The Cost Of Being On The Wrong Side Of Volatility Trading

Last week Market Crumbs wrote about a badly timed trade decision that cost the California Public Employees’ Retirement System (CalPERS) more than $1 billion. CalPERS exited one of its two hedges just before the stock market began its unprecedented selloff.

As bad as that sounds, it appears CalPERS has been outdone by the Alberta Investment Management Corporation (AIMCo). AIMCo, which manages nearly $125 billion for pension funds, sovereign wealth funds and other public accounts, lost $3 billion trading volatility.

AIMCo has since pulled the plug on its Volatility-trading program after being on the wrong side of the volatility trade when markets crashed earlier this year. Sources say another complex strategy— the derivative-based "portable alpha" overlays, may have exacerbated AIMCo's losses.

VIX CBOE SPX Volatility Index

Public data on the now-defunct volatility-trading program at AIMCo is sparse. According to the LinkedIn profile of David Triska, he developed and oversaw "three equity volatility strategies across global developed and emerging markets" at AIMCo.

AIMCo declined to comment on the volatility trade or any of its strategies.

"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," AIMCo communications director Dénes Németh told Institutional Investor. "AIMCo acknowledges that it is not immune to the challenges, unique as they may be, that institutional investors around the world have experienced."

The losses on the volatility-trading program come at a particularly bad time for AIMCo. AIMCo is slated to fold-in about $13 billion in assets from the Alberta Teachers’ Retirement Fund. The Alberta Finance Minister’s office did not answer whether the fold-in will still occur as scheduled or be delayed as a result of AIMCo's recent losses.

"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 Institutional Investor. "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."

Shorting volatility has become a popular trade in recent years, even inspiring a former Target) manager to undertake the trade a few years ago, generating millions of dollars in profits.

One source who frequently trades with large institutional investors best summed up AIMCo's trade gone awry, telling Institutional Investor "It’s not very hard to lose $3 billion selling volatility, you’re doing stuff that has a minus-infinity potential outcome."