ANDREW WILLIS and BERTRAND MAROTTE AND KONRAD YAKABUSKI

TORONTO AND MONTREAL — The Caisse de dépôt et placement du Québec on Tuesday revealed the unprecedented steps it took to exit derivative and currency hedging positions during the recent market downturn, a damage control exercise that is playing out at most major Canadian pension funds.
As speculation continues to swirl over possible losses at the country's largest pension fund, Caisse executives explained that last month, with the loonie in freefall, the fund “adjusted its currency-hedging operations in the context of the Canadian dollar's instability and closed out certain futures contracts that could have created the need for additional capital in a down market.”
The $155-billion money manager is sticking with its policy of only revealing performance at year-end.
The Caisse also sold “liquid securities” last month, a move meant to preserve capital. Sources close to the Caisse have said the fund dumped up to $10-billion of stock, but Caisse executives say the sales were “much smaller,” without giving details.

The Caisse's wheeling and dealing is typical of what large funds are doing to cope with a violent shift in markets at a time when investments are tied up in multiple currencies and long-term holdings such as real estate and private equity. The Montreal-based fund said Tuesday that “like all the world's large institutional investors, [the Caisse] has to adjust its strategies in response to a financial crisis whose course over the short term is unforeseeable.”
While the Caisse is putting the best face on strategies used to invest the retirement savings of Quebec residents, opposition politicians in the midst of an election campaign continue to question the fund's leadership and results.
There has been widespread speculation in Quebec business circles that newly named Caisse chief executive officer Richard Guay will not return to the fund after a medical leave that is scheduled to end on Dec. 10 – two days after voters go to the polls. Mr. Guay took the top job in September; prior to that, he was the fund's chief investment officer.
A Caisse director who spoke on condition he not be identified said the board dismissed suggestions it has lost confidence in Mr. Guay's abilities to lead the Montreal-based fund through the global financial meltdown. The director said: “He has the full support of the board.”
The Caisse also continues to grapple with problems created by the 15-month-old freeze in Canada's $32-billion third-party asset-backed commercial paper (ABCP) market. An ABCP restructuring backed by the Caisse was to be completed by month-end but was delayed yesterday, with no new deadline set.
To date, the Caisse has written down the value of its $13-billion ABCP portfolio by $1.9-billion or 15 per cent. In contrast, Desjardins Group, another large Quebec financial institution, has written down its holdings by 30 per cent.
An executive at one of seven Quebec plans that have their money invested by the Caisse said: “There was a clear lack of oversight there. They failed to consider the liquidity risks [of having so much tied up in ABCP].”
He added that this whole saga – the ABCP freeze and the Caisse's scramble during the market meltdown – will create resentment among the different portfolio teams within the fund, since the failures of a few are pulling down results for the entire organization. “The Caisse is a confederation of fairly autonomous [portfolio management] units. There is competition between them.”