Equity Portfolios with Improved Liability-Hedging Benefits

This paper extends the LDI paradigm by assessing whether LDI solutions can be enhanced by the design of performanceseeking equity benchmarks with improved liability-hedging properties. We confirm this intuition and show that improving hedging characteristics of the performance portfolio generates welfare gains unless this improvement comes at an exceedingly large opportunity cost in terms of performance — a result that we call the fund interaction theorem.