But the collective impact of correlated behaviour across a cohort of funds, especially in the face of similar underlying vulnerabilities, can have a material impact on market outcomes. Indeed, what are individually rational actions by individual funds can – collectively – lead to disruptions in core markets.
A single LDI fund that has taken on substantial leverage through repo or derivatives could perhaps sell assets in the face of market volatility, without materially affecting market outcomes. But, in aggregate, across all LDI funds with similar vulnerabilities, the impact of correlated actions can – and has – led to destabilising markets. 2.