ABC Pension Fund is evaluating its investment strategy for the upcoming fiscal year. The fund has a liability-driven investment (LDI) approach, aiming to align its assets with its long-term liabilities to manage risk effectively. Recent market volatility has prompted the fund manager to consider increasing the allocation to alternative investments.
The board of trustees is particularly cautious about illiquid investments due to the need for consistent cash flow to meet pension payouts. Additionally, the pension fund is assuming a significant increase in its liabilities due to demographic changes within its participant base, specifically an expected increase in pension payouts over the next decade. The manager is considering three potential strategies: increasing public equity exposure, shifting to a diversified hedge fund strategy, or allocating more to fixed income securities that match the duration of the liabilities.
Which of the following strategies is most aligned with the fund's LDI approach while addressing the board's concerns about liquidity?