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Philosopher’s Stone was Fool’s Gold: The Alliance Disaster

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(Bloomberg) — They’ve been touted as the philosopher’s stone: Allianz SE’s “Structured Alpha” hedge funds were designed to make profits when markets are up, when they’re down, even when they’re just creeping along.

Hardly anyone in the management of the German insurance giant seems to have questioned the claims of a small group of financial gurus who managed these funds in sunny Florida.

Two years after the spectacular collapse of the fund, with damage estimated by some at 6,000 million dollars (5,500 million euros), the shock waves from Florida continue to shake the group’s headquarters in Munich, 8,000 kilometers away.

The races have been ruined. Complaints and comparisons accumulate. The US Department of Justice and the US Securities and Exchange Commission are investigating. Allianz set aside €3.7bn for the February disaster, but the final accounts are still pending, and could be billions more.

Even after all these months, the big question remains: How could a few obscure fund managers, names that didn’t appear on any list of hedge fund luminaries, drive such a big hole in Allianz’s balance sheet? A global company whose history dates back to the era of Otto von Bismarck?

Court filings, Allianz marketing materials, and people who know Structured Alpha’s strategy firsthand tell a classic Wall Street story of salesmanship and greed. It is a lesson in our fickle times.

no misconduct

The alliance, which denies any wrongdoing, said earlier this month that the independent advisers it has hired to investigate the events have so far not found the board to be “lacking in duty”. A spokesman declined to comment.

At the center of the debacle is Greg Tournant, 55, a stock options expert and former management consultant for McKinsey & Co. The French-American joined Allianz Global Investors in the early 2000s through Oppenheimer Capital.

Upon investigation, it turns out that Tournant and other Structured Alpha fund managers, including long-time colleague Trevor Taylor, had struggled with similar strategies before. Long before the pandemic, a small investment firm collapsed, a foretaste of later calamities. This is reported by two former directors of the company. Tournant and Taylor declined to comment.

Tournant and his structured Alpha team should deliver above average returns for AllianzGI. Instead of applying the standard formula for hedge fund fees, the “2 and 20” mix of management fees and a share of profits, they were paid for one thing: performance. The higher the earnings, the higher the payday. While Allianz made no bones about the deal, disgruntled customers later claimed that was the main reason for the risks.

Tournant also personally invested heavily in the funds he manages, according to a person familiar with the matter. In early March 2020, realizing the impact of the pandemic on his bottom line, Tournant took sick leave for unexplained reasons, the person said. That didn’t end Structured Alpha’s problems.

panic days

The job finally collapsed in the early days of the Covid-19 panic when wild market swings changed the options strategy, which, according to fund managers’ marketing parlance, was designed to “generate alpha regardless of the waves of the market”. In the first quarter of 2020, five structured alpha funds lost between 49% and 97% of their value.

In the ensuing blame game, some big investors accused the advisers they hired to review Structured Alpha of not heeding the warning signs and not understanding what the funds were actually doing.

Since then, Allianz has resolved some of its legal difficulties, including through a settlement reached in February with most of the investors on unspecified terms. In general, however, the firm argues that the clients were experienced investors who knew what they were getting into.

The insurance company keeps sweeping up the broken pieces. She fired Tournant and another fund manager, Stephen Bond-Nelson, accusing them of violating compliance rules, according to public filings with the Financial Industry Regulatory Authority. Tournant and Bond-Nelson declined to comment.

More on the topic: Allianz fires fund managers after billions in fund lawsuits

Roman Frenkel witnessed an earlier failure firsthand while working at Innovative Options Management, a small Miami firm that briefly helped Tournant while also working for Allianz. His bankruptcy came in 2008, when the collapse of Lehman Brothers rocked global finance and paralyzed the markets, and with them the business of Innovative Options.

“The spreads were so wide they couldn’t close their positions,” said Frenkel, who served as chief compliance officer for Innovative Options. Instead of expanding with the company, Frenkel helped liquidate it.


Tournant returned to Allianz and enjoyed success in the long bull market that followed the financial crisis. Well-funded investors jumped in, including dozens of pension funds from public and private institutions like Blue Cross & Blue Shield and the New York Metropolitan Transportation Authority.

Structured Alpha performance was solid. One of its US equity funds produced an average annual return of 10.9% between early 2005 and June 2018, compared to 8.7% for the S&P 500 during the same period. This is according to a 2018 marketing document. Allianz trusted the Tournant team so much that it allowed a performance fee of 25% to 30% of net capital appreciation compared to a benchmark index.

Furthermore, Allianz assured investors that the more volatile the markets became, the more profitable the funds would be. Structured Alpha’s risk management processes are protected. As of December 2019, Structured Alpha had grown to more than $10 billion in assets under management, according to a person familiar with the matter.

But when the pandemic hit, everything went haywire. Investors say Allianz and Structured Alpha gave up risk control and created a mess by overcoming a bad strategy. At least that’s what the Arkansas Teachers Retirement System claims, which has sued for its $624 million in structured alpha losses and has since settled.

A pension fund run by the American International Brotherhood of Electrical Workers union filed a lawsuit in 2020 outlining what it believes went wrong. The fund claims that structured alpha made a fatal bet against further market declines when the pandemic began to increase volatility in February. To do this, the fund sold options to other investors that would be paid out if the S&P 500 fell.

The gamble turned out to be a debacle when the index fell 13% in March, its worst month since the peak of the 2008 financial crisis. Before the end of the month, Allianz announced it would close two structured alpha funds.

The story is far from over. Allianz warned in February that it could not yet predict the final cost of the matter.

Analysts at Bloomberg Intelligence estimate that the insurer’s current €3.7bn provision is unlikely to be enough and that legal costs could reach $6bn.

Allianz CEO Oliver Bäte lamented Structured Alpha’s losses in February, saying they will have a “significant impact” on board member bonuses.

What Allianz once touted as a “‘third way’ to deliver sustained alpha” will ultimately cost insurers dearly.

Title of the article in the original:

Behind Allianz’s $4 billion funding explosion, red flags and fat fees

(Repeat from Friday)

More stories like this are available at bloomberg.com

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