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Alberta’s public-sector investment manager has suffered from a poor approach to risk management and insufficient oversight, which led to its $2.1-billion loss on derivatives trading, an investigation by the Crown corporation’s board of directors has concluded.

Alberta Investment Management Corp., known as AIMCo, failed to properly gauge the potential for huge losses from a derivative trading strategy that involved betting against market volatility. In fact, AIMCo expanded the program two years ago and was too late to cut its losses before markets whipsawed in March, said the board’s report into the trading rout, released on Thursday.

“The losses incurred by our clients as a result of the [volatility] strategy are wholly unacceptable,” the report said. “The board is determined that the lessons from this experience will improve AIMCo’s management processes, prevent any similar occurrences and, most importantly, strengthen the risk culture of AIMCo.”

The board, assisted by Barbara Zvan, former chief risk officer of the Ontario Teachers’ Pension Plan, investigated what went wrong, and listed 10 changes that AIMCo has adopted. They include giving senior executives and the directors more oversight, making sure risk-management and investment staff collaborate more closely, and developing procedures to identify which strategies could lead to large and unexpected losses.

Kevin Uebelein, AIMCo’s chief executive officer, said he bears the ultimate responsibility for the failed strategy and for improving the culture and procedures.

“I’m the CEO, so ultimately the accountability falls entirely in my lap. That’s for the performance of investments and anything else that happens at AIMCo,” Mr. Uebelein said in his first interview since the trading loss came to light in April.

“So with the board’s report, I’ve been doing my own analysis and research, my own personal learning. Frankly, the board and I have reached virtually the same conclusions about what should have happened differently and didn’t, and what needs to be done.”

AIMCo 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.

When financial markets went on a roller-coaster ride in response to economic disruptions caused by COVID-19, the volatility bet – which had been a reliable moneymaker since AIMCo adopted it in 2013 – produced outsized losses equal to a sixth of its 2019 investment returns. It has scrapped the strategy.

The loss, which came on top of other negative investment results amid the pandemic, prompted pension-fund clients to question why AIMCo did not adequately manage the risk, and why it traded such derivatives. It has also fuelled heated debate in Alberta over Premier Jason Kenney’s recent legislation that puts more pension funds under the AIMCo umbrella, and his proposal to pull out of the Canada Pension Plan and launch a provincial one.

The debacle caused internal upheaval. Last month, AIMCo said it had parted ways with its vice-president of public equities and a portfolio manager who ran the volatility-based strategies. Mr. Uebelein declined to say if more staff changes are possible.

The board accurately identified the problems with the corporate culture as it relates to risk and what needs to be done to prevent multibillion-dollar losses in the future, he said. No employee at AIMCo, regardless of job function, can assume that managing risk is someone else’s job, even though there is a risk-management team, Mr. Uebelein said. Most employees see that as part of their role, but it has to be all staff, he said.

The board said the cause of the failure of the volatility strategy was that “the breadth and depth of risk governance controls, collaboration and risk culture” were unsatisfactory, despite some improvement in recent years.

The changes don’t necessarily prohibit future derivatives trading, but establish much more stringent review, analysis and approval processes – including board approval at a “significant” level of exposure, the report said.

Mr. Uebelein called the fallout from the volatility loss “painful and demoralizing.”

“We know that we could and should be doing better. We know that we as an organization are better than this. We know that we have to be forthright and transparent with our clients, which we have been,” he said. “It is a gut punch, but it’s one that I think we’ve managed through quite well; in other words, we can’t afford to let anything else not get done, and so we’re not going to let anything else not get done.”

Last month, AIMCo’s largest client, the Local Authorities Pension Plan, reported it had suffered a 10.2-per-cent loss in the first quarter. The $50-billion plan, whose beneficiaries are health care and municipal workers, tempered some of the loss with its own investments.

Key recommendations from AIMCo investigation report

Chief executive, risk and investment officers to take personal leadership roles in making sure risk and investment management staff have collaborative relationship. A portion of investment and risk-management staff compensation to be tied to improved collaboration.

Management will reinforce need for appropriate companywide risk culture, with better description of risk appetite and tolerance.

Management will submit to the board revised approval thresholds for any investment strategy or product involving options, swaps or other derivatives, other than derivatives used solely for purposes of hedging risks.

The board to be kept apprised of stress-test results for strategies with potential for outsized losses.

Escalation and remediation procedures will be developed to identify risks that could lead to disproportionate or unexpected losses, regardless of the risk limit.

Risk-management group will provide an independent review of all significant investment risks associated with new or expanded investments.

CEO will update AIMCo’s talent-management strategy, organizational design and management-succession plan.

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