Barb Zvan to Review AIMCo's Vol Blowup

Andrew Willis of the Globe and Mail reports that after a $2.1-billion trading loss, AIMCo's board hires outside experts to audit fund manager:
Alberta’s government-owned money manager is launching a formal investigation into a recent $2.1-billion loss and promising to fix what ails a fund plagued by poor performance.

The board of directors at Alberta Investment Management Corp., known as AIMCo, announced that accounting firm KPMG LLP and former Ontario Teachers’ Pension Plan chief risk officer Barbara Zvan were brought in to “to identify lessons learned and corresponding enhancements to AIMCo’s investment and risk management processes.”

In its first public comment on the loss, which came to light in early April, the board said a report is expected by the middle of June and will be shared with AIMCo’s clients and the provincial  government.

Edmonton-based AIMCo oversees $119-billion on behalf of 31 clients, including pension plans for health care workers and police officers and the $18-billion Alberta Heritage Savings Trust Fund, the province’s war chest fund derived from oil royalties.

In late March, stock markets plummeted and then soared in reaction to the COVID-19 outbreak. AIMCo posted outsized losses when an investment strategy linked to volatility “performed particularly poorly,” the board said last Thursday in a press release. In the derivative-based strategy, now discontinued, AIMCo earned small returns when markets were calm, but suffered heavy losses when the economic collapse wrought by COVID-19 sent the S&P 500 and other stock benchmarks on a roller-coaster ride, putting it on the losing end of the trades.

In early April, AIMCo clients said the fund manager faced losses of up to $4-billion but AIMCo has subsequently revised the estimate.

After learning of the loss, many of AIMCo clients met with the fund’s executives and subsequently said they were frustrated with a lack of disclosure on who was responsible for the volatility-linked strategy and what, if anything, went wrong with risk management.

AIMCo’s board took ownership of the trading losses last week and committed to improving performance at the fund manager. “Oversight of AIMCo’s investment strategies and risk management is the responsibility of the board,” the directors said in a press release. “We deeply regret this result and are determined that the lessons from this experience will improve the corporation’s management processes and prevent any similar occurrences.”

AIMCo’s board is led by former Enbridge Inc. chief financial officer Richard Bird and includes retired executives from a number of financial institutions, including BlackRock Inc., Sun Life Financial Inc. and Manulife Financial Corp. The board said it hired senior partners from KMPG’s financial risk management team to conduct "an independent review,” in additional to an internal audit by the fund’s executives. Ms. Zvan, an actuary by training, volunteered to help the Alberta fund’s board after spending 24 years at the $201-billion Ontario teachers’ fund before leaving in January. She is known as one the country’s top risk management experts.

Last month, AIMCo executives also said the fund manager planned to change its approach. “Let me be clear, the performance of this investment is wholly unsatisfactory,” chief executive Kevin Uebelein said in an open letter to clients. “Please know I am fully focused on one thing: making any and all changes to ensure AIMCo is stronger and that we avoid a repeat of this outcome.”

AIMCo incurred its high-profile loss at a time when Alberta’s economy is reeling from the combined impact of the global pandemic and oil price war. The fund manager is a central player in the ruling United Conservative Party’s plans to revive the province.

Last year, Alberta Premier Jason Kenney announced the previously independent pension plan for the province’s teachers is moving into AIMCo next year, a plan the teachers’ union opposes. Mr. Kenney has also been considering moving the province’s contributions to the Canada Pension Plan into AIMCo.

Investment performance is a continuing issue at AIMCo. The firm’s biggest client is the $50-billion Local Authorities Pension Plan, known as LAPP, which oversees retirement savings for the province’s health care workers. Alberta regulations require LAPP to use AIMCo as its fund manager. The pension plan has flagged poor performance as a problem for many years, noting in its most recent annual report that “AIMCo has been short of LAPP’s value-added expectations for 46 consecutive quarters, or 11 years and six months.”

AIMCo is expected to release financial results for the first three months of the year by the end of May, and clients who have been briefed on performance say the fund manager lagged comparable funds across most sectors, in addition to taking a significant hit on the volatility-linked strategy.

