Poll reveals explosive growth in LDI
Sep 1st, 2008 | Filed under: Liability Driven Investing, Today's Post
While liability-driven investing (LDI) has achieved some measure of celebrity over the past year, the concept still has a reputation for being of interest only to egg-heads and actuaries (apologies to egg-heads…okay, and actuaries).
About a month ago, consultancy Mercer wrote:
“It seems like only yesterday that Liability Driven Investing (LDI) was an interesting academic idea with few “real world” proponents among pension plan sponsors. Now, LDI regularly makes the front page of pension industry publications and is widely accepted as a practical and effective risk management framework. Plan sponsors implementing LDI strategies were “mavericks” only a few years ago; now they are “cutting edge.” For such a new area, LDI seems to have more than its fair share of experts. And there is a surprising diversity of opinions on what it is and what best practices are.”
The pace of change seems to be accelerating. Poll results released last Friday by SEI Global Institutional Solutions show that the simple, traditional definition of the concept, “matching the duration of assets to the duration of liabilities” is giving way to a more holistic view that LDI is ”a portfolio designed to be risk managed with respect to liabilities.”
Although this sounds like the same definition delivered by a marketing person instead of an actuary, SEI says this “suggests a stronger understanding around the broader implementation of LDI”. Curious about whether LDI was having a break-out year, we requested a copy of the full report. Here’s some of what we learned…
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Sometime around 1959 the investment world surpassed the number of gambling options offered by traditional (legal and illegal) gambling outlets. Hedge funds, derivatives, CDOs, SIVs, etc. offer the informed, if not the simply adventurous investor, numerous opportunities for profit based almost exclusively on, well, gambling as opposed to genuine “investments” as in capital formation that can in turn be used to produce goods and services.
Now, isn’t it time for the professional gambling world to emulate the “investment” community’s creative efforts? Say, why not develop an LDI, for instance, at a blackjack table where gamblers can bet on the gamblers instead of directly gambling themselves. Joe and Shirley have been losing their shirts for two straight hours so why not place on a bet on whether they’ll continue losing or begin to win? Mort has been winning at the roulette table for three spins in a row. Won’t someone allow us to bet on whether his luck will run out? That’s after all how The Street works now, isn’t it?