Week 6 (1) Flashcards
Investment Stretegy
What is investment Strategy?
Investment strategy is defined here as the investment
decisions that are longer-term in nature and that have a
‘big picture’ perspective – as distinct from investment
analysis and trading which can have a more short-term
and specific focus.
Investment strategy involves considering the investor’s
objectives, their constraints (e.g. their liabilities), and the
overall governance of any investment policy (e.g. roles and responsibilities of any different parties that are involved).
Competitive and Non-Competitive Perspective
As regards the subjective (qualitative) element, there is a
competitive perspective and a non-competitive perspective.
The non-competitive approach takes the view that markets are efficient, while the competitive approach sees markets more like adaptive systems.
There are also perspectives that merge these two perspectives to
various degrees.
The non-competitive perspective usually considers there to be a positive relationship between
(systematic) risk and expected return and that the purpose of
investment strategy is about finding the appropriate balance
of risk and reward that fits the circumstances of the investor.
The competitive approach considers that this ignores many
aspects of how markets operate in practice, and therefore
would result in a simplistic approach to setting investment
strategy.
Liability Driving Investment
- The classical actuarial approach of immunisation, whereby bond-like assets and liabilities can be matched by duration is covered in earlier subjects. More sophisticated alternatives are now available, the main
one being what is commonly referred to as liability-driven investment (LDI). LDI portfolios are fixed income portfolios that have similar sensitivity to changes in interest rates and inflation to the liabilities. - The typical instruments used for LDI include: Bonds and bond futures, Swaps, Repo and total return swaps, Swaptions, Buy-in, buy-out and
longevity swaps.
