Impact & Use of Leverage
Pension funds are increasingly employing leverage within their portfolios. In Canada, for one, the nation’s six biggest pension funds saw an increase in average leverage from 19% in 2009 to 24% in 2017. Common sources of leverage include the use of derivative-based investment strategies, and fixed-income investments financed through the repo market, while less common examples include the use of synthetic equity or synthetic credit strategies.
Leverage-based investment strategies, when utilized correctly, can improve pension funds’ asset liability management by reducing asset liability mismatches (hedging) or improving the risk/return trade off. At the same time, however, these strategies can increase pension funds’ exposure to macroeconomic shocks and consequent fluctuations in available market liquidity.
Impacts of Leverage on Risk Taking
Optimal Leverage Ratio
Impact of Taxation on Pension Fund Leverage