Another Lawsuit Challenges Fund Manager Strategy During COVID-19 Market Crash

Allianz Global Investors (AllianzGI) and related entities, including its parent company, are facing a third lawsuit alleging the stated investment strategies of the AllianzGI Structured Alpha Funds were abandoned, resulting in significant losses to a pension fund.

The Employees’ Retirement System of the City of Milwaukee (CMERS) was a passive investor in the Alpha Funds, having ceded all discretion to its fiduciary, AllianzGI, according to the complaint. Similarly to the plaintiffs in the other lawsuits filed recently, CMERS alleged that, before the market crash caused by concerns over the COVID-19 pandemic, AllianzGI abandoned the hedging and risk-management strategies that it marketed as “generating returns in times of rising or falling equity markets and both low and high market volatility.”

In addition, the lawsuit says the asset manager, in an attempt to generate returns and earn income for itself, sold the hedges that could have protected the funds during market volatility.

The CMERS lawsuit says AllianzGI explained in its response to a due diligence questionnaire that it was supposed to use “proprietary quantitative tools to stress test positions at both the individual and portfolio level” in an “iterative” process that could identify “any potential areas of unintended risk for a given scenario.” AllianzGI said it had “developed deep analytical capabilities” that it believed were “crucial to manage an option strategy with due mathematical rigor and care.”

These risk control measures were supposedly overseen and enforced by the Allianz Global Investors defendants, and AllianzGI’s parent, Allianz SE. “Had AllianzGI actually run and adhered to the stress-test protocols that it was required to follow, the funds’ exposure to the market conditions in February and March 2020 would have been readily apparent, and their losses averted,” the lawsuit claims.

In a March 26 analysis of AllianzGI’s management of the Alpha Funds, CMERS’ investment consultant, Callan, recommended that CMERS terminate its investment in them “due to the outsized magnitude of realized losses incurred year-to-date 2020, heightened risk related to the ongoing viability of the Structured Alpha platform business due to losses and incentive fee model, and the lack of formal communication from AllianzGI during the recent periods of uncertainty, which exacerbates uncertainty regarding the portfolios going forward,” the complaint states. CMERS says between January 1 and March 27, it lost at least $286 million on its investments in the Alpha Funds.

In a statement to PLANSPONSOR, Allianz Global Investors said: “As we set out at the time, the Structured Alpha portfolio sustained losses during the severe market rout in late February and March. While the losses were disappointing, the allegations made by the Employees’ Retirement System of the City of Milwaukee (CMERS) are legally and factually flawed, and we will defend ourselves vigorously against them.

“CMERS is a professional investor and was advised by a sophisticated investment consultant to evaluate the Structured Alpha strategy. CMERS bought these hedge funds in the knowledge that they sought to deliver substantial returns, net of fees, of as much as 10% above the fund’s benchmark index return. As was fully disclosed, the Structured Alpha funds involved risks commensurate with those higher returns. CMERS, and its investment consultant, determined that the Structured Alpha Portfolio fit with its overall investment goals and risk tolerances.”