The median pension plan return was a 7.1-per-cent loss in the quarter, according to data compiled by a division of Royal Bank of Canada. However, there was a wide range of results, with top fund managers down just 2.9 per cent and the poorest-performing pension plans off by 12.7 per cent, according to RBC Investor and Treasury Services.

“It has been an exceptionally difficult period for Canadian pension plans to navigate, as the markets have been experiencing an unprecedented amount of volatility across asset classes,” RBC executive David Linds said in a release. Canada’s stock benchmark, which is heavily weighted to energy companies, was one of the worst performing markets in the world, with the S&P/TSX Composite Index declining 21 per cent in the first three months of the year.
Janet French of the CBC also reports on how accounting firm to review AIMCo's $2.1-billion investment loss:
Outside reviewers will study how the Alberta Investment Management Corporation (AIMCo) lost $2.1 billion this year on a single investment strategy.

The government-owned investment corporation has called in accounting firm KPMG to conduct an independent review, AIMCo said in a statement published last week.

Barbara Zvan, a past chief risk manager at the Ontario Teachers' Pension Plan, will voluntarily provide advice to the board, the statement said.

"We deeply regret this result and are determined that the lessons from this experience will improve the corporation's management processes and prevent any similar occurrences," it said.

Among AIMCo's $119-billion portfolio is the $18-billion Alberta Heritage Savings Trust Fund and public sector pension plans holding the retirement savings of hundreds of thousands of Albertans.

The Alberta government has decreed that by the end of 2021, AIMCo must also manage investments for the $18-billion Alberta Teachers' Retirement Fund, which has more than 80,000 members.

The Alberta Teachers' Association has called that move a "hijacking" done without consultation.

Objective look at a costly decision

David Long, a past chief investment officer at the Healthcare of Ontario Pension Plan, said on Monday the value of large pension plans can often fluctuate by several billion dollars.

Less common is to lose more than one per cent of a portfolio's value to a single investment strategy, said Long, who is now managing partner of Alignvest Investment Management in Toronto.

AIMCo lost about two per cent of the value of its assets with a volatility-based strategy when the coronavirus pandemic began to pummel the global economy.

A board has the responsibility to arrange an impartial and objective look at decisions made by a management team, traders, and portfolio managers in cases where top managers could have culpability for an error, Long said.

External reviewers will likely study whether AIMCo followed written investment policies and client direction, he said. How straightforward were internal communications? And why did people make decisions at certain times?

"When this amount of money gets lost, presumably unexpectedly, there has to be some level of accountability," he said.

The loss could also affect some of the bonuses AIMCo executives pocket for investment success.

AIMCo's 2018 annual report shows CEO Kevin Ueblein earned $3.4 million that year, nearly $2.9 million of which came from meeting short- and long-term performance objectives.

Teacher renews call for pause

Edmonton school principal Greg Meeker, who spent 12 years on the Alberta Teachers' Retirement Fund (ATRF) board and a decade as board chair, has watched AIMCo's performance closely.

He opposes the government's move to require AIMCo to invest teachers' pension money and said the recent losses should prompt the government to hit pause.

Calling in external consultants to discuss risk strategies should happen before investment decisions are made, not as an "autopsy," Meeker said on Monday.

"This might be the biggest case of shutting the door after the horse has departed," he said.

He said the results of the review should be released publicly and to pension fund managers, which include the Local Authorities Pension Plan, Management Employees Pension Plan and Public Service Pension Plan.

He wants to know how much top executives at AIMCo knew about front-line investment decisions and how those choices aligned with managers' instructions on risk tolerance.

Zvan is "tremendously qualified" and should have good insight for AIMCo, Meeker said. However, he's concerned that her voluntary role may limit the weight AIMCo gives to her advice.

AIMCo declined an interview request on Monday.

The board's statement said the review and any "resulting process enhancements" will be shared with clients and its shareholder — the provincial government — by mid June.
Alright, it was a beautiful Victoria Day yesterday, a nice long weekend where I wanted to relax but my email was cluttered with this story.

