Allianz hedge fund implosion results in 3.7b euro charge

[NEW YORK] The price tag for one of the biggest trading debacles during the pandemic-fuelled market meltdown of early 2020 is beginning to emerge.

Allianz SE, facing multiple lawsuits and regulatory probes tied to the collapse that year of its Florida-based hedge funds, said late Thursday that it will take a charge of 3.7 billion euros (S$5.6 billion) and warned investors of more pain to come.

The German insurance and financial services firm, which also owns bond giant Pacific Investment Management, said it expects to reach settlements soon with major investors in its Structured Alpha Funds. Allianz said it can't provide a total cost because it's still in discussions with other plaintiffs as well as the US Securities and Exchange Commission (SEC) and Department of Justice (DOJ).

"We achieved an agreement with the majority of the investors," chief financial officer Giulio Terzariol said in an interview on Bloomberg TV Friday (Feb 18). "There are still ongoing conversations with remaining plaintiffs. We are in conversations with the DOJ, and this conversation is very constructive."

Investors - including public pension funds, Blue Cross & Blue Shield and New York's Metropolitan Transportation Authority - claimed they lost billions of dollars from the collapse of the hedge funds, which were designed to withstand a market crash yet incurred steep losses during the tumultuous early days of the pandemic. Allianz liquidated 2 of the funds in March 2020 and has been unwinding the others.

The lawsuits accuse Allianz of abandoning a stated investment mandate and downside risk protections of its Alpha Funds, and then doubling down on risky strategies in an attempt to recoup losses during the market volatility - a move that some plaintiffs derided as an "extraordinarily risky and self-interested gamble".

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In its defense, Allianz told a judge last year that the plaintiffs are sophisticated investors that chose high-risk private funds with open eyes.

Allianz, as a result of the 1-time charge disclosed Thursday, posted a 292 million-euro loss for the fourth-quarter, overshadowing an otherwise strong rebound from the pandemic. Excluding that charge, net income rose 38 per cent to 2.5 billion euros.

Late last year, chief executive officer (CEO) Oliver Baete boosted the insurer's medium-term performance targets, seeking to persuade investors that the company is strong enough to shoulder the extra legal and regulatory costs.

The firm hadn't set aside reserves earlier because it couldn't estimate the price tag.

In a Feb 8 note to clients, Berenberg analysts pegged the total cost at 5.8 billion euros, describing the unresolved disputes as the "main overhang" for the company.

Allianz warned in August that the hedge funds' implosion could "materially impact" earnings, after the Justice Department launched its probe into the funds, joining the fray with the SEC and investors, who alleged losses of about US$6 billion.

In October, Allianz appointed the CEO of its life insurance unit, Andreas Wimmer, as the head of asset management, succeeding Jackie Hunt, who departed after the company issued its profit warning. Wimmer indicated in an interview last month that the company plans to push further into alternative asset classes and continue its focus on active fund management.

Senior executives have remained supportive of the unit that offered the funds, Allianz Global Investors (AGI), while pledging to take a close look at its product offerings. Of the roughly 450 active investment strategies that existed at the end of 2019 at the unit, about 140 were discontinued or merged with others in the past 2 years, Wimmer said in the interview.

"We are looking very carefully into what didn't go as it was supposed to go in the operation of AGI," Terzariol said. "We are taking all steps that we need to take in order to make sure these kinds of situations are not going to happen again."

Despite the debacle, AGI saw third-party clients add 9.5 billion euros in the fourth quarter. Its bigger sister unit Pimco recorded 11.1 billion euros in net inflows.

On Thursday, Allianz announced plans to repurchase as much as 1 billion euros of stock and proposed increasing the annual dividend 12.5 per cent to 10.80 euros a share. BLOOMBERG