Indexing Strategies in Liability-Driven Investment

As a fixed income portfolio manager, you have been tasked with developing a Liability-Driven Investment (LDI) strategy for a pension fund that has a defined benefit obligation. The fund intends to meet its future liabilities to retirees. Given the current interest rate environment and changing demographics affecting the pension fund, you have decided to incorporate indexing strategies.

Discuss the advantages and disadvantages of using indexing strategies in an LDI context. Consider factors such as risk management, cost efficiency, liquidity, and alignment with the fund's liabilities. Additionally, provide examples of how indexing can be implemented effectively in this scenario.