LDI in 2016: Navigating your way through the hedging maze

Published by Matt Tickle on

The Liability Driven Investment (LDI) market has expanded significantly over the last five years and is a topic that features on the agenda for many of our clients.

Against this backdrop, 2015 saw some relatively significant shifts for LDI investors:

  • Volatility in gilt yields increased, whilst the overall yield remained at significantly lower levels than in 2014.  Despite these lower yields UK defined benefit schemes continued the recent trend of increasing the level of hedging;
  • We saw the difference in swap and gilt yields increase significantly – raising questions as to the suitability of ‘active’ LDI strategies;
  • We saw the ever increasing hand of regulators in the market, with the promise of more to come.

In this note, we discuss two key decisions around LDI on which the events of 2015 may have an impact – when should you hedge and what instrument should you use.