes (I have both). For starters, one is vaguely valuable and the other... not so much.

    Do you actually have a background in finance to back up these very strong views that you're forwarding?

  10. #100

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    My ref to mpf is merely referencing the similarity that the funds are subject to real trading and market risk and investment acumen of others, and not your box standard dull pension fund risk such as decrease in purchasing power due to inflation or values are subject to currency risk and fluctuations because they are invested in other currencies. I don't think I'm overreacting and it is only only only because it is a pension fund. But I am beginning to think I am overreacting for this particular one because everyone else quite chill and the 2 who have responded are telling me it's not what I'm making it out to be. Both of you had the same q on how it is not like mpf so we are looking at completely diff issues - I will bow out here regrettably, just too far apart to bridge, because even a theoretical discussion would interest me. maybe next time.

    Last edited by sarsi; 02-10-2022 at 03:52 PM.

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