Allianz Hit From Hedge Fund Implosion Reaches $5.9 Billion

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(Bloomberg) — Allianz SE is setting aside an additional 1.9 billion euros ($2 billion) to resolve lawsuits and regulatory probes tied to the collapse of a group of its hedge funds two years ago.

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The additional amount is a “fair estimate” of the remaining exposure, including potential payments to resolve government proceedings, Allianz said in a statement on Wednesday. The German company is seeking a timely resolution with authorities, it added.

The charges bring the total cost from the implosion of the Florida-based Structured Alpha funds to 5.6 billion euros, after the insurer anounced a 3.7 billion-euro hit earlier in a first round of settlements with investors.

The provisions bring Chief Executive Officer Oliver Baete closer to concluding the most painful chapter in his tenure, reminding investors of the risks associated with the insurer’s giant asset management business. Andreas Wimmer, who took over as the new head of asset management after the debacle, indicated earlier this year that despite the cost, the company plans to push further into alternative asset classes and continue its focus on active fund management.

Shares of Allianz rose 2% at 9:24 a.m. in Frankfurt trading, paring losses this year to 4.8%.

The Structured Alpha hedge funds were designed to provide protection against a market crash yet incurred steep hits during the tumultuous early days of the pandemic. Investors said they lost billions of dollars. Allianz liquidated two of the vehicles in March 2020 and has been unwinding the others.

The case attracted the attention of the U.S. Department of Justice and Securities and Exchange Commission, which both opened investigations.

Allianz said the newest provisions will cut first-quarter profit by 1.6 billion euros after tax, resulting in a net income attributable to shareholders of about 600 million euros. Operating profit in the three months amounts to 3.2 billion euros.

Allianz, which has previously denied wrongdoing, said in March that advisers it’s hired to dig into what happened had so far found no “breaches of duty” by the management board. Two fund managers responsible for Structured Alpha were fired over violations of compliance policies, regulatory records show.

The funds were part of Allianz Global Investors, the sister unit of Pacific Investment Management Co. At the end of last year, Allianz’s total assets under management stood at 2.6 trillion euros.

The lawsuits by investors had accused Allianz of abandoning a stated investment mandate and downside risk protections, 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.”

The Structured Alpha team was incentivized to pursue outsized returns, Bloomberg reported earlier. Instead of employing the usual formula for hedge-fund fees — the “2 and 20” mix of management charges and a cut of profits — they were compensated for one thing alone: performance. The bigger the investment gains, the bigger the payday. While Allianz made no secret of this arrangement, clients would later claim it was a recipe for bigger risks.

Fitch Ratings said in a February note it believes that “this case of misconduct is an isolated case and is no indicator of more widespread corporate conduct concerns at the group.”

(Updates with share reaction in fifth paragraph, details from statement throughout.)

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