AIMCO to review volatility strategy linked to reported $3-billion loss
The Alberta Investment Management Corp. is conducting a review of a volatility-based investment program that reports have indicated cost the pension manager $3 billion amid market upheavals triggered by the coronavirus pandemic.
Jerrica Goodwin, spokesperson for the Treasury Board and Finance Alberta, said Thursday that AIMCO will be doing a review and providing updates to the minister.
The “volatility-based investment program” isn’t a recent strategy and “began well before the current UPC government,” Goodwin said in an interview, noting that the pension manager operates independently and at arm’s-length from government.
“We are facing unprecedented times and these are challenging market conditions for all investors,” she said. “It’s anticipated that all institutional investors will have some tough quarters due to the economic effects of the pandemic.”
She added that AIMCO, which had assets under management of almost $119 billion at the end of December, has a long track record of outperforming market benchmarks and is expected to continue to meet the long-term objectives of pension and endowment clients.
Dénes Németh, AIMCO’S director of corporate communications, said he could not comment on the volatility-based investment program or the suggested losses. But he called circumstances in March 2020 “exceptional,” as the “level of volatility that markets experienced … rose faster, and on a more sustained basis than at any other time in history.”
Németh said the pension giant is invested across a diversified portfolio of asset classes and strategies and that, so far in 2020, “some have performed well, while others have not.”
He added that, as a long-term investor, AIMCO can “withstand, and not overreact to, short-term market fluctuations.” This, he said, can mitigate against having to “crystallize” losses or “underperformance” when it occurs.
Jim Keohane, who retired this month as chief executive of the Healthcare of Ontario Pension Plan, said AIMCO’S losses from stock market declines in the first quarter were probably far greater than the suggested $3 billion from the volatility strategy.
“The difference is that that is an unrealized loss and a lot of that would have come back in the recent market rally,” he said. “The loss on this volatility strategy is money gone that is never coming back. It is a permanent loss of capital.”
Keohane said he suspects AIMCO had a short position in volatility taken via swaps.
If this were the case, the pension fund would collect each day volatility stayed below the level at which the transaction was made and pay out when volatility moved higher.
“The calculation is quite complicated, but an important aspect is that it is non linear — in other words as volatility goes up the loss per point increases,” Keohane said.
“Prior to the recent market decline volatility was trading around 10 and in the crisis it spiked to almost 90, which is the second highest reading in history. It is still in the mid 40s so you will still be paying away significant amounts every day unless you close out the strategy.”
Keohane said the “opened-ended” risk of such as strategy has been described to him as “picking up dimes in front of a steamroller — most of the time you get your dime but occasionally you get run over by the steamroller.”