New York’s Metropolitan Transportation Authority (MTA) Defined Benefit Pension Plan Master Trust, Manhattan and Bronx Surface Transit Operating Authority Pension Plan and MTA Other Post-Employment Benefit Plan have filed a lawsuit against Allianz Global Investors U.S. alleging mismanagement of an AllianzGI Structured Alpha (SA) fund caused “astonishing” losses.

As alleged in a similar case filed by the Blue Cross and Blue Shield Association National Employee Benefits Committee, the lawsuit says the investment manager “failed to act as a reasonably prudent manager would act in the face of an historic market dislocation, and failed to follow the ‘all-weather’ hedging and risk-management strategies that it repeatedly touted as capable of ‘perform[ing] whether equity markets are up or down, smooth or volatile.’”

The MTA plaintiffs claim they “reasonably relied on AllianzGI’s representations that it would manage the fund with an eye toward managing risk, in particular the specific approach of buying put options to guard against market downturns,” and that they “relied on these representations when they invested, continued to invest and when determining to remain invested in the fund at various times throughout their investment.”

The lawsuit also alleges that AllianzGI was motivated by an “incentive allocation.” The complaint states, “If the fund had no positive returns for the quarter and investors began to withdraw their funds, AllianzGI would receive no compensation. Moreover, because of the structure of the fund, AllianzGI knew that if it adhered to its investment strategy, it would take multiple quarters, if not years, to get back to even, meaning it would take multiple quarters, if not years, for AllianzGI to see any revenue for itself. At the beginning of March, with only one month to go before quarter-end, AllianzGI therefore disregarded its strategy and took unreasonable risks with its investors’ money to generate at least some returns, which in turn would generate some revenue for itself.”

The complaint says that, in effect, “AllianzGI bet the house that the market would rebound.” It says this decision was at odds with the advice of Mohamed El-Erian, chief economist at Allianz SE. Allianz SE is also a defendant in the case.

On April 23, the MTA plaintiffs redeemed what was left of their investments in the fund. According to the lawsuit, the MTA Other Post-Employment Benefit Plan redeemed $644,124.00 (from an account balance of $23,540,148.14 on December 31); the MTA Master Trust redeemed $5,246,860.64 (from an account balance of $191,751,709.49 on December 31); and the Manhattan and Bronx Surface Transit Operating Authority Pension Plan redeemed $3,157,774.78 (from an account balance of $115,404,001.35 on December 31). “As a result of AllianzGI’s negligent and imprudent mismanagement of the fund, the MTA plaintiffs lost an astonishing 97.26% of the value of their investments between December 31, 2019, and the final redemptions on April 23,” the complaint states.

AllianzGI told PLANSPONSOR, “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 claimants are legally and factually flawed, and we will defend ourselves vigorously against them.

“The claimants are professional investors, most of whom were advised by a sophisticated investment consultant to evaluate the Structured Alpha strategy,” AllianzGI continued. “They bought these hedge funds in the knowledge that they sought to deliver substantial returns, net of fees, of as much as 10% above the returns of the fund’s benchmark, an index like the S&P 500. As was fully disclosed, the Structured Alpha funds involved risks commensurate with those higher returns. The MTA determined that the Structured Alpha Portfolio fit with their overall investment goals and risk tolerances.”