Institutional investors tighten duration and derivatives governance

Key Points

While immediate market shocks demand swift tactical adjustments, the true challenge for long-term allocators lies in understanding how geopolitical realignment alters balance sheet strategies.

“When something happens, a lot of times the short-term impact will be on how we manage our interest rate exposure, duration and FX,” Cheng Duan Pang, board director at China Life Singapore, said at AsianInvestor’s Insurance Investment Briefing in Singapore on September 17. “But beyond this, geopolitics has a much longer-lasting impact.”

Cheng Duan Pang
China Life Singapore

The longer-term horizon implies permanent alterations to global supply chains. “In the past, it was globalisation, and today what has happened? Regionalisation, friendshoring, onshoring,” Pang said. “The impact of that is inflation... I never thought that it was transitory.”

Because structural inflation keeps borrowing costs elevated, these macro transformations directly reshape Strategic Asset Allocation (SAA) frameworks and duration expectations. “What is going to happen is higher-for-longer duration and divergence in monetary policy,” Pang said. "These are medium-horizon changes, and it affects our SAA."

Beyond interest rate dynamics, shifting geopolitical alignments are also changing cross-border capital and regulatory standards, which means  allocators have to rethink their geographic and asset class footprints.

“Capital flows have changed very drastically,” Pang said. “We look at commodity pricing, technology standards and even regulatory frameworks. All these have a massive, very long impact on our portfolios. We need to look at our US dollar versus non-US dollar exposure, and we are looking at more private credit-type of investments.”

For insurance investors, the consequence of geopolitical fragmentation is no longer limited to short-term market volatility.

Structural changes in trade patterns, inflation dynamics and capital flows are prompting institutions to reassess SAA, shorten investment tenors in private markets and strengthen governance around hedging tools. Together, these shifts reflect a broader effort to build portfolios that can remain resilient amid a more uncertain global landscape.

Rather than attempting to time market noise, allocators are insulating portfolios by re-engineering deal structures to retain flexibility when liquidity dries up.

“If there's a war in the Middle East, you might want to trim sovereign and corporate bond exposure in that region. But in reality, when the conflict broke out earlier this year, bond managers saw spreads balloon immediately, only for them to tighten back the next day,” Shiuan Ting van Vuuren, chief investment officer HK & Private Wealth at Sun Life, said at the Insurance Investment Briefing in Hong Kong on September 15. “If you are locked into 30-year fixed income positions, volatility can be harder to manage.”

Shiuan Ting van Vuuren
Sun Life

To retain control in unpredictable conditions, allocators are shortening deal horizons and tightening underwriting terms in private transactions.

“If we are structuring a data centre deal, do we commit to a 10-year or a 30-year tenor? If there is uncertainty, stick to 10 years,” Van Vuuren said. “Do we demand a higher risk premium for the uncertainty? Yes. In a private transaction, can we negotiate tighter covenants and exit protections? Absolutely.”

A FRAMEWORK FOR DERIVATIVES GOVERNANCE

But adjusting portfolio structures alone does not address the day-to-day volatility created by shifting interest-rate expectations and currency movements. For that, insurers continue to rely on derivatives, making governance and oversight increasingly important.

To protect portfolios against trading failures, Pang outlined a derivatives governance framework for boards anchored on three pillars: purpose, process and transparency, regardless of whether they are used for duration hedging or efficient portfolio management.

“The number one task... is to clearly state the purpose,” Pang said. “What is the process to control risk? You need to talk about what limits will be in place, who the counterparties are... and who the authorised traders are,” he added.

As market conditions change rapidly, static approvals must be paired with active oversight. “When you put on the position, on paper it may look very good, but in reality... it may no longer be that efficient,” Pang said. “You need almost close to a daily monitoring... What is your target level? Where is your cut-loss level? All need to be very clearly spelled out and not be a moving target.”