Allianz Hedge Fund Implosion Results in $4.2 Billion Charge

(Bloomberg) — The price tag for one of the biggest trading debacles during the pandemic-fueled market meltdown of early 2020 is beginning to emerge.

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Allianz SE, facing multiple lawsuits and regulatory probes tied to the collapse that year of its Florida-based hedge funds, took an unprecedented, 3.7 billion-euro ($4.2 billion) charge to cover a settlement reached Friday morning with the vast majority of investors in the funds.

In a sign of more pain to come, the German insurance and financial-services firm, which also owns bond giant Pacific Investment Management Co., warned that ongoing probes by U.S. Securities and Exchange Commission and Department of Justice are at a “sensitive” stage and that it couldn’t yet estimate the final price tag.

“There are still ongoing conversations with remaining plaintiffs,” Chief Financial Officer Giulio Terzariol said in an interview on Bloomberg TV Friday. “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 two of the vehicles 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 Structured 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.”

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 one-time charge, posted a 292 million-euro loss for the fourth-quarter, overshadowing an otherwise strong rebound from the pandemic. The company also announced plans to repurchase as much as 1 billion euros of stock and proposed increasing the annual dividend 12.5% to 10.80 euros a share.

“It’s a step in the right direction,” analysts at Morgan Stanley wrote in a note. “However, management did mention that it expects to incur additional expenses before the matter is finally resolved, which does imply some litigation-related overhang to persist.”

Shares of the insurer fell 1.4% at 11:41 a.m. in Munich, paring gains this year to 5.7%.

Chief Executive Officer Oliver Baete told reporters that management would see a significant impact on compensation from the hedge fund debacle. He has been tying to persuade investors that the company is strong enough to shoulder the extra legal and regulatory costs, boosting the insurer’s medium-term performance targets last year.

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 $6 billion.

Asset Management

In October, Allianz appointed the CEO of its life-insurance unit, Andreas Wimmer, as the head of asset management, succeeding Jackie Hunt. 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, 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 two years, Wimmer said in the interview.

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.

“It was a very isolated event at AllianzGI U.S. We are very comfortable with the current team and are happy with the trajectory the business is taking,” Baete told Bloomberg in a phone interview.

(Adds settlement starting in second paragraph.)