Liquidity Solutions

Most LDI solutions are aimed at reducing the funding ratio volatility for a given level of expected return.  These types of solutions tend to focus on long-duration assets with the intent of better matching the interest and credit hedge ratios. 

At the other end of the spectrum, some plans are also interested in solutions that can provide liquidity to help them defease their short-term cash flows (typically three to five years).  This can allow plans to hold on to more illiquid assets in their RSA in an effort to generate higher returns.


Liquidity solutions tend to have more of a buy and maintain nature where coupons and maturing principles are extracted and used to pay off upcoming liabilities while portfolio turnover is kept at low levels.  As a result, the initial portfolio construction is critical and should seek cash flow sufficiency under presumed default scenarios.

Given the maturing nature of these types of solutions, there are no readily available benchmarking options. Therefore, excellent communication regarding the plan's specific objectives is critical.  Questions such as "Can the portfolio hold on to downgraded bonds?" and "Is the only measure of success defeasance of the cash flows?" are of significant importance and need to be addressed.