Under the Hedging/Return seeking portfolio, there are two variants.
- Partial hedging where more finds are allocated to the Return seeking asset to as to generate more returns.
This obviously lead to less conservative asset allocation and the portfolio is not fully hedged.
- Dynamic Hedging on the other hand increases allotment to the Hedging portfolio as the funding ratio increases.
Since more funds are being allotted to the Hedging asset, shouldn’t Dynamic hedging fully hedge the portfolio considering we may even have more asset than the PV of Liabilities in the Hedging Portfolio.
I understand that by allocating more funds into the hedging portfolio, we are loosing out on the returns that could have been earned in the instrumental allotment. But the focus here is to deface the liability first, so if more asset is being allocated to the Hedging Portfolio, I think it should offer full protection against the liabilities.
Pls share your views. Thank you.