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What Happened

In 2018, Norwegian trader Einar Aas suffered losses exceeding €100 million while trading energy derivatives in the Nordic power market. The losses were large enough to trigger a default at Nasdaq Clearing, impacting multiple market participants.

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Market Context

Aas was trading power spread contracts, which are price differences between regions in the electricity market. These spreads are typically:
  • low volatility
  • mean-reverting
  • considered relatively stable
This made them attractive for leveraged positions.

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The Core Mechanism

The strategy relied on:
  • historical stability of spreads
  • convergence between regional prices
  • relatively small price fluctuations
However, these assumptions failed under changing market conditions.

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What Changed

An unusual combination of factors occurred:
  • weather-driven supply shifts
  • changes in energy flows across regions
  • reduced liquidity
This caused spreads to move sharply and persistently.

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Why It Failed

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1. Concentration Risk

Multiple positions were exposed to the same underlying factor: → regional price relationships in the power market Despite appearing diversified, the portfolio was highly concentrated.

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2. Correlation Breakdown

Assets that historically behaved predictably diverged. → relationships that were assumed stable stopped holding

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3. Leverage

Positions were large relative to capital. → small price changes produced outsized losses

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4. Tail Risk

The strategy worked under normal conditions. → but was exposed to rare, high-impact events

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Outcome

Losses accumulated rapidly. Margin requirements increased. Positions could not be maintained. → The account collapsed.

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Key Insight

Stability in historical data does not guarantee stability under stress.

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Structural Lesson

The failure was not due to a single bad trade. It resulted from:
  • concentrated exposure
  • reliance on stable correlations
  • sensitivity to rare events

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Connection to Risk Management

This case illustrates that:
  • low volatility strategies can carry hidden risk
  • correlation can increase suddenly
  • diversification can be misleading

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Final Insight

The critical question is not:
“How stable has this strategy been?”
But:
“What happens when its underlying assumptions break?”
→ Accounting for Correlated Risk in Trading
→ How Losing Streaks Actually Behave
→ The Real Reason Accounts Blow Up