Institutional

LHA Design - In Our View

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.