39;LDI39; tools gain popularity two years after pensions blowup
Providers say they are better able to absorb shocks
Value of leveraged hedging halves in two years regulator
LONDON, Oct 4 Reuters Two years after market chaos jeopardised Britain39;s 2 trillion pound 2.7 trillion pensions industry, the hedging strategy that exacerbated the crisis is increasing in popularity although providers say with less of the risk.
In September 2022, Britain39;s thenprime minister Liz Truss39; 39;minibudget39; promising unfunded tax cuts spooked investors, triggering a massive selloff in UK government bonds or 39;gilts39;.
That had a disastrous knockon effect for many pension funds, who were not only heavily exposed to these assets but who had also used leveraged financial instruments to hedge against sharp rate moves and inflation, under a strategy known as 39;Liability Driven Investment39; LDI.
The dramatic swings in gilt prices triggered collateral calls on pension funds39; LDI positions, sparking a dash by operators to firesell the funds39; most liquid assets to raise the necessary cash.
For most funds, this meant selling off UK government debt into a rapidly tumbling market. The Bank of England was forced to step in and buy gilts to stabilise prices.
Regulators have since then been pressing for more collateral and reduced leverage to avoid a repeat of the crisis whilst recognising the role that hedging plays in protecting assets.
LDI is as important as ever to pension…