Liability Driven Investment And Management Of Sovereign Wealth Funds

Based on the fact that China has accumulated a large amount of foreign reserve in recent years, and meanwhile the exchange rate of USD has been going down continuously, still worse is that, most of China's foreign reserve has been invested in Bond Rate of developed countries with a relatively high margin of safety and low return. In this thesis, the idea of liability-driven investment has been put into the operation and management of sovereign wealth funds, all with a view to improve the asset allocation of the Portfolio.First, we compared the different founding background, development history, operation mode, investment style and strategy of the world's leading SWFs. Then we analyzed the transaction of investment style of these SWFs during the global financial crisis and post-crisis era, as well as the development tendency of them.When we take China into consideration, a question has been put forward: how to manage SWFs to hedge the risk of a shrinking foreign reserve. In China's special case, we introduced the idea of debt identifying, that is taking the monthly total volume of key imported commodities by Commerce Department as the estimation of SWFs'future expenditure, which will isolate China from the soaring prices of imports when purchasing overseas.In the article, we gathered MSCI monthly country and industry data from 2001, to compute the return, variance and correlation of different index with the help of simple regression. Then using Markowitz classical mean-variance model, and without taking liability into consideration, to gain the optimal risky portfolio, minimum-variance portfolio and efficient frontier.Because of the different risk tolerance of investors, if taking liability into consideration, we'll optimize the portfolio with surplus return and variance. Or rather, setting a specific surplus return of the portfolio, then get the optimal risky portfolio and efficient frontier via quadratic programming, and its corresponding property proportion. Last but not least, we compared the performance of ACWI industry index with the index of optimal portfolio (with and without liability), and it turned out that portfolio index, taking liability into account, show the optimum effect.