Raytheon lost $280M on a volatility fund — a defense contractor's financial bet gone wrong

Raytheon Technologies was one of the world's largest defense contractors, building missiles, radars, and aircraft systems for the US military. In 2020, the company disclosed that it had lost $280 million from its investment in the Allianz Structural Alpha volatility-selling funds — the same complex strategy that cost the Arkansas Teacher Retirement System $770 million.

Raytheon had invested in the Allianz funds as part of its corporate treasury management, seeking higher returns on its cash reserves. The strategy involved selling options on the S&P 500 — a bet that markets would remain calm. The strategy generated steady income in normal markets but was catastrophically exposed to a volatility spike.

When the COVID-19 pandemic hit in March 2020, the S&P 500 volatility index (VIX) spiked to an all-time high. The Allianz funds collapsed, and Raytheon's investment was nearly wiped out. The $280 million loss was a significant hit for a company that had reported $7.2 billion in operating profit the previous year.

The loss was particularly embarrassing because Raytheon was a defense contractor — not a hedge fund. Shareholders questioned why a company that builds missiles was speculating on market volatility. The case became a textbook example of why non-financial companies should not be running complex option strategies with their cash reserves.