U.K. pension funds upped hedging activity in the second quarter amid uncertainty over the economic outlook.
The latest BMO Global Asset Management LDI survey, for which the money manager polled investment bank trading desks to gauge pension fund hedging activity, showed inflation hedging activity grew by 12% in the three months ended June 30, to £39.6 billion ($48.8 billion). Interest rate hedging by pension funds grew 3% to £43.5 billion. Activity included increases in hedged positions and switches between asset classes, Rosa Fenwick, LDI portfolio manager, said in a post on BMO's website.
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.
One particular theme in the second quarter was a "heightened" use of credit in hedging or cash flow-driven investment strategies, Ms. Fenwick said. "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."