Latest ERS options fiasco falls on leadership failure

“Harvard, Hawaii Gambled on Market Calm — Then Everything Changed” was a sobering Wall Street Journal headline on Feb. 14. This detailed how Harvard and Hawaii pension systems had engaged in selling put options against the volatility index resulting in significant losses.

On Feb. 15, Pacific Business News reported that Hawaii Employees’ Retirement System chief investment officer Vijoy Chattergy was fired. How could this happen to the pension fund so many are counting on? In a nutshell, ERS was enamored with the allure of “easy money” generated selling put options — insurance/hedges that market volatility would remain in a stable range.

Complacency and years of low volatility were a ticking time bomb. During the recent market sell-off, volatility exploded, with an ensuing “acceleration event” which decimated billions in investments on the wrong side of the trade. Hawaii ERS was one of those losers. The market has bounced back somewhat since then, but those dangerous volatility puts are indelible, unrecoverable losses.

Hawaii has a major pension liability and is deeply underfunded. They have made several key changes to avert a true crisis, but this latest options fiasco still falls on leadership failure. I am not a Hawaii ERS member. I believe members should be questioning the leadership and review the selection process for advisers and strategies.

Along these lines, the contrived “revitalization” of Kaanapali project should be tabled and subjected to a similar review process as former chief investment officer Chattergy. ERS should stand for fiscal and community responsibility, not another “Big Short” gone awry.

Gary Weiss