By Ann C. Logue
Seemingly every market meltdown is followed by news of a fund blowing up and a spectacular fraud. The market slid when the COVID lockdowns began. Because the decline was short-lived, there wasn’t much malfeasance uncovered. Allianz managed to have a blow up and a fraud in one fund, and this week, the German insurer settled with the SEC. It paid $1 billion in fines and $5 billion in restitution.
The issue is a fund that offered something called Structured Alpha, a complex options strategy designed to provide protection against market crashes. It was targeted toward pension funds, especially those for state and municipal employee groups. The strategy didn’t work in early 2020, however. Or maybe the strategy never worked—the SEC investigation found evidence that the fund managers lied about how the strategy worked and then lied to the SEC about what they had done.
The fund beneficiaries included such folks as schoolteachers in Arkansas, and it is possible that the Allianz team figured that the plan sponsors were too dumb to figure out what was going on. After all, there is no shortage of arrogance and classism in the investment industry.
The industry also has a surplus of people suffering from the Dunning-Kruger effect. Alas.
Allianz agreed to shut down its US asset management business, and the three fund managers involved responded to criminal charges with guilty pleas.
Right now, we’re well and truly in another meltdown. In the next few weeks, there are likely to be headlines about other frauds and blowups. While most of these will likely be found in crypto markets, they could be anywhere except index funds. A pure beta strategy reduces exposure to negative alpha from attempts to gain positive alpha.
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