What Asset-Liability Management Strategy for Sovereign Wealth Funds?

That study put forward a model to optimise the investment and risk management practices of sovereign wealth funds, which can be regarded as the extension to sovereign wealth funds of the liabilitydriven investing paradigm recently developed in the pension fund industry.

Author(s):

Frederic Ducoulombier

Director of EDHEC Risk Institute–Asia.

Lixia Loh

Senior research engineer at EDHEC-Risk Institute–Asia.

Stoyan Stoyanov

Professor of finance at EDHEC Business School and head of research at EDHEC Risk Institute–Asia.

The model suggested that the investment strategy of a sovereign wealth fund should involve a state-dependent allocation to three main building blocks: a performanceseeking portfolio, an endowment-hedging portfolio, and a liability-hedging portfolio. The objective of the current publication is to compare these research conclusions with current perceptions by sovereign investment professionals. There is indeed widespread belief in the public that sovereign wealth funds are long-term investors free of liabilities and short-term constraints and as such have nothing to gain from dynamic asset-liability management (ALM) approaches. The industry reactions that we collected offer a strong rebuttal of these perceptions in that a large majority of the sovereign investment practitioners surveyed manage short-term constraints and implicit liabilities and they believe that the ALM framework provides a better understanding of optimal investment policy and risk management practices. The majority of respondents also recognise the need to hedge endowment fluctuations and endorse the approach put forward by the foundation paper. This has important potential implications in terms of the emergence of genuinely dedicated ALM and risk management solutions for sovereign wealth funds, the lack of which practitioners lament. Practitioners’ responses also point to the need for further applied research and education with a view to illustrating how the dynamic ALM approach presented can be tailored to a particular fund and its specific model of corporate governance.

Type: EDHEC Publication
Date: le 22/03/2012
Research Cluster : Finance

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