It’s only half as bad as you were told by the media, Alberta Investment Management Corp. Chief Executive Officer Kevin Uebelein says in a letter to stakeholders — the Crown-owned funds-management corporation only lost $2.1 billion gambling on market volatility.
The first news reports on April 22 indicated the loss was about $4 billion.
A loss of more than $2 billion is still pretty darned bad, but while Mr. Uebelein admitted in the letter posted online Thursday that he is accountable for the performance of AIMCo, it sure doesn’t sound as if he or anyone else on his senior management team is inclined to resign for losing so much money in an incomprehensible gamble on market volatility.
On the contrary, Mr. Uebelein said in the letter, which soon attracted media attention, that he just wants to set the record straight: “Markets behaved in a manner never-before-seen and the result was a very unfortunate loss.”
Well then, OK!
He also argued “media reporting has dramatically overstated the extent of the losses,” stating that “realized and unrealized losses to date are approximately $2.1 billion of the $118.8 billion of assets we manage on behalf of our clients.” A final picture is expected to emerge in June when AIMCo delivers its next quarterly report.
For its part, Alberta’s United Conservative Party Government wants very, very badly for AIMCo to manage all Alberta public-sector pension funds for its own purposes — which are presumably unrelated to the gambling mentality that led to the bet that lost billions but may involve some very bad bets of the UCP’s own. That desire also includes the party’s dream of taking over all Albertans’ retirement security funds now in the Canada Pension Plan. So we can expect the usual UCP suspects on social media to start repeating Mr. Uebelein’s talking points incessantly as the debate over AIMCo continues.
Meanwhile, the same day Mr. Uebelein posted his letter, the reporter who broke the original story wrote in a New-York-based online publication for institutional investors that it was “amateurish” trading that blew up AIMCo’s volatility trade strategy.
“Many traders believed that they were effectively getting free money,” wrote Leanna Orr in Institutional Investor. “Banks were paying to get risk off their books in order to pass stress tests regulators imposed after the last financial crisis. But, the thinking went, the insurance would never actually pay out, because such a dramatic crash had never happened.”
“The capped-uncapped strategy is amateurish,” she quoted a volatility market consultant as saying.
Calling AIMCo’s approach “a beginner’s mistake,” the consultant observed that “anybody with experience in options and volatility trading knows that those ‘century-rare’ events happen every few years — much more frequently than the simpler math would tell you. It’s a guarantee. How often should you play Russian roulette? How about with three bullets?”
It’s shocking to see professional money managers adopting such a strategy, the consultant said.
In her story, Ms. Orr described the Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan as being among the world’s top institutional investors, who know how to conduct themselves in volatile markets.
“Experts and data put AIMCo on a lower tier of sophistication,” she wrote. “The organization may not have understood the risks it was taking. Or AIMCo leaders buckled under pressure mid-crash and killed a thoughtful — if risky — program.”
It doesn’t matter if you don’t have your savings in an Alberta public sector pension plan, you should think about that observation when you ponder the covetous glances cast by Alberta Premier Jason Kenney at your Canada Pension Plan.
Even without considering Ms. Orr’s troubling story, there’s nothing in Mr. Uebelein’s letter to suggest we should have any more confidence in the acuity or judgment of AIMCo, whether the size of the loss turns out to be $4 billion, $2 billion or some other sum.
It will still take time to restore trust in AIMCo. The government of Alberta still needs to put the plan to force Alberta pension plans to deal only with the Crown corporation on hold, and to stop the effort to move the better-managed Alberta Teachers Retirement Fund over the objections of its contributors and retirees into AIMCo’s portfolio.
And, sorry, but AIMCo’s senior management team still needs to do more than promise, as Mr. Uebelein did, to “avoid a repeat of this outcome, regardless of market turmoil.”
No matter what Premier Kenney and the UCP want, this story is still not going away.