The Garrulous Jay – Structurally Unsound

Publish date


On the 17th February this year European insurer Allianz published a press release saying it was “to book a provision of €3.7 billion in the financial statements 2021”. The charge related to pending court and governmental proceedings in the US in relation to the company’s ‘Structured Alpha Funds’.

Allianz’s CEO, Oliver Baete, subsequently conceded that that the charge to the 2021 accounts would potentially not represent the total cost of the litigation, whilst confirming that he and his fellow Board members would take a “significant” cut to their bonuses.

At issue here was the fact that Allianz’s US investment management subsidiary, AGI, marketed their Structured Alpha Funds as being relatively low risk, offering returns in excess of those available by just investing in a stock market index, whilst providing the level of diversification available by investing in such an index.

Or, as the 2018 marketing material for their Alpha US Equity 250 Fund puts it, “We believe that a combination of passive exposure with an options-based alpha engine can offer a more enticing “third way” for investors to harvest sustainable alpha potential in a category in which many have already resigned themselves to receiving index-like results”.

Options based alpha engine? Enticing third way? Harvest sustainable alpha potential? With the benefit of hindsight, it is easy to see these phrases as potential red flags.

Ultimately the problem with the Structured Alpha product was when Covid-19 struck the alpha engine broke despite the marketing literature saying, “The portfolio could underperform for a few weeks [but] higher volatility levels should enable greater potential outperformance in subsequent months”.

Allianz is by no means alone in marketing so-called structured products to investors, and very few of them end up delivering the performance of the Structured Alpha funds. They are, however, not a mainstream product offered by the majority of investment houses, potentially with good reason…

•    First, they are often complex. Structured products may use derivatives and options to deliver their returns, for example, with features allowing the fund manager to end the contract early under certain conditions.

•    Secondly, these products can be expensive to structure and manage. As a generalisation, with complexity comes cost, particularly when it comes to the trading of the derivatives described above.

•    Thirdly, despite the allure of relatively stable returns, the AGI example shows that the ‘real’ risk profile, at times of market turbulence may not be as secure as investors would hope. In other words, in precisely the market conditions under which investors would be seeking a degree of stability, they may experience elevated volatility.

•    Finally, they are often illiquid. Some structured products lock investors in for a fixed or minimum period of time, sometimes reflecting the duration of the underlying positions adopted by the funds.

Two of the oldest lessons in the investment book can be relearnt from the AGI debacle. First, beware of complexity and always make sure you understand what you’re investing in. Second, if it looks too good to be true it probably is.