By Alfredo Merlet

Between January and September 2026, Fund E, the most conservative of Chile’s five mandatory pension fund types, lost about ten per cent in real terms, its second-worst result on record, while the funds’ positions in foreign interest-rate derivatives swung to a reported valuation loss of about US$7.7 billion. This article asks why standard Value-at-Risk (VaR) measures did not warn of the loss. Using daily unit values for the seven pension fund administrators (AFPs) from January 2015 to October 2026, Chilean and US government yields and the exchange rate, I estimate the funds’ effective duration to US long-term yields and backtest six VaR models at daily and monthly horizons. Four hypotheses were stated before estimation. First, Fund E’s sensitivity to the US ten-year yield rose from about 0.2 years in 2016-2019 to 7.2 years in 2026 (change 6.3 years, z = 11.4), rising from late 2022 and accelerating from late 2023, consistent with the build-up of receive-fixed dollar swaps; US rates account for-7.9 of the-6.5 percentage points of nominal return in January-September 2026. Second, contrary to the hypothesis, daily 99% VaR models broadly met their coverage in 2026 (three to six exceptions against about two expected); the loss was a persistent drift, not a sequence of tail days. Third, an exposure-adjusted VaR, which applies the current factor exposure to a long history of rate moves, rose to 7.4% of the fund for a one-month horizon in June 2026, more than twice the 3.5% given by historical simulation scaled by the square root of time, which was then at its lowest level since early 2024; only the exposure-adjusted measure covered the September 2026 loss of 5.1%, in all seven AFPs and in nine window combinations. Fourth, differences in pre-shock exposure across AFPs did not significantly predict the size of the loss (Spearman ρ = 0.50, exact p = 0.13). The gap between what a volatility-based VaR measures and what the portfolio is exposed to supports the stress-based derivatives limit that the regulator introduced in April 2026.

Source SSRN