Nowadays, whenever I hear about a new article on AIMCo and its infamous volatility blowup, I feel like this guy:

In all seriousness, I'm tired of covering this story, it annoys me for a lot of reasons (mostly because I am disappointed with AIMCo and its senior managers who should have known better) but it needs to be covered properly and there are a lot of things that are not being reported accurately and adding to the confusion.

Let me begin by stating the CBC's Janet French reached out to me yesterday and I put her in touch with Jim Keohane and David Long and told her to talk to them as they are derivatives and pension experts.

Now, let's go over the public statement AIMCo's Board quietly put out late last week:
During the current COVID-19-induced economic downturn one of AIMCo’s investment strategies has performed particularly poorly. This volatility trading strategy incurred a loss of $2.1 billion or about 2% of AIMCo’s portfolio. Oversight of AIMCo’s investment strategies and risk management is the responsibility of the Board of Directors. We deeply regret this result and are determined that the lessons from this experience will improve the Corporation’s management processes and prevent any similar occurrences.

Accordingly, the Board identified three immediate priorities. The first was to limit the damage from the volatility trading strategy.

Second, the Board has confirmed that no other investment strategies could generate substantial losses in very unusual circumstances.

Third, the Board is undertaking a comprehensive review of the volatility trading strategy to identify lessons learned and corresponding enhancements to AIMCo’s investment and risk management processes and has enlisted the assistance of Senior Partners in KPMG’s Financial Risk Management team to provide an independent review. Additionally, Barbara Zvan, former Chief Risk & Strategy Officer of the Ontario Teachers’ Pension Plan has agreed to share her considerable expertise and insights in this regard to support the Board through this process.

The review and resulting process enhancements will be shared with AIMCo’s clients and shareholder with a target completion of mid-June.
Before delving into my comments, make sure you carefully read the last three comments I have written on AIMCo's vol blowup:
There are expert comments from David Long, Jim Keohane and others that need to be read so you understand the risks of this particular vol strategy.

Also, one pension expert told me straight out: "We warn brokers if they come to us with a volatility bomb, we will never engage their services again. Our meetings dropped but we got the message out."

Let this be a lesson to all of you who work at big pensions and take important meetings with big Wall Street brokers peddling you all sorts of ideas. These people aren't your friends, they are looking to make serious money off of you and the pension your work for! (read Frank Partnoy's classic Fiasco and learn how most derivatives salespeople are typically looking to "rip a client's face off").

There are many excellent books on derivatives and blowups, including Philippe Jorion's classic on the Orange County blowup but for my comment, I will bring to your attention this LSE paper by Sebastien Lleo and William T. Ziemba, "How to Lose Money in Derivatives: Examples From Hedge Funds and Bank Trading Departments."

The paper focuses on hedge funds but lessons are important for Canadian pensions doing hedge fund strategies internally. I quote this passage:
A great risk exposure is the extreme scenario which often investors assume has zero probability when in fact they have low but positive probability. Investors are frequently unprepared for interest rate, currency or stock price changes so large and so fast that they are considered to be impossible to occur. The move of some bond interest rate spreads from 3% a year earlier to 17% in August/September 1998 led even savvy investors and very sophisticated Long Term Capital Management researchers and traders down this road. They had done extensive stress testing with a VaR risk model which failed as the extreme events such as the August 1998 Russian default had both the extreme low probability event plus changing correlations. Several scenario dependent correlation matrices rather then simulations around the past correlations from one correlation matrix is suggested. This is implemented, for example, in the Innovest pension plan model which does not involve levered derivative positions (see Ziemba and Ziemba (2013, Chapter 14) . The key for staying out of trouble especially with highly levered positions is to fully consider the possible futures and have enough capital or access to capital to weather bad scenario storms so that any required liquidation can be done orderly.
Now, in AIMCo's case, they weren't prepared for the pandemic and they got their heads handed to them on this vol strategy.

