Liability-Driven Investment (LDI)

Liability-driven investment (LDI) is an investment strategy primarily used by pension funds and insurance companies to manage assets in a way that aligns with their long-term liabilities. The goal of LDI is to structure a portfolio that generates returns closely matching the timing and amount of future liabilities, such as pension payments or insurance claims. This strategy reduces the risk of funding shortfalls by ensuring that the portfolio’s cash flows meet the company’s obligations.

Example

A pension fund adopts an LDI strategy to match its bond investments with the timing of its future pension payments, ensuring that it can meet its obligations as they come due.