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The Calgary skyline, photographed on Sept. 15, 2017. Alberta's public-pension manager has spoken out about a costly bet on market volatility and launched an internal review.Jeff McIntosh/The Canadian Press

Alberta’s public pension manager has estimated losses from a bad bet on market volatility at $2.1-billion and said its board of directors has launched a review of the strategy that led to the costly rout.

In a letter posted online, chief executive Kevin Uebelein said that Alberta Investment Management Corp. takes responsibility for the losses and has worked to limit the eventual damage.

Last week, The Globe and Mail, quoting sources at AIMCo’s pension-fund clients, reported that it incurred up to $4-billion in realized and unrealized losses, and that some could be recouped. On Thursday, AIMCo said the loss was less significant. The final tally is expected by June.

Nonetheless, Mr. Uebelein, in his first public comments about the situation, called the recent performance of the volatility-linked investment strategy “not acceptable.”

“Let me be clear, the performance of this investment is wholly unsatisfactory, and AIMCo’s board and management share the frustration and disappointment of our clients, their beneficiaries and all Albertans. We are committed to learning important lessons from this experience,” Mr. Uebelein said in the letter.

"AIMCo’s board of directors has begun a thorough review of this situation. They are using both the strength of AIMCo’s internal audit capabilities, as well as outside, third-party experts."

He said Albertans’ retirement investments are not at risk.

AIMCo is a Crown corporation that manages $119-billion for 31 clients in Alberta. They include public-sector pension funds and government accounts such as the $18-billion Heritage Savings Trust Fund, the rainy-day fund built in the 1970s from a portion of oil and gas revenues.

Starting in March, it suffered far larger losses than comparable funds on financial contracts that pay off only if stock markets remain stable. It suffered the 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. The strategy raised questions about the level of risk AIMCo had taken on as a steward of pensions and public funds.

Mr. Uebelein said AIMCo was unable to offset the losses with gains that would normally follow when markets calmed down.

"As an independent investment manager, AIMCo takes full responsibility for the investment losses incurred by this strategy. Over the past few weeks, we have focused on implementing measures to minimize the potential losses from this strategy and across our entire portfolio, while honouring our commitment that our clients remain fully informed of our results,” Mr. Uebelein said.

The losses reaffirmed the importance of diversifying investments over the long term while managing total risk, he said. He did not comment on what would constitute undue risk for AIMCo.

The fund manager suffered the rout at an uncomfortable time for Alberta Premier Jason Kenney, whose province is struggling with severe economic strain due to the slowdown caused by the coronavirus pandemic and collapse in oil prices.

Last year, his government passed legislation that will put the pensions of Alberta teachers under the AIMCo umbrella. Teachers and their union have staunchly opposed the move and word of the failed investment only inflamed their opposition. The transition is not due to be completed until late 2021, however, so they did not suffer the loss.

Mr. Kenney has also proposed the idea of pulling Albertans’ public pensions from Canada Pension Plan and having them managed by AIMCo, though no decision has been made.

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