is the family office of Bill Hwang who trained under Julian Robertson at Tiger Management
, and is part of the mafia known as Tiger Cubs. He was the head of Tiger Asia Management, a prolific hedge fund that was shut down in 2012 after they settled with the SEC
on insider trading charges in Chinese stocks. When his fund shut down he started his family office Archegos to manage his personal capital. He was considered one of the best in the industry, and what people would call a “pro’s pro”.
However, sometimes even the best blow up, and when they do, they blow up big - $10 BILLION big. Archegos lost $10 Billion in 2 days, and led to several Billion in losses for the banks that gave them margin loans. I’m sure books will be written about this, but if one was to point to the one factor that led to this blow up, it would be EXCESSIVE LEVERAGE.
He owned stocks worth $50B with only $10B in capital!
Bill was able to do this by using an over the counter instrument called a Total Return Swap
(TRS). This is not an instrument that you or I can use, and is restricted to professionals. Simply put it’s a contract between 2 counter-parties that “passes through the gains or losses incurred by the securities held on behalf of the buyer, in exchange for a fee paid to the seller
So, what was happening is that these big banks were buying the stocks and holding them in their name, and passing on the gains/losses to Archegos and were getting paid a nice fee.
Additionally, these very same banks were providing leverage in the form of margin loans to Archegos to put on this trade. You can see how this was very enticing to the banks. As long as they “managed their risk” they could not lose!
Archegos ran a very concentrated portfolio with 5 stocks making up the majority of their portfolio - Discovery, Viacom, Baidu, Tencent and a couple others. Things were going well for them as these stocks started trading up likely due to their buys, in a self fulfilling prophecy. But, when Viacom took advantage of their soaring stock price and issued $3B in new shares, the game was over. The market was not expecting this and was not able to absorb this “fresh supply”, and Bill’s positions moved against him - resulting in the dreaded MARGIN CALL.
This was no ordinary margin call though. Bill’s positions were spread across 7 big banks’ prime brokerage divisions. These were the banks that had entered into the Total Return Swaps with Archegos. It was around this time that they all realized that Bill was highly levered and would not be able to post the capital required by their margin call. They could call and call, but no money would come!
It is then that panic set in. The banks realized that they were going to be the proverbial “bag holders”, and could end up losing Billions if they did not act swiftly. They met, and tried to see if it was feasible to do an orderly sale of the securities. But when they realized the size of the positions it was every “bank” for themselves - they had all the goods, and there were no buyers to be found!
Goldman Sachs & Morgan Stanley were the first to break rank amongst the banks and were able to sell their positions first with limited losses (about a Billion each), but Nomura & Credit Suisse got left holding the bag to the tune of several Billion! Credit Suisse may end up losing close to $7 Billion from this one relationship with Archegos; for context their equity capitalization is $26B. This is a huge hit from just 1 customer! Clearly there were issues with their risk management practices, and this blow up led to the resignation of their Head of Risk Management.
At first glance, one may think that it was Bill Hwang of Archegos who is to blame for this entire fiasco - why did he take on so much leverage, why were his positions so concentrated, did he not know what he was doing etc. However, the real culprits here are the banks who in their greed of easy “fee generation” offered excessive leverage to their client, and ultimately ended up losing their investors money. At least Bill just lost his own money.
This saga reminded me of the fantastic scene (Senior Partners Emergency Meeting)
from the 2011 movie Margin Call
starring Kevin Spacey, Stanley Tucci, Jeremy Irons & Demi Moore. Just replace the mortgage bonds with the holdings of Archegos and you can see a spitting image of what was likely going on inside big banks that had Archegos exposure.
The big lesson to learn from all of this is to tread very carefully with leverage and always know that the banks are not on the same side of the table as you. They play for themselves.