Explain the approach known as liability-driven investing

Liability-driven investing (LDI) builds the asset portfolio around the size, timing and interest-rate sensitivity of the liabilities it must fund, rather than around a market index. Liabilities are classed by how certain their amounts and timing are, from fixed schedules to uncertain amounts at uncertain dates. The core tool is matching the money duration (basis point value) of assets to that of liabilities so the surplus is protected from rate changes; hedge ratio = asset BPV ÷ liability BPV. Implementation uses long bonds, cash flow matching, immunisation or overlays with swaps and futures. A trap is matching duration alone; asset convexity must also exceed that of the liabilities, and non-parallel curve shifts can still open a gap.