The Case for Alternative Credit Investments in a Liability-Matching Portfolio
Demand for fixed-income investments that provide attractive returns, have good credit profiles and offer high durations is growing. Structural demographic changes create a natural shift towards liability-matching investments, driven by dissaving and the reduction of retirement investment risk towards and during retirement. Holding period returns on traditional matching assets are currently historically low, prompting institutional investors to look for alternatives. Initiatives to increase the level of collateralisation in the use of derivatives, such as the European Market Infrastructure Regulation (EMIR), increase required cash reserves. The low return on cash then makes a limit on the use of derivatives desirable.
Alternative credit can provide a solution to these challenges by incorporating the asset class in a liability-matching portfolio. Alternative credit provides attractive return potential compared to liquid asset classes in the matching portfolio and can make an institutional investor’s balance sheet more e cient.
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