Arkansas Teacher Retirement System, Little Rock, filed a lawsuit against Allianz Global Investors and subsidiaries, charging the money manager improperly invested the pension fund's assets in three absolute-return strategies.
The lawsuit, filed Monday in U.S. District Court in New York, alleges that AllianzGI employed a "reckless strategy contrary to its obligations to ATRS, and abandoned the risk controls it was required to have in place," according to the court filing.
The $15.3 billion pension fund lost $924 million in value in March from three Allianz structured alpha portfolios, according to recent investment reports. The worst-performing portfolio was the Allianz Structured Alpha Global Equity 500 strategy, which crashed to $206 million as of March 31 from $743 million a month earlier. The Global Equity 350 portfolio's assets fell to $196 million from $411 million, and the U.S. Equity 250 portfolio fell to $100 million from $172 million.
The numerical values in the strategy names correspond to the amount of alpha in basis points above a corresponding index the strategy is expected to achieve.
The lawsuit, which claims negligence, breach of fiduciary duty and breach of contract, alleges that AllianzGI "abandoned the funds' investment thesis" by repositioning the portfolios in late February and early March to recoup losses incurred in February, according to the filing, and the portfolio's positions "left the funds dangerously exposed to even the slightest increase in market volatility or decline in equity price," which the lawsuit says Allianz economists and many others warned were on the immediate horizon, the filing said.
AllianzGI's structured alpha strategies have historically been designed to be both long and short volatility, according to a September 2016 presentation: Taking range-bound spread positions, to sell options that were most likely to expire worthless (short volatility); hedged positions designed to protect against market crashes (long volatility); and directional spread positions designed to generate returns when equity indexes rise or fall more than usual during multiweek periods (long/short volatility).
The lawsuit seeks a "money judgment against defendants exceeding $75,000, the amount to be determined at trial," according to the filing.
Avi Josefson, partner at Bernstein Litowitz Berger & Grossmann, attorney for the plaintiff, said in an email that "Allianz's mismanagement of the Alpha Funds caused massive losses, and its refusal to account to its clients left Arkansas Teacher with no choice but to take action to recover its losses."
John Wallace, AllianzGI spokesman, said in an email: "The premise of the lawsuit is simply incorrect and without foundation, as the funds in the Structured Alpha portfolio did not diverge from their investment strategy. Our own analysis has revealed that the portfolio was at all times managed to its alpha targets and in accordance with its design. While the losses suffered in the portfolio are deeply disappointing, there is no basis for legal liability. AllianzGI intends to defend itself vigorously against these allegations."
