AIMCO report calls for cultural change
The Alberta Investment CALGARY Management Corp.’s risk management controls were “unsatisfactory” and a culture change is needed at the public pension manager, according to a report on what led to $2.1 billion in losses at the Crown corporation.
The June 30 report to AIMCO’S board of directors, provided to the Financial Post on Thursday, describes how a volatility trading program launched in 2013 eventually imploded and was wound down earlier this year. It criticizes the risks taken by the volatility program, called VOLTS, and provides 10 recommendations on how AIMCO can improve.
“We’re implementing them immediately,” AIMCO chief executive Kevin Uebelein said in an interview. “Some of them have effectively already been implemented. Some are going to take some more time.”
Uebelein said the losses from the program, largely incurred between March 9 and March 13 were “not acceptable” and some AIMCO employees have left the organization since then. “We are making a range of operational and organizational changes,” he said, declining to address specific dismissals and departures.
The report calls for “changes to the culture” at the pension manager. “No matter how carefully designed a set of prescriptive rules are, a so-minded individual or group can usually find a way to circumvent such rules,” it states.
Uebelein said he is working to ensure that every department and employee, not just risk management executives, understands the organization’s risk tolerance.
“Every employee of AIMCO needs to be aware of the expectation for the right risk culture. That’s something you can’t do by fiat,” he said. “That’s going to be hard work, but it’s something that we’ve already started.”
The report details how the VOLTS program was expanded two years ago to include capped and uncapped variance swaps, which the report said offers a relatively fixed return during moderate trading volatility.
But the report warned those options “carry the risk of greatly magnified losses from extreme volatility events, such as the Covid-related volatility experienced in March or that experienced in the October 1987 Black Monday event.”
As markets crashed in March and major economies around the world went into lockdown, those “magnified losses” became a reality for AIMCO. “By the time the public equities began to take action to reduce VOLTS exposure in early March, it was too late,” the report noted. “Unprecedented and sustained volatility caused by the COVID -19 crisis made it impossible to unwind the positions without considerable loss.”