U.S. asset management group BlackRock said on Friday it was reducing leverage in so-called liability-driven investment (LDI) funds at the centre of chaotic market conditions for British pension funds this week, to protect its clients’ capital.
British government bond prices slumped by their most in decades following finance minister Kwasi Kwarteng’s first fiscal statement last Friday, threatening the stability of the country’s pension funds and forcing the Bank of England to intervene on Wednesday.
“As a result of the extreme volatility in the gilts market this week, we have been working expediently over recent days to support our clients’ interests,” a BlackRock spokesperson said in an emailed statement.
“We have been reducing leverage in some of our LDI funds, acting prudently to preserve our clients’ capital in extraordinary market conditions. Trading in BlackRock funds has not been halted, nor has BlackRock ceased trading in gilts.”
LDI funds can be leveraged up to four times, industry consultants say.
Pension schemes had to stump up cash to meet calls for collateral on loss-making derivative positions managed by the LDI funds and used to hedge the pension scheme’s gilt holdings.
The LDI funds themselves were also under extreme pressure before the BoE announcement, industry sources say.
In a note to clients on its LDI liability matching funds, dated Sept. 28 and seen by Reuters, BlackRock said at the time that it would not be proceeding with further recapitalization events until further notice.
It also said in that update that it was “closely monitoring leverage levels across the range” with a focus on those at risk of assets being exhausted.
“For such funds, we will fully unwind exposure to rates and inflation and initially hold the asset in cash before looking to reinstate unleveraged exposure in a controlled manner should future market conditions accommodate,” the note added.
However, the Pension Protection Fund, a 39-billion-pound ($43.4 billion) lifeboat fund for the pension schemes of troubled companies, has kept all its liabilities hedged, without the need to sell assets, its chief investment officer said on Friday.
“Members of the PPF, and those in schemes protected by us, can be reassured that despite the current market environment, we’re well able to continue to pay them, and their dependants, what they’ve been promised for as long as they need,” Barry Kenneth, PPF Chief Investment Officer, said in an emailed statement.
($1 = 0.8994 pounds)