Arkansas teachers' pension lost $770M on a volatility fund — the bet on calm

The Arkansas Teacher Retirement System (ATRS) was a $19 billion pension fund responsible for the retirement savings of Arkansas's public school teachers. In search of higher returns, ATRS invested heavily in a complex strategy offered by Allianz Global Investors — a volatility-selling structured products fund that generated steady income by selling options on the S&P 500.

The strategy worked beautifully in calm markets, collecting option premiums month after month. ATRS was one of the largest investors in the Allianz volatility funds, committing hundreds of millions of dollars. The pension fund's board believed the strategy was low-risk, because volatility selling had been profitable for years.

When the COVID-19 pandemic hit in March 2020, the stock market crashed and volatility exploded. The Allianz funds suffered catastrophic losses as the options they had sold went deep into the money. ATRS lost $770 million — nearly 40% of the fund's investment in the strategy.

The loss was devastating for a pension fund that served public school teachers. It became one of the largest pension fund losses from a single investment strategy, and was part of a broader scandal in which Allianz was charged with fraud for misleading investors about the risks of the volatility strategy.