Thread by @MarketBricoleur

Ever read an article in Bberg or WSJ about a big fraud and wondered how so many professional investors were fooled?

Well then, this may be the thread for you!

Let's take a look at AllianzGI Structured Alpha in '17 👇🏿
1/n

As one might expect, it was presented as a return enhancement. Boy did it work, until it didn't of course. Designed to outperform in all scenarios!

Sidenote: @choffstein & @bennpeifert did y'all ever run into these folks?

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Just so it's absolutely clear that we are talking about the same folks... Good size team (not going to put the whole crew out there). 3/n

By 2017, they had already gathered a lot of institutional clients and several of the strategies were closed. There was an entire suite available for whatever your needs were if you were large enough (beta-choice). 4/n

On an institutional level, they were pretty legit and checked all the boxes. They even had great capacity analysis and said all the right things. Pros... 5/n

If you needed a historical analysis security blanket, they had you covered and even offered extensive data for you to wow at. Cool, they did their homework✅. @Ksidiii have you ever seen a synth VIX going back that far? 6/n

Anyhow, it all looks fine. They don't always hit their target but who does? Can't win 'em all. Plus, multi-week equity corrections set them up for future outperformance. 7/n

Alright, alright. Let's move into philosophy. Again, they have the story down. Don't need to forecast, just prepare for all the eventualities and hedge your bets. 8/n

This slide may seem plain, but it is BIG. Take a look at that 0% management fee. They only get paid if they win, AND they have a cumulative high water mark! How long is the waiting list!? 🤩 9/n

With the benefit of hindsight, perhaps an 85% probability of success was meh? I'm sure it started out pretty genuine, but at what point did it all become fraud? 👺 10/n

This one is simplified. But, you can clearly see the danger zone even if you're uninitiated in these types of strategies. You need things to be not too hot and not too cold. More skilled/smart/knowledgeable folks can explain the details. 11/n

Look, don't worry about the danger zone. We have you hedged, at all times. Overhedged in fact. -25% doesn't happen that fast according to history you see... 12/n

We hope to hold all these options to expiration and just live with the mark-to-market vol. Cool. 13/n

But sometimes we have to restructure. Look it happens, we've thought through many different scenarios and have plans in place. Again answers that sounded great. 14/n

As long as the institutional clients don't blink at the first sign of danger, we will all be fine. Evaluate us over the longer term and sit tight. This is by professional for professional only. 15/n

Here is what to expect, that way you can guide your asset allocation programs accordingly. 16/n

They even made improvements in order to REDUCE drawdown risk and lessen downside equity correlation. What's not to like. These were pretty good answers. 17/n

Plus, there were MULTIPLE layers of risk management. On the team & outside. Things were monitored and checked all the time. 18/n

Historical returns. They didn't always win, so that wasn't even the sell. They consistently improved their process etc. It really did look legit. 19/n

Versus peers in the institutional world, it was a category destroyer. Top-notch, well polished. Fraud is hard to detect. This is coming from a former federal regulator. 20/n

That said, the eye-popping numbers need to REALLY be understood. But, it's incredibly difficult. Sometimes you just need to put it in the "too hard" pile and move on. 21/n

Thanks for making it this far. It took longer than I expected.

Hope you enjoyed the thread. One day, I'll have more time to contribute to the #fintwit community. 22/END

@ShawnaOhm: how'd it go?
@FiSurgi: Even professionals get fooled all the time.

wsj.com/articles/allia…