Liability hedging by institutional investors was higher in 2016 than at any other time in the past nine years, BMO Asset Management claims.
The asset manager’s quarterly liability driven investment (LDI) survey, which has been monitoring such activity since the start of 2008, also believes that de-risking is likely to continue this year as funding levels improve.
BMO’s research picked up an abnormality during the year. Interest rate and inflation liability hedging levels dipped in the final quarter. Interest rate liability hedging activity decreased by 6% to £27.9bn in Q4, while inflation hedging contracted by 7% to £23.9bn.
These falls were linked to movements in sterling resulting from commentary surrounding the nature of the UK’s exit from the European Union.
BMO Global Asset Management LDI portfolio manager Rosa Fenwick said that 2016 saw a greater peak-to-trough move in 30-year gilt yields than in 2008. It also saw the greatest annual volume of hedging activity since the survey began.
“This statistic points to a shifting paradigm within the hedging mentality of the LDI marketplace,” she added.
“More pension schemes are taking liability risk off the table and adopting both a systematic hedging approach to increase outright hedging levels and a dynamic hedging strategy that makes the most of short-lived market events. This was particularly evident in 2016’s final chapter of trading activity.”
