LHA should be designed within the context of the liabilities as well as the entire asset allocation. Two important risk factors to consider in designing a solution are the interest hedge ratio and the credit hedge ratio. 

The burden of hedging interest rates rests exclusively with the LHA, but the LHA work in a complementary fashion with the RSA in hedging the credit spread movements. For small LHA allocations, the LHA should have extended duration and less credit relative to the liabilities; as the LHA allocation increases, however, the LHA should gradually work more like the liabilites themselves.

Diagram showing 1. LHA doing all the hedging for Treasury Rate Hedge and 2. LHA Complementing Return Seeking Assets for Credit Spread Hedge.

The ability of an actual portfolio to deliver the required cash flows is not guaranteed and is subject to a variety of factors including, but not limited to, the availability of bonds, active management and trading, transaction costs, default risk, reinvestment risk, rebalancing risk and liquidity risk.

Commodity, interest and derivative trading involves substantial risk of loss.

Any investment that has the possibility for profits also has the possibility of losses.

This is for informational purposes only and should not be construed as investment advice. Investment decisions should consider the individual circumstances of the particular investor. Any opinions or forecasts contained herein reflect subjective judgments and assumptions of the author and do not necessarily reflect the views of Loomis, Sayles & Company, L. P. Investment recommendations may be inconsistent with these opinions. There can be no assurance that developments will transpire as forecasted. Examples and analysis are provided for illustrative purposes only and do not represent actual accounts. Accuracy of data is not guaranteed but represents our best judgment and can be derived from a variety of sources. Opinions are subject to change at any time without notice.