Allianz increased risky investment positions in its Structured Alpha family of funds instead of exiting them — a “negligent and imprudent bet” that “proved to be disastrous” as stocks continued to plunge, the complaint says.
As a result, its Structured Alpha 1000 fund — where MTA pensions had an account balance of more than $330 million at the end of last year — dropped nearly 87 percent for the year by mid-March, according to the suit.
After Allianz was forced to liquidate that fund in late March, the MTA pension funds were left with just about $9 million — an investment value loss of than 97 percent in a single quarter, the complaint alleges.
The recent market downturn Restructuring had historically been relatively limited as a percentage of total Portfolio positions. However, as equity markets declined and volatility increased into March 2020, per the strategy’s design, the portfolio managers implemented multiple rounds of restructuring trades. For example, as markets declined the Portfolio Management team replaced near-to-the-money short S&P 500 puts and short NASDAQ puts with new short puts struck at prices further away from then-current market levels. While re-establishing alpha-generating positions at lower strike prices, this resulted in realized losses on the near-to-the-money short puts.
Similarly, the portfolio managers replaced short-term short VIX calls with new longer-term short VIX calls at more distant strike prices. An analogous process occurred for short VXX calls. In some instances, this restructuring was repeated on subsequent days on legacy positions and on positions that represented the new restructured legs. Despite these steps, the Portfolio ultimately could not be restructured quickly enough to keep pace with the market decline, resulting in additional losses.
The below graphic provides an example of the restructuring efforts in the Portfolio for a set of SPX short put options expiring on March 20, 2020 that were held by the Structured Alpha 1000 fund. During the eleven trading days between March 2 and March 16, there were at least four instances of restructuring of these short put positions to lower risk by both reducing the strike prices of the put options and by decreasing the number of positions held. Nevertheless, although the market was up on certain days in this period, the market ultimately continued to decline through these lower strike prices, causing losses to the Structured Alpha 1000 fund.