I want to be crystal clear on a few things:
  • AIMCo is not the only Canadian pension plan selling volatility. Most of the sophisticated ones like HOOPP, OTPP and CPPIB have the exact same strategy and when done properly, it makes sense for a large pension with solid balance sheets and a long investment horizon to sell volatility as long as the risks are managed properly.
  • AIMCo did not manage the risks of this vol strategy properly. There is no way they didn't conceive that if this blew up, they'd be facing massive and unacceptable losses.  
  • Dale MacMaster, AIMCo's CIO, isn't stupid. Far from it, he is extremely knowledgeable as are other AIMCo officers who worked on this strategy.
  • The bottom line is they didn't manage the risks properly. They didn't size their positions accordingly, failed to prepare for the unforeseeable and succumbed to heavy losses when market volatility reached levels we haven't seen since the Great Depression.
  • Yes, this pandemic is a once in a century event (let's hope) but saying you "deeply regret the losses" after the fact is totally unacceptable when senior managers are being paid millions and the Board is supposedly overseeing their activities and is suppose to understand the risks they were taking.
  • Despite this massive vol blowup, I still think AIMCo should manage ATRF's assets and think this is in the best interests of Alberta's teachers and taxpayers over the long run. 
Clearly, AIMCo's Board didn't understand the risks of this vol strategy or possibly didn't have a clue of the entire risk profile of this strategy and how senior managers took outsized risks.

Is AIMCo's Board completely incompetent? Of course not, AIMCo's board members are all extremely competent and highly reputable but they dropped the ball on this strategy and I wouldn't be surprised if other board members also dropped the ball on a similar strategy.

Trust me, it's easy. Most of you you have never worked at a large Canadian pension. And many of you who are working at a Canadian pension have never been to a board meeting.

Let me let you in on a little secret. For the most part, these board meetings are deadly boring. Board members are suppose to review and approve a ton of deals every month at these big Canadian pensions, and they often don't have time to review all external and internal strategies in-depth, so they rely heavily on their senior managers not to drop the ball.

And once in a while, when it hits the fan, that's when all hell breaks loose and they are caught with their pants down, after the tide comes in exposing who was taking dumb risks.

Importantly, what happened at AIMCo can happen anywhere, and while it's easy to point the finger at the Board and claim they're incompetent, I assure you that's not the case and it won't solve anything.

Now, let's get to the response. The Board has hired KPMG to review its governance AND separately hired Barb Zvan, OTPP's former Chief Risk and Strategy Officer to help them bolster and improve its governance, especially in regard to these complicated strategies.

It's important to understand KPMG was hired to look at risk governance separately from Barb Zvan.

The guy in charge of financial risk at KPMG Canada is Mohamed Mokhtari, Partner and National Leader, Financial Risk Management:

Mohamed Mokhtari is the national lead partner in charge of the Risk Consulting Advisory Services practice of KPMG in Canada. Mohamed is also our global leader for investment & risk management service offerings initiatives within the context of large public pension funds and sovereign funds. He has 16 years of experience advising financial institutions, pension funds and corporations in sound treasury and risk management practices. Mohamed has worked extensively with large pension funds providing advisory services in the areas of investment management and Investment risk management at the aggregate portfolio level and across the main asset classes and supporting functions. He advises clients on market risk quantification and hedging strategies, and has led projects related to market and credit risk modeling, stress testing and counterparty risk. He also teaches risk management as part as the Executive Education program at HEC Montréal
Full disclosure, I briefly worked for KPMG last year reporting to the Advisory department in Toronto. What I learned was they have experts across public and private markets who really understand risks and governance.

Anyways, I never got to meet Mohamed Mokhtari even though he's based in Montreal because the man is extremely busy. He's in high demand, has an exceptional reputation and we only briefly spoke over the phone once at an internal meeting with other partners going over their prospects and engagements (it was a conference call for those not present and he was traveling on business).

As far as Barb Zvan, everyone knows her stellar reputation. She was the former Chief Risk & Strategy Officer at OTPP  and she is also one of the four authors who wrote the Expert Panel on Sustainable Finance report.

