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Laxman Pai, Opalesque Asia: U.K. pension funds upped hedging activity in the second quarter amid uncertainty over the economic outlook, said BMO.
Amidst grave uncertainty as to the global economic future, both interest rate and inflation activity increased. Interest rate hedging activity rose by 3% and inflation hedging activity by 12%.
"The second quarter of 2020 was strong in hedging activity. Total interest rate liability hedging activity was approximately £43.5 billion, a 3% rise. Inflation hedging activity increased by 12% to £39.6 billion," explained the report.
Inflation hedging increased, despite further delays to the RPI reform consultation, reveals the importance of prudent risk management, particularly at a time of higher volatility and an uncertain future post-Brexit. Hedging activity comprised both hedge increases and switching between asset classes.
In the first quarter, inflation hedging activity grew by 21%, to £35.5 billion, while interest rate liability hedging increased by 13% to about £42.3 billion.
A particular theme of the quarter was the heightened use of credit as part of a hedging or cashflow-driven strategy. Where schemes were able to access credit rapidly, either via physical or synthetic instruments, they were able to seize the opportunity of a fleeting but dramatic cheapening in credit spreads.
Over the past few years, there has been a preponderance of hedging using leveraged gilts. As previously discussed, repo spre...................... To view our full article Click here
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