Asset-Liability Management in Private Wealth Management

The objective of this paper is to shed light on the ways new forms of welfare- improving financial innovation inspired by the use of asset-liability management techniques, originally developed for institutional money management, can be used in private wealth management.

Author(s):

Noel Amenc

Professor of finance and director of research and development at EDHEC Business School.

Lionel Martellini

Professor of finance at EDHEC Business School and scientific director of the EDHEC Risk and Asset Management Research Centre.

Vincent Milhau

Research engineer at the EDHEC Risk and Asset Management Research Centre

Volker Ziemann

Senior research engineer at the EDHEC Risk and Asset Management Research Centre.

Asset-liability management (ALM) refers to the adaptation of the portfolio management process to the presence of constraints relating to the commitments represented by the investor's liabilities. We argue that suitable extensions of portfolio optimisation techniques used by institutional investors, e.g., pension funds, could be transposed to private wealth management, precisely because these techniques have been engineered to incorporate in the portfolio construction process an investor's specific constraints, objectives, and horizon, all of which can be summarised in a single state variable, the value of the "liability" portfolio. As such, our paper can be seen as an attempt to merge two somewhat separate strands of the literature, that is, the literature on long-term financial decisions for private investors, which has focused mostly on an asset-only perspective, and the literature on asset-liability management decisions, which have been analysed mostly from an institutional perspective (pension funds, insurance companies, or endowments). We do so by casting the long-horizon life-cycle investment problem in an asset-liability management framework suitable for the private wealth management context, which allows us to show that pursuing an assetonly strategy usually involves a substantial opportunity cost

Type: EDHEC Publication
Date: le 17/09/2009
Research Cluster : Finance

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