Milwaukee City Employes' Retirement System filed a lawsuit against Allianz Global Investors, alleging mismanagement of hedge funds the firm managed for the $5.4 billion pension fund.
The lawsuit, filed Oct. 16 in U.S. District Court in New York, alleges Allianz Global Investors was negligent in its management of its Structure Alpha strategies, resulting in losses in February and March totaling $286 million for the pension fund, according to the court filing.
The pension fund was invested in the manager's Structured Alpha 1000 Plus and Structured Alpha U.S. Fixed Income 250 strategies. 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 Allianz structured alpha strategies historically have been designed to identify "areas of systematic disagreement with option prices about the probability distribution of future index moves," according to a September 2016 AllianzGI presentation.
After extreme losses by the two strategies in which it was invested in February and March, the pension fund terminated investment in the strategies effective March 26.
The lawsuit, which includes claims of negligence, breach of fiduciary duty and breach of contract, alleges that AllianzGI "abandoned the hedging strategies that it was supposed to have in place to provide structural risk protections to the alpha funds in any market environment."
An AllianzGI spokeswoman said in an emailed statement that while the losses in February and March were disappointing, the pension fund's allegations are "legally and factually flawed, and we will defend ourselves vigorously against them."
"As was fully disclosed, the structured alpha funds involved risks commensurate with those higher returns. CMERS, and its investment consultant (Callan), determined that the structured alpha portfolio fit with its overall investment goals and risk tolerances," the spokeswoman said.
Avi Josefson and Hannah Ross, both partners at Bernstein Litowitz Berger & Grossman, the Milwaukee fund's attorney, could not be immediately reached for comment.