Interest Rate Risk Management in Sovereign Wealth Funds

Hard Institutional Portfolio Mgmt Sovereign Wealth Funds

A sovereign wealth fund (SWF) is a state-owned investment fund that is used to invest a country's reserves in various assets. SWFs can have different objectives, including stabilizing the economy, saving for future generations, or funding social programs.

Consider the following scenario: The Horizon Sovereign Wealth Fund is mandated to achieve both capital appreciation and liquidity to support its government's long-term fiscal obligations. As part of its investment strategy, the fund must balance risks associated with equity investments while still considering the potential impact of interest rate changes on its bond portfolio.

Which of the following approaches is MOST appropriate for the Horizon Sovereign Wealth Fund to adopt in order to manage the interest rate risk in its bond investments while maintaining capital appreciation in its equity holdings?

Implement a barbell strategy in the bond portfolio while maintaining a growth-oriented equity allocation.

Focus solely on long-duration bonds to maximize yield, while reducing equity exposure to minimize volatility.

Maintain a diversified bond portfolio with a combination of short, intermediate, and long-duration bonds, alongside a balanced equity allocation.

Hint

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