(Bloomberg Opinion) -- Allianz SE is taking an eye-watering charge of 3.7 billion euros ($4.2 billion) to cover the cost of the implosion of its Florida-based hedge funds two years ago. It's a reminder that even the most risk-seeking market traders need to stay within the rails they've agreed upon with their clients.
Customers of the firm's Structured Alpha Funds allege that as the pandemic roiled markets in March 2020, the funds abandoned the stated mandate of providing downside protection strategy, instead increasing risk-taking in an effort to recoup losses. U.S. regulators are investigating, and Allianz says the cost may rise further.
It's not the first time that an asset manager going off-piste has cost investors dearly. Investors in H2O Asset Management, which delivered healthy returns for several years by pursuing global macro bets in easy-to-trade public securities, are still stuck with illiquid securities issued by German entrepreneur Lars Windhorst
In the middle of 2020, the Financial Times reported that H2O had stocked up on private debt issued by companies controlled by Windhorst. After research company Morningstar suspended its rating on one of H2O's flagship funds, investors withdrew almost $10 billion from the firm. More than $1 billion was subsequently trapped in so-called side pocket funds which investors are still unable to withdraw.
Efforts to sell the securities back to Windhorst have faltered, with Bloomberg News reporting in July that the financier was being investigated by German regulators for allegedly breaching banking rules. Last month, H2O said it had written down the value of some of those hard-to-sell assets by as much as 40% since August.
Switzerland's GAM Holding AG is the poster child for how badly things can go wrong when fund managers go rogue. In July 2018, it suspended Tim Haywood, who ran its absolute return bond fund, citing issues with his risk management procedures. It subsequently liquidated nine funds with $7.3 billion of assets that had made big bets on notes issued by supply-chain financing company Greensill Capital, which itself has now shut down and is being investigated by U.K. regulators.
In December, GAM was fined about $12 million, with Haywood paying $305,000, after the U.K. Financial Conduct Authority found they failed to manage conflicts of interest.
While the firm says it repaid its customers more than 100% of their investments, GAM is a shadow of its former self. Its market capitalization is about 200 million Swiss francs ($217 million), down from a peak of almost 3 billion francs four years ago. Its assets under management have dwindled to 100 billion francs, down from 162 billion francs in the first quarter of 2018. Last year, it cut 100 members of staff, reducing its workforce to about 600 people.
Generating alpha isn't easy, as illustrated by the lackluster returns hedge funds have achieved in recent years compared with what customers could have earned from a cheap stock-market tracker. But breaking the compact with your customers, either by explicitly deviating from an agreed strategy or betraying their implicit trust by dabbling in new securities that they wouldn't expect to find in their portfolios, increases the chance of losses and lawsuits. Some risks just aren't worth taking.
More from Bloomberg Opinion:
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Big Time Funds Should Be Able to Bear Some Light: Paul J. Davies
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Hedge Funds and the Art of `Phony Happiness': Marc Rubenstein
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A Decent Year for Hedge Funds Is Still Not Good Enough: Mark Gilbert
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."
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