Behind Allianz's $4B Fund Blowup, Red Flags and Fat Fees

It’s every investor’s dream: Make money when markets go up, and when markets go down, and even when markets go practically nowhere.

But inside Allianz SE, where a handful of hedge fund managers claimed they could do just that, few grasped how wrong that dream could go. Four billion dollars wrong so far, with outside estimates that it could grow much larger.

Two years after the spectacular collapse of the insurance giant’s Structured Alpha hedge funds, a low-profile business registered in Florida, 5,000 miles from the Munich headquarters, the shock waves continue to reverberate.

Careers have been upended. Investor lawsuits and settlements have piled up. The U.S. Justice Department and Securities and Exchange Commission have opened investigations. Allianz in February set aside $4.1 billion for the disaster, but the final reckoning is still due — and could cost plenty more.

All these months later, the big question remains: How could a few obscure money managers — people on no one’s list of hedge-fund luminaries — blow such a huge hole in Allianz, which traces its history to the days of Bismarck?

The answer that emerges from court filings, Allianz marketing materials and people with first-hand knowledge of Structured Alpha’s investment strategy is a classic story of Wall Street salesmanship and greed, and a tale for these volatile times.

No Wrongdoing

Allianz, which has denied wrongdoing, said earlier this month that independent advisers it’s hired to dig into what happened have thus far found no “breaches of duty” by the insurer’s management board. A spokesman declined to comment.

At the center of the debacle is Greg Tournant, 55, an equity-options whiz and one-time McKinsey & Co. consultant. A dual U.S.-French citizen, he arrived at Allianz Global Investors in the early 2000s by way of Oppenheimer Capital.

It turns out that Tournant and other fund managers behind Structured Alpha — including longtime colleague Trevor Taylor — previously ran into trouble during the 2008 financial crisis, with strategies that also involved options.

Long before the pandemic, their small investment firm on Miami’s Brickell Avenue, aka, Wall Street South, collapsed when its trades went bad, according to two former employees there — foreshadowing what was to come. Tournant and Taylor declined to comment.

At Allianz Global Investors U.S., Tournant and his Structured Alpha team were incentivized to pursue outsized returns. 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, angry clients would later claim it was a recipe for bigger risks.

Tournant himself was heavily invested in the funds he managed and lost money along with clients, according to a person familiar with the matter.

In early March of 2020, as he was grappling with the pandemic’s effect on his funds, Tournant went on medical leave for undisclosed reasons, the person said. Structured Alpha’s troubles continued after his departure.

In the finger-pointing that followed, some big investors accused the professional consultants they had hired to vet Structured Alpha of ignoring red flags and failing to understand what the funds were doing, according to lawsuits.

Crashing Down

It all came crashing down in the early, panicked days of Covid-19, when wild market swings upended an options strategy that was marketed as “aiming to generate alpha regardless of market waves.”

During the first quarter of 2020, five Structured Alpha funds lost between 49% and 97% of their value, performance that investors contend in legal filings was far worse than similar strategies.

Allianz, which also owns bond powerhouse Pacific Investment Management Co., has resolved some of its legal woes, including a February settlement with a majority of investors for undisclosed terms. At the same time, the firm has argued that its clients were sophisticated investors who knew what they were getting into.