AIMCo’s $3 Billion Volatility Trading Blunder

The Canadian fund pulled the plug on its volatility strategies following significant losses, sources say.

Edmonton, Alberta Canada. (Bigstock photo)

Edmonton, Alberta Canada.

(Bigstock photo)

The Alberta Investment Management Corp. — which manages pension assets, sovereign wealth, and other public money — lost billions of dollars on wrong-way volatility trades when markets crashed earlier this year, and then shut down the strategies, according to informed sources.

The now-defunct volatility-trading program cost pensioners and Albertans about $3 billion, the sources said. That’s on top of substantial, first-quarter losses to portfolio value that nearly all public funds are dealing with amid the coronavirus crisis.

“It’s not very hard to lose $3 billion selling volatility,” said one quantitative hedge fund manager who frequently trades with the likes of AIMCo. “You’re doing stuff that has a minus-infinity potential outcome.”

Another highly complex strategy — AIMCo’s derivative-based “portable alpha” overlays — may have exacerbated the bleeding, according to one of the sources.

AIMCo wouldn’t comment on these or any other strategies, but pointed to extraordinary challenges in markets this year.

“The level of volatility that markets experienced in March 2020, the result of the Covid-19 pandemic, during which volatility rose faster, and on a more sustained basis that at any other time in history, is exceptional,” communications director Dénes Németh told Institutional Investor in an emailed statement this week. “AIMCo acknowledges that it is not immune to the challenges, unique as they may be, that institutional investors around the world have experienced.”


Indeed, many retirement systems and nonprofits reaped years of steady returns by investing in asset managers that sold options or other forms of short-term risk insurance. But when markets blew out, a number of these funds blew up.

[II Deep Dive: A Hedge Fund’s Fatal Bet. And the Consulting Firm Tied Up in the Mess.]

Only a handful of institutions run their own volatility-trading strategies in-house, and the vast majority of them are Canadian. AIMCo provides virtually no public details about the program, which a portfolio manager named David Triska takes credit for building at least in part, according to his LinkedIn profile.

Triska claims that he managed and developed “three equity volatility strategies across global developed and emerging markets” at AIMCo, using historical options data, volatility surface estimation, and methodology inspired by at least three types of stochastic volatility (Gatheral, Heston, and Bates), among many other items.

Canada boasts some of the world’s most sophisticated and best performing public investment funds, which essentially operate like Wall Street firms but siphon profits to ex-bus drivers and retired nurses.

AIMCo is not among that top tier, experts and data suggest.

For example, the Ontario Teachers’ Pension Plan delivered 9.8 percent annualized over the last decade, whereas AIMCo gained 8.2 percent — a gap of more than 1.5 percentage points per year.

Even within its own province, AIMCo has trailed the smaller Alberta Teachers’ Retirement Fund. AIMCo is slated to vacuum up ATRF’s C$18 billion (about $13 billion) or so in assets, despite teachers’ and fund leaders’ protracted opposition. Had this already happened, AIMCo’s wayward volatility trades would likely have hit educators’ pensions.

The Alberta Finance Minister’s office did not directly answer when asked if it would push ahead with the ATRF fold-in or consider pausing until the chaos clears.

“The transition of ATRF’s assets has not yet occurred and AIMCo operates with full operational and investment independence from the Government of Alberta,” a spokesperson for the provincial Treasury Board and Finance told II Tuesday. “AIMCo has a long track record of outperforming market benchmarks and providing great value to Albertans. We are facing unprecedented times and these are challenging market conditions for all investors. We are confident AIMCo will continue to meet the long-term investment objectives of their clients.”

The full extent of the first-quarter damage will come out in AIMCo’s annual public reporting. But in announcing its 2019 returns, the organization seemed set on controlling expectations.

“Our team is responding decisively in an effort to protect our clients’ liquidity and assets in the near- and medium-term, while still identifying longer-term investment opportunities that will come out of these challenging market circumstances,” said Kevin Uebelein, AIMCo’s chief executive officer, in an April 8 statement. “We know the impacts to their portfolios during these times of market uncertainty will be significant, and we are committed to accountability and full transparency to our clients as we navigate these conditions together.”