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Sourcing of CDI assets may prove difficult, especially since many asset managers are chasing the same type of assets. The available assets may not meet the client’s objectives or may not be attractively priced. The ramp up period can be long for large CDI investments and necessitate the use of synthetic CDI portfolios.
There is a risk that CDI assets may become illiquid if the economic or market situation deteriorates. Consequently, it may not be possible to sell or buy CDI assets at all or quickly enough before their expiry.
Given the illiquid nature of CDI assets, their mark-to-market may be adversely affected by changing market conditions.
Because of the inherent complexity of such a strategy and the lack of liquidity of some CDI assets, a CDI portfolio may not always deliver the expected cash flows.
By nature, there is a difference between pension liability cash flows and CDI assets. It is important to keep this aspect in mind when structuring a CDI portfolio in order to minimize basis risk .
Given the multiple CDI asset classes and the potentially long ramp up period, the required level of governance is quite high and can involve performance, risk, trigger and exposure monitoring as well as the use of synthetic CDI assets. Assessment of relative value between synthetic proxies and real assets may also need some governance. Not providing the appropriate level of control and governance could negatively impact the long-term performance of the CDI strategy.