AIG and the Quants

Today, the NY Times has an excellent article that starts to shed some light on how AIG was brought down.  I’ll be honest, when I heard AIG was getting rescued by the US government, it wasn’t all that clear how things could have gone so wrong for them. AIG was everywhere and looked to be doing pretty boring stuff – insurance.  In India, AIG has an insurance partnership with the Tata Group – the largest private company in India and well regarded.

The article focuses on AIG Financal Products (AIGFP) based in London as the culprit for the turmoil of AIG. In the quarter that ended Sept. 30, 2007, A.I.G. recognized a $352 million unrealized loss on the credit default swap (CDS) portfolio. At the end of A.I.G’s most recent quarter, the London unit’s losses reached $25 billion.

AIGFP seemed to be doing deals with all types of financial products. One of the deals involved acquiring an equity state in Aspect Capital back in Jan 2006.  AIGFP took a 4.3%  stake and provided USD $75 million in capital to Aspect’s investment programs.

Who is Aspect Capital?  Here’s the blurb from their website:

Aspect Capital (“Aspect”) is a systematic investment manager. The company applies a quantitative and systematic approach to investment management with the aim of generating high-quality and diversifying alpha for its clients’ portfolios.

Aspect was started by Michael Adam, Martin Lueck, Eugene Lambert and Anthony Todd. All of them used to work at Man Investments (MI), which currently manages around USD 80 billion.  In fact, Adam is the “A” and Lueck is the “L” in AHL, the highly successful algorithmic fund at MI – Man AHL .

So why the investment from AIGFP, access to their trading models, access to their capacity, access to their clients?  My guess is AIGFP was making so much money, they were just looking to stash their cash flow into all types of deals.  I’m sure this deal worked out better then their investments in the CDS business.