2008 accident risk model loses AIMCo $ 2.1 billion during COVID

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The Alberta pension fund manager was blinded by the same risk assessment model that investors failed in the 2008 financial crash, according to a review of losses during the COVID-19 market turmoil.Alberta Investment Management Corp.’s volatility bets about $ 2.1 billion was valued by a legacy value-at-risk model that breaks down when risks are nonlinear and outside of its 95% confidence interval, the pension manager said in the review. published Thursday.

“The unprecedented and lasting volatility caused by the COVID-19 crisis made it impossible to close out positions without considerable loss,” AIMCo said in the review.

AIMCo – which manages approximately $ 120 billion for 31 pension, endowment and government funds in the Canadian province – has been under fire since April, when reports of excessive trading strategy losses were said to be taking advantage of the weak stock market volatility. The losses led to calls to prevent AIMCo from managing some of the province’s funds, and at least one of its customers said it was reviewing its relationship with the company.

Chief Executive Officer Kevin Uebelein said in a letter in April that the performance was “completely unsatisfactory” and that the company would review the strategy.

AIMCo said in the review that it has been investing in volatility contracts since 2013, and in 2018 it expanded the size of the strategy and widened it to include instruments called capped and uncapped variance swaps. These changes have increased the risks of the strategy and “dramatically magnified” its potential losses during times of extreme volatility, said the Edmonton pension manager.

Value-at-risk calculations such as those used by AIMCo have been partly accused of underestimating the risks of the subprime mortgage derivatives that fueled the 2008 financial crisis, leading banks to suffer far greater losses provided that. AIMCo said it realized the gap in its assessment of the volatility strategy in January and started trying to untie the strategy in March, but it was too late by then.

AIMCo Introduces 10 Changes to Improve Risk Management, Including Greater Involvement of the CEO and the Chief Investment Officer in the Process, Revising the Investment Approval Thresholds for OTC Derivative Strategies and more risk management at the start of the new business strategies.



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