Archegos and Its $30 Billion Mistake
The story of Bill Hwang and his multi-billion-dollar hedge fund, Archegos, and how he almost single-handedly caused the combined loss of close to $30 billion in the markets, is one littered with red flags and a call for potentially more regulation of “family office”-style funds. Bill Hwang first gained attention after he spun off from the leading hedge fund, Tiger Management and formed the Asia-centric fund, Tiger Asia. His fund quickly rose to one of prominence as it grew to almost $5 billion in the course of just 10 years. However, during this time, he was able to achieve tremendous gains through insider trading with various investment banks. This led to both a civil and criminal lawsuit where Tiger Asia admitted wrongdoing and was forced to pay $44 million in damages.
Hwang pivoted from there, closing Tiger Asia and forming a family office-style fund, which allowed for much less regulation. Managing much less capital, Hwang was forced to take on large amounts of leverage to hold big positions in the market. He did this through a derivative called total return swaps. A total return swap is when a payer approaches a receiver and arranges a deal in which the payer pays recurring fees to the partner in exchange for the partner to buy stocks for them in the market. The payer benefits from this arrangement through either dividends being paid from the various stocks or gaining from the increase of the price of the stocks, however he must also be wary of taking on the losses if the stock price falls. The player uses leverage, while posting limited funds to potentially maintain huge positions. This is where Archegos, being a family office and using swaps, was critical. With this lack of regulation, Archegos was able to maintain a level of anonymity and go to various investment banks without having to disclose the positions they already held, the other banks they already had deals with and how much they already were leveraged. With the swaps, Archegos was able to hold over 10 percent equity of various companies without having to announce it. Archegos was also able to only put up 15 percent of the money for every position it wanted to hold, a deal that most banks would never agree to. On top of all this, Archegos did not maintain a diversified portfolio, meaning that its risk exposure was enormous. All the dominos were set to fall, it just needed one push.
The push came on March 22, when ViacomCBS stock dropped more than 25% after it was announced that they were releasing more stock. This started a vicious cycle, where Archegos, forced to cover the losses from ViacomCBS, started selling large amounts of their other positions. Those sales then led to further losses, as the stocks Hwang was selling also lost value due to the large volume of what he wanted to sell. When the banks, noticing the sudden drop of his positions, called for a margin call, Archegos was unable to deliver. This led to a bank firesale of all of Archegos’s holdings, which dropped the prices of the stocks even further. All in all, the investment banks had a combined loss of $10 billion. The two biggest losses came from Switzerland’s Credit Suisse, which lost $5.5 billion, and Japan’s Nomura, which lost $2.85 billion.
With these losses came outrage and calls for further regulation. Managers across all of the investment banks had to step down, most notably the Chief Risk and Compliance Officer of Credit Suisse, Lara Warner and investment banking head, Brian Chin. Some are saying this is not enough, with one partner at law firm Mayer Brown, Marlon Paz, saying “We should not be surprised if this leads to a re-evaluation of where family offices fit within the regulatory structure.” Ultimately, only time will tell if these changes are enough to make sure that stories such as this don’t repeat themselves.
Photo Caption: This month saw massive losses in the markets, after numerous investment banks rushed to sell Archigos holdings.
Photo Credit: Pixabay