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This Bloomberg article tipped me off. Has anyone else heard about this?

Apparently, AIMCo (the Alberta Investment Management Corp., which invests Alberta public pensions) lost billions of $ on faulty volatility strategies during the recent market crash.


Long story short: Alberta's pension manager tried to use some fancy financial engineering, but screwed it up and lost billions of $ of public money.

The first two paragraphs describe AIMCo’s volatility selling strategy. We have talked about it a couple of times; AIMCo’s strategy is technically known as “capped-uncapped variance swaps” and pejoratively known as “picking up pennies in front of a steamroller,” but it is in principle a form of selling insurance against market volatility. AIMCo. would collect a stable insurance premium every month, as long as volatility stayed constant or went down or went up a little or went up a medium amount or even went up a largish amount. But if volatility went up by a truly enormous amount, AIMCo. would, uh, blow up.

In March, that happened, so oops.
 

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I saw the headline on this awhile ago (even though I'm not in Alberta) and had the question: who's regulating these guys anyways? Or is it the case of the fox looking after the hens' house? Big Oopsies there.
 

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I am in Ab and part of that Pension via AIMCo. I was unimpressed to say the least. Having said that we are still over 100% funded so really no impact.

Recently the UCP (new conservative govt) merged Ab Pensions (multiple) under the AIMCo board for management. It was my understanding that LAPP (one of the Ab pensions now under AIMCo) saw what was happening and felt the risks were too great and bought an insurance policy to protect against the downside risk. When AIMCo lost billions, the policy kicked in and recovered like 30-40% of the loss.

Good thing LAPP still has some autonomy. They 'saved the bacon'.

Disclaimer - I am part of the LAPP pension.
 

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I think the UPC government's 7.5 billion funding for Keystone is very risky as well.

If Biden wins the Presidency, there is no way that Keystone will get built.
 

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I am in Ab and part of that Pension via AIMCo. I was unimpressed to say the least. Having said that we are still over 100% funded so really no impact.

Recently the UCP (new conservative govt) merged Ab Pensions (multiple) under the AIMCo board for management. It was my understanding that LAPP (one of the Ab pensions now under AIMCo) saw what was happening and felt the risks were too great and bought an insurance policy to protect against the downside risk. When AIMCo lost billions, the policy kicked in and recovered like 30-40% of the loss.

Good thing LAPP still has some autonomy. They 'saved the bacon'.

Disclaimer - I am part of the LAPP pension.
... how're you able to tell on the funding level? And is it current?

And as for the "insurance policy" to protect the downside risk - what was it? I'm curious.
 

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And Alberta wants to take back their portion of the CPP to invest it with AIMCo? With negative returns, they should expect increase in contribution rates rather than a decrease because they are no longer "subsidizing" the RoC.
 

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The silver lining is that the executives likely made good money. The government probably had "good reasons" to invest with them, incidentally not related to the welfare of the pensioners.
 

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These strategies generally blow up in your face. Experience tells us that, and it can be confirmed by simple arithmetic. Try out a few possible scenarios and find that they cost money and have a large possibility of doing nothing or being worse than doing nothing.

For someone like a pension fund we know what works, value investing for the long term. They have the long term outlook and the wherewithal to buy good stocks and bonds and wait. The problem is financial markets are so manipulated that they have trouble getting sufficient return. The response is to trust some hedge fund or try some fancy didos which never work long term. So they end up worse off than if they took the conservative route.
 

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