• Market Crumbs

CalPERS Outdone By AIMCo

Image via Dorothe Wouters on Unsplash

Last week Market Crumbs wrote about a badly timed 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.

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."

Leftover Crumbs

  • Nearly half have been cancelled. As a result of COVID-19, only 53% of the sporting events scheduled for 2020 are currently set to take place, according to sports marketing agency Two Circles. "Whilst live sports is halted, every corner of the sports industry will continue to feel this significant financial pain, but we are certain that it returns, whether that’s behind-closed-doors or with full houses, sports' economy will thrive once again," Two Circles CEO Gareth Balch said.

  • Mortgage demand continues to slow. Total mortgage application volume fell 0.3% last week, according to the Mortgage Bankers Association’s seasonally adjusted index. With rates mostly unchanged from the prior week, refinance demand fell 1% but remains 225% higher than the same period a year ago. Mortgage applications to purchase a home rose 2% for the week and have now fallen 31% from the same period a year ago.

  • Video game sales surge. With everyone locked in their homes, video game sales jumped 35% in March from the same period a year ago to $1.6 billion, according to NPD Group. March's sales total ended a seven-month streak of sales declines and was the best March total for the industry since 2008. Nintendo saw sales of its Switch console more than double, surpassing the sales total from its initial launch in March 2017.

  • Chipotle hit with record fine. Chipotle has been hit with a $25 million fine to settle criminal charges related to a food-borne illness that caused more than 1,100 people to get sick between 2015 and 2018. It is the largest food safety fine ever imposed, according to the Justice Department. "Chipotle failed to ensure that its employees both understood and complied with its food safety protocols, resulting in hundreds of customers across the country getting sick," U.S. Attorney Nick Hanna for the Central District of California said.

  • Nintendo attracts activist investor. Activist investor ValueAct Capital Partners has taken a $1.1 billion stake in Nintendo, betting the company can transform to a broader entertainment business. ValueAct began building a stake in April 2019 and has recently increased its stake. "We are aware that ValueAct is holding a stake and we’ve been engaged in dialogue with them. We don’t disclose content of our dialogue with our investors," a Nintendo spokesperson said.