A U.S. District Court judge in New York ruled Thursday that some claims in lawsuits filed by a dozen institutional investors alleging mismanagement related to an enhanced return strategy managed by Allianz Global Investors can move forward.
Plaintiffs alleged in the suits that AllianzGI abandoned its investment and risk management strategies in the management of its Structured Alpha strategies that subjected investors to "undisclosed risk and ultimately led to the massive losses the funds incurred in February and March of 2020."
U.S. District Judge Katherine Polk Failla denied some of AllianzGI's motions to dismiss regarding certain claims in the various lawsuits. One such denial was that she said plaintiffs could move forward in attempting to show the manager violated terms of a private placement memorandum for the Structured Alpha funds.
When addressing three plaintiffs' allegations of breach of the implied covenant of good faith and fair dealing in the alternative to their contract claims, Ms. Failla denied AllianzGI's motion to dismiss the claim due to a failure to "identify any gaps" in the governing documents.
Ms. Failla did dismiss some state law-based claims. An AllianzGI spokesman said in an email the court filing was an "early procedural ruling in which the court made no decisions on the merits of the plaintiffs' complaints. We appreciate that the court has limited some claims, and we will continue to defend ourselves vigorously in these actions."
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, which added the investment process was designed to be both long and short volatility.
It consisted of 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 AllianzGI spokesman said in an email in June 2020 that the strategies suffered in the face of "unprecedented market turmoil" during March of that year.
During March 2020, the largest five-day percentage change in the CBOE Volatility index was 151.7%, greater than the largest five-day change of the VIX of 55% during the global financial crisis in the 2008-2009 period.
Plaintiffs in the lawsuits, however, said AllianzGI had purchased hedging puts "further out of the money" than the manager had represented in order to save on costs, purchased hedging puts that expired sooner than the risk-bearing options it hold, bet against large increases in volatility by selling options on volatility indexes and failed to conduct adequate stress tests, according to Thursday's court filing.
Among the plaintiffs is the $21.2 billion Arkansas Teacher Retirement System, Little Rock, which was the first asset owner to file a lawsuit in July 2020 and alleged 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 its original court filing.
ATRS lost $924 million in value in March 2020 from three Allianz structured alpha portfolios, according to the system's 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.
Other plaintiffs include Raytheon Technologies Corp., Waltham, Mass., the $5.4 billion Milwaukee City Employes' Retirement System and Blue Cross Blue Shield's national employee benefits committee.