The other three authors are Kim Thomassin, Executive Vice-President and Head of Investments in Québec and Stewardship Investing at CDPQ, Andy Chrisholm, member of the board of directors of the Royal Bank of Canada who spent most of his career at Goldman Sachs serving as head and co-head of the Global Financial Institutions Group, and Tiff Macklem, the former dean of the University of Toronto’s Rotman School of Management and new Governor of the Bank of Canada.

Truth be told, I was suprised Barb Zvan took this mandate with AIMCo as I thought she was working on something else with Mark Carney but she took it. Did Leo de Bever recommend her to the Board or did Helen Kearns who previously sat on OTPP's Board go out and hire her?

I have no idea. It doesn't matter who brought Barb on to review AIMCo's risk strategies and make recommendations, she is extremely competent, perhaps a bit too much so.

Some people who have worked with Barb in the past told me she's very qualified to review but she tends to be a "belt and suspenders" type of manager who imposes a lot of rules and regulations on investment teams.

"If she's going to review this strategy and what went wrong at AIMCo, I guarantee you she will write a detailed report with 20 recommendations, many of which will be excellent but some will be onerous and counterproductive."

Interestingly, people that worked with Barb also told me that under Ron Mock's watch, the position of Chief Risk & Strategy Officer stopped reporting to the CIO and started reporting to the CEO and "she had in camera 15 minute session with OTPP's Board at board meetings to go over risks in their portfolio."

"The problem with Barb is she's a risk person and risk people typically stifle you and suck the air out of a room full of investment managers."

My take? This isn't a Barb Zvan problem, it happens all over Canada's large pensions where senior risk managers are often at odds with senior investment managers and it's often the latter that win when push comes to shove.

I've seen it firsthand. Senior investment officers tolerate risk officers as long as they don't overstep and start asking tough questions.

To be fair, risk officers are often super qualified, have CFAs, FRMs and even PhDs, but they're lousy investment officers because they are risk averse people by nature and in order to make money in markets, you need to take risks, sometimes crazy risks.

"It's like that old saying, ships are safe as long as they are docked at ports but that's not what ships were made for," one senior investment officer told me.

I agree but I've also seen my share of senior investment officers take silly and dangerous risks across public and private markets, so I am not as quick to condemn all risk departments as a bunch of overqualified people who are there to produce useless reports nobody pays attention to.

My problem with risk departments at Canada's large pensions is they're too mathematical, great at producing VaR reports but not as good at understanding qualitative risks which quite frankly requires a different skill set and cross departmental collaboration which sadly is non-existent at Canada's large pensions (but getting better from my time there).

Anyway, back on topic. One expert, Brett Friedman of Winhall Risk Analytics, shared this in an email:
I saw in the news yesterday that AIMCo hired KPMG to do the audit. Not surprising, Boards usually go for a Big 4 under such circumstances for their name and reputation (that is, unless their very survival is on the line -- in that case, they bring in those who really know what to do). The Big 4 then brings in an outside specialist, which is where Barbara Zvan comes in.

Thinking about it, and not to kick a dead horse, the investors still have a problem: the AIMCo Board might be conflicted. Without knowing the full details, and just based on the past 20+ risk reviews I've completed, I'm willing to bet that AIMCo was selling vol because they were under pressure to goose returns to justify their takeover of other teachers' funds. They justified it as "selling insurance" or something low risk like that but that's just a cover -- it seemed like a free 50 bps, worked like a charm for the last few years, and made them seem very clever. I'm also willing to bet that the pressure was coming from the Board itself. Hence, the conflict. It's the classic problem: either they knew about it and did nothing or didn't know about it and should have. Either way, it's bad. KPMG would be nuts to blame the Board that pays them and they will downplay their role in this, burying it in policies and procedures or something bland like that that no one will ever read.

Similar to a workout where each creditor committee brings in their own people, If I were Alberta Teachers or similar pissed off investor, I would be demanding our own reps participate or at least consult in the review to find out what really happened (and to see if there is anything else in the portfolio that is a ticking time bomb). I know that could be very contentious, and I'm not sure they (or you) want to open that can, but is it worth suggesting? With a referral, I would be happy to make the suggestion.

