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.
Loomis, Sayles & Company, L.P. | One Financial Center, Boston, MA 02111
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