An Arkansas-based teachers pension fund has sued Allianz Global Investors for costing retirees in the scheme approximately $800m so far this year in what it has described as a "reckless strategy".
The Arkansas Teacher Retirement System claims that AllianzGI's 'market-neutral' Structured Alpha funds put bets in place earlier in the year against the S&P 500 index falling further as the pandemic began to rear its head, shortly before it tumbled 8.5% in February then by a further 12.5% in March.
The pension fund claims that, by doubling down on unprofitable trades, Allianz's investors became "dangerously exposed to even the slightest increase in market volatility or decline in equity prices", despite the vehicles being advertised as being able to protect investors during falling market conditions - including during "a severe downside market move, such as the Black Monday of 1987", according to marketing material.
As detailed in the lawsuit filed on Monday, the Alpha 250 fund has lost more than 43%, Alpha 350 is down 56% an Alpha 500 has tumbled by 75%.
The Arkansas Teacher Retirement System alleges the shorts against market volatility were placed in a bid for Allianz to earn its management fees in the case that February's losses were crystalised.
In a statement given to the Financial Times, AllianzGI said that "while the losses suffered in the portfolio are deeply disappointing, there is no basis for legal liability".
It added that the lawsuit "mischaracterised" the products as they are not supposed to be market neutral, and as such the firm intends to "defend itself vigorously against these allegations".
"The premise of the lawsuit is simply incorrect and without foundation, as the funds in the Structured Alpha portfolio did not diverge from their investment strategy," it said.
The case comes less than four months after two of AllianzGI's Structured Alpha funds - the 1000 and 1000 Plus vehicles - were liquidated by the firm, after put options in the portfolios caused significant losses as markets fell.
The firm has 27 Structured Alpha funds in total, with Structured Alpha 1000 and 1000 Plus the most aggressive in the suite, according to Allianz, given they both targeted a return of ten percentage points above their benchmarks.