Again, apologies if I'm kicking a very dead horse!
I have spoken to Brett, he's very competent and smart and I have no problem referring hm to AIMCo's Board or the Alberta Auditor General who might be a better fit here (Brett's email is

I don't agree with him, however, that AIMCo's Board is conflicted. Where I agree with him is that these reviews must be transparent to everyone and the findings must be made public.

I am a stickler for good governance and full transparency. What if it embarrases AIMCo, its senior managers and its Board?

Tough luck. Kevin Uebelein and Dale MacMaster are big boys getting paid big bucks, if they are man enough to put these strategies on, they should be man enough to accept the findings and whatever repercussions go along with them.

At the end of the day, you are managing pension assets, you need to take intelligent risks and properly manage the downside.

Some people on LinkedIn and former pension fund managers told me that this proves Nassim Taleb is right and these pension managers should have skin in the game.

I'm less enamored by Nassim Taleb as others and think this notion of pension managers having skin in the game is just as overtouted as hedge fund managers having skin in the game.

I've seen plenty of hedge fund managers with lots of skin in the game take seriously dumb risks over my career and trust me, skin in the game doesn't stop managers from taking stupid risks, it often gives their investors a false sense of security and can even incentivize managers for taking excessive risks.

Having said this, Canada's pension overlords get paid millions of dollars based on four-year rolling average performance, and while it makes sense given their long investment horizon, it can't be used to mask unacceptable risks senior managers might take in any given year.

All this to say, the governance at Canada's large pensions is excellent but it's far from perfect.

The problem is the Office of the Auditor General (federal and provincial) is not staffed properly to conduct a full in-depth review of these pensions doing complex investments across public and private markets and I'm afraid what happened at AIMCo isn't a one-off, it's just that it went public.

We need better whistleblower policies at these large pensions to protect whistleblowers and we might even need to look at Norway's governance model where the central bank reviews risks being taken.

Whatever we do to improve governance, however, can't be at the risk of stifling creativity and intelligent risk-taking behavior which has led to the success of Canada's large pensions.

You need to strike a balance between good governance and good investment management.

Barb Zvan knows all this and I'm sure she will do a great job reviewing AIMCo's risk and investment policies as will KPMG's Mohamed Mokhtari.

Somebody asked me if I want to get involved in this review and I said the last time the Treasury Board of Canada asked me to review the governance of a large Canadian pension, I got bailiffs coming at my house at 7:00 a.m. to threaten me with nasty demand letters which needlessly stressed me (but also emboldened me).

And to add insult to injury, my report which took three months to produce ended up collecting dust in some office in Ottawa and it took the federal government forever to pay me a measly $25,000 for writing that bloody long report!

So, thanks but no thanks, I am done writing reports on pension governance, the topic bores me to death and quite frankly, nobody really cares until the next blowup happens.

I prefer analyzing markets and I believe the worst is yet to come with stocks. Yesterday on LinkedIn I posted this:
Monday's market short squeeze was well orchestrated and telegraphed. Fed Chair Powell on 60 Minutes last night saying the Fed ‘stands ready to do more’ and the Moderna phase I news this morning before the open (to get people all excited over nothing and even scientists are now raising questions). Here is my short term call, the S&P 500 ETF (SPY) will briefly pop above its 200-day and strategists will tell you the bull is back and then we slowly head back down as traders sell the good news of the economy reopening. Either way, this market is so rigged, it’s laughable:

Please stop asking me if I’m still bearish. I remain bearish and think this is the Mother of All bear market rallies based on nothing more than the Fed's swift response and cranking its balance sheet up to wazoo.

As Stanley Druckenmiller pointed out, the Fed can address liquidity, it can't address solvency concerns. So, all of you selling volatility in this market, enjoy goosing your returns while it lasts because when the next downturn comes, vol sellers will get burned badly once again!

Below, one of the greatest investors of our time, Stanley Druckenmiller, Chairman & CEO, Duquesne Family Office LLC, discusses today's market strategies with the moderator Scott Bessent.

All you super smart board members and senior pension managers, take the time to listen very carefully to Stan Druckenmiller, he's spot on.