The Canada Pension Plan’s investment arm lost C$700 million betting on market volatility in the year ending March 31, primarily in the final months as stocks crashed worldwide.
CPPIB disclosed the substantial loss in its latest annual report.
This $700 million hit will be taken in stride internally, sources suggested. It’s a lot of money, even for a $409 billion portfolio, but may look relatively modest next to the losses incurred by other investors, including a Canadian pension peer.
AIMCo — Alberta’s $119 billion public investment fund — lost at least $2.1 billion trading volatility earlier this year before pulling the plug on its program. Since Institutional Investor broke the story in April, Albertans have expressed mounting outrage while AIMCo became the subject of an external investigation into its losses.
Toronto-based CPPIB said its strategy for profiting off of market fluctuations (called “volatility risk premia”) “behaved as expected, and well within our established limits,” a spokesperson told II Wednesday via email. ”Our strong risk management ensured the program was sized appropriately and within our risk/reward expectation; We also have the deep internal expertise which allowed us to carry out the strategy.”
These trades belong to a capital markets and factor investing group, which lost a net $3.2 billion in fiscal 2020 with losses concentrated in the fourth quarter, “as the fallout from the COVID-19 pandemic roiled financial markets,” per the annual report. “The highly-volatile environment was particularly challenging, with losses experienced across most programs.”
Industry insiders often brought up CPPIB when asked about AIMCo’s losses, as both organizations are well known to take on risk from Wall Street banks in exchange for premiums.
But their tastes in risk and deal structures differ.
For example, AIMCo had great appetite for effectively selling extreme crash insurance, protecting banks from infinite downside in an unprecedented crash. Those trades — called capped-uncapped variance swaps — blew up spectacularly.
CPPIB, in contrast, prefers to limit its worst-case scenarios, according to sources. “Canada is definitely known for having some of the most sophisticated players, and CPPIB is known for being one of the best,” said one hedge fund manager. “By being in Canada, AIMCo piggybacks on the reputation.”
CPPIB declined requests for an interview about the volatility program.