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Quantitative Methods for LDI Solutions  

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Traditional Asset and Liability Management (ALM) models have been recently recast as Liability Driven Investment (LDI) models for making integrated financial decisions in pension schemes. Investors are increasingly concerned with the difference between their pension funds assets and liabilities and not solely on their assets returns. Global accounting and regulatory frameworks have moved towards requiring companies to fully disclose the difference between scheme assets and liabilities directly impacting the companies’ balance sheets and valuations.

In the not too distant past, quantitative models were being used mainly for risk management. However, nowadays, there is an increasing use of quantitative models for the full active asset management process of generating returns in excess of the market, while being hedged against risks. Optimization increasingly plays a key role in this process. Advanced optimization methods allow the fund managers to automate the construction of a portfolio from a wide range of assets with the optimizer choosing assets to meet the companies’ specific risk-return requirements. They are also important tools in the construction of products with specially engineered properties such as guaranteed returns.

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