By Dean Seal

Law360 (September 3, 2020, 5:06 PM EDT ) Investors in a hedge fund that lost nearly $1 billion during the coronavirus-induced market crash earlier this year say "extreme risk taking" by fund manager Allianz Global Investors caused the fund to collapse in a proposed class action in New York federal court.

A Teamsters Union retirement plan filed the suit Wednesday against AllianzGI, the investment management division of German financial services giant Allianz SE, alleging it abandoned its risk controls and meaningful downside hedging strategies for a fund purportedly designed to weather extreme market volatility.

When U.S. equity markets experienced a crushing downturn in late February and March amid the COVID-19 pandemic, AllianzGI failed to take any meaningful steps to reduce the fund's risk and protect its investors, the complaint alleges.

"AllianzGI's reckless throw of the dice in the late winter of 2020 — and its abject failure to meaningfully 're-balance' its 'market neutral' positions or acquire more than token hedge positions (despite having had plenty of time to do so) — proved to be a fool's bet and resulted in catastrophic losses of over 75% for the fund's investors," the suit claims.

The complaint echoes claims made in other lawsuits filed over the summer related to losses from AllianzGI's "Structured Alpha" funds during market downturns related to COVID-19. Wednesday's suit deals with losses in Structured Alpha US Equity 500 LLC, an AllianzGI-managed hedge fund with the stated goal of outperforming the S&P 500 Index by 5% each year, net of fees and expenses.

As stated in its offering documents, the fund's investment strategy was "designed to outperform whether equity markets are up or down, smooth or volatile" and to protect against a market crash through sophisticated hedging techniques. AllianzGI said as much early on in 2020, telling fund investors it was "positioned for a strong improvement" in the event of a "violent correction and volatility surge," according to the complaint.

But when the market did take a turn, AllianzGI's fund was "actually positioned for catastrophic disaster," the investors allege, and rather than reduce the fund's leverage or rebalance its portfolios, AllianzGI instead waited and hoped that markets would swiftly reverse course.

The complaint claims AllianzGI's "extreme risk taking" was motivated by the fund's fee structure, which only provides fees as a percentage of the amount by which the fund outperforms the S&P 500 and stipulates that investors don't have to pay any fees until the value of their accounts reaches and increases above that benchmark.

That structure put AllianzGI in a conflicted position in late February and March because, as markets continued to move against the fund's position and the costs of reducing its risk exposure increased, the losses already incurred extended the length of time AllianzGI would have to wait to start collecting fees again, according to the suit.

"Accordingly, rather than lock in relatively small losses to 'protect [investors] against a market crash,' in the late winter of 2020, AllianzGI was instead incentivized to recklessly gamble — with its investors' money — that a favorable and prompt change in the investment winds would save the fund and put the fund's portfolio back into the profitable territory without incurring the costs of meaningful re-balancing and hedging efforts," the investor alleges.

That may have been the best risk-adjusted option for AllianzGI, the investors claim, but it left the fund exposed to catastrophic losses, and by late March, the fund had lost more than 75% of its value, equal to about $950 million. The suit asserts breach of contract, violations of fiduciary duty, negligence and other claims against AllianzGI.

The defendant's parent company Allianz SE disclosed in a regulatory filing last month that it expects more investors to bring similar actions and has received a related information request from the U.S. Securities and Exchange Commission regarding its Structured Alpha funds. The company said it is cooperating with the SEC and intends to "defend vigorously" against the lawsuits, "which Allianz believes to be legally and factually flawed."

A spokesperson for AllianzGI told Law360 on Thursday that the latest complaint "appears to cover similar ground to those that have preceded it."

"While the losses sustained by the Structured Alpha portfolio during the market rout in late February and March are very disappointing, AllianzGI believes the complaints filed are without merit and plans to vigorously defend itself against the claims," the spokesperson said.

Counsel for the retirement plan did not respond to a request for further comment Thursday.

The investors are represented by William C. Fredericks, Donald A. Broggi and Zachary M. Vaughan of Scott + Scott Attorneys at Law LLP.

Counsel information for AllianzGI was not immediately available Thursday.

The case is Teamster Members Retirement Plan v. Allianz Global Investors U.S. LLC et al., case number 1:20-cv-07154, in the U.S. District Court for the Southern District of New York.

--Editing by Alyssa Miller.

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