What benefits do you foresee by transitioning from portfolio theory language to that of balance sheet management?
First, it allows a manager to formally separate liquidity risk from market risk, both of which are embedded in endowment asset liability management. Currently, liquidity risk gets a lot of attention, because it is indeed very important to have enough liquidity to satisfy various kinds of short-term liabilities. However, the issue of liquidity management is different from answering market risk- and asset liability management-related questions, such as: What is the nature of my exposures to adverse market movements? What are the implications of the low return environment for my institution? And, to borrow a term from pensions, what is my current hypothetical funded status—that is, the ability of my current assets, their expected investment returns, and additional future contributions to satisfy liabilities in perpetuity? Of course, one must be careful in how implicit liabilities of endowments are integrated into strategic asset allocation decisions. On the one hand, distributions—which a
