The Archegos fiasco has reportedly made life harder for hedge funds investing in SPACs

Bill Hwang

A slowdown in SPAC IPOs since March could in part stem from the $20 billion unraveling of Archegos Capital, according to a report from the Financial Times’ Ortenca Aliaj and Joshua Franklin.

Bill Hwang’s Archegos utilized extreme leverage from a number of banks to build ahighly concentrated stock portfolio that ultimately moved against the firm as it was unable to meet margin calls. That leverage unwind caused $10 billion in combined bank losses, with Credit Suisse and Nomura losing the most.

Following the late-March leverage unwind, banks are exhibiting more caution when extending leverage to hedge funds and family offices, according to the report. Less leverage has forced hedge funds to rethink their strategy when investing in SPACs, according to the report.

Hedge funds would often employ leverage to buy SPACs at the $10 offering price, and then immediately sell any pops to get out early and lock-in gains. That leverage would significantly help juice returns for hedge funds.

A senior banker who works on SPAC deals told the Financial Times, “A lot of the return profile for hedge funds is derived from the leverage they employ. It was a gravy train when it was levered.”

Now, less leverage being offered to hedge funds in the wake of the Archegos fiasco has coincided with a significant drop in SPAC IPO listings. Over the past month, just 13 SPACs listed, compared to 110 SPAC listings in March.

“We are seeing it in the price action where securities are trading below par because banks are not offering leverage as freely as they did and it’s now more expensive,” Matthew Simpson of Wealthspring Capital told the Financial Times.

An analysis of Refinitiv data by the Financial Times found that 80% of SPACs that are still in search of a deal are now trading below the $10 level, which is often the IPO price for the blank-check firms.

“All the rocket fuel has come out of these things. If hedge funds were allowed to lever up, hedge funds would be levering up to buy all the SPACs trading under $10,” Matthew Tuttle of Tuttle Capital Management told the Financial Times.

But the unwind of leverage being offered to hedge funds isn’t the only reason why few SPACs have gone public in recent months. Increased regulatory scrutiny of SPACs and an unwind in the high-growth tech trade have certainly contributed to a decline in SPAC offerings.

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Ark Invest’s Cathie Wood welcomed the tumble in tech stocks – and revealed Archegos chief Bill Hwang funded the launch of her ETFs

Cathie Wood
Cathie Wood.

  • Cathie Wood celebrated the tech-stock slump as a chance to score higher returns.
  • The Ark Invest chief said the sell-off reflected a broadening bull market.
  • Wood disclosed that Archegos Capital’s Bill Hwang funded the launch of her ETFs.
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Ark Invest’s Cathie Wood cheered the tumble in tech stocks, and revealed that Archegos Capital’s Bill Hwang was one of her early backers, in a CNBC interview on Friday.

“I love this setup,” the star stock-picker said about the sharp sell-off of Tesla, Shopify, and other holdings in Ark’s exchange-traded funds. “The worst thing that could have happened to us is to have the market narrowly focus on just our ilk of stock – the innovation space.”

Wood also argued that only the prices of her favorite companies have changed, not their prospects. She now expects to score compounded annual returns of 25% to 30% in her funds over the next five years, up from her target of 15% earlier this year.

The Ark chief’s flagship innovation ETF is currently down 12% year-to-date, a sharp reversal from its roughly 150% gain in 2020.

Wood told CNBC about her relationship with Hwang during the interview. The pair of proudly Christian investors met through church and first exchanged ideas in 2013, and Hwang invested in Netflix after Wood recommended the video-streaming stock to him, she said.

“He did provide the seed for our first four ETFs and we’re very grateful to him,” Wood continued, emphasizing that Hwang’s help was crucial as it was tough to secure funding for ETFs in the early 2010s.

She added that she wrote to him after Archegos blew up in March, and doesn’t know whether he’s still an investor in any of Ark’s funds.

Archegos imploded after Hwang’s aggressively leveraged bets on tech and media stocks soured. Several Wall Street banks slapped him with margin calls, declared him in default when he didn’t pay up, and rushed to dump more than $20 billion of his positions in a matter of days.

Credit Suisse and Nomura were among the banks caught out by Archegos’ collapse and the subsequent fire sale, and suffered billions of dollars in losses as a result.

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Archegos may wind down as banks seek to recoup billions in losses, report says

Bill Hwang
  • Archegos is preparing for insolvency as banks seek to recoup losses suffered during the meltdown, the Financial Times reported Wednesday.
  • The family office has reportedly hired restructuring advisers to tackle financial and operational obstacles.
  • Some of the banks are drafting “letters of demand” in which they are requesting repayment from Archegos before filing legal claims.
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Archegos Capital Management is reportedly preparing for insolvency as banks seek to regain roughly $10 billion in combined losses suffered during the meltdown in March, the Financial Times reported Wednesday.

According to the report, Bill Hwang’s family office has hired restructuring advisers to navigate financial and operational obstacles as well as the potential legal claims from the banks involved.

Credit Suisse, Nomura, Morgan Stanley, UBS, MUFG, and Mizuho all lost billions each after Bill Hwang’s family office failed to meet margin calls on highly levered positions in a handful of stocks.

As a result, some of the banks are drafting “letters of demand” to the firm requesting repayment before filing legal claims, according to the Financial Times.

On Wednesday, UBS Group Chairman Axel Weber apologized for the loss the bank suffered amid the Archegos fiasco in an interview with Bloomberg TV.

Weber blamed the episode on a lack of oversight of family offices, which do not have to disclose as much information about investments to regulators compared to other asset managers, such as hedge funds.

Policymakers and executives including Morgan Stanley CEO James Gorman have suggested tougher regulation on family offices, though no proposals surfaced to date since.

The implosion of Archegos caused widespread chaos on Wall Street and exposed the fragility in parts of the financial system, especially in lesser-known areas such as total return swaps.

The founder, a former Tiger cub, grew his $200 million investment to $10 billion but did not need to register as an investment advisor since he was only managing his own wealth.

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Nomura to tighten financing for hedge fund clients in the wake of Archegos blowup, new report says

Nomura
  • Nomura is tightening financing for some hedge fund clients, per Bloomberg sources.
  • Japan’s largest brokerage is facing an estimated $2 billion loss due to the Archegos collapse.
  • Nomura will limit margin financing exceptions for hedge fund clients in order to prevent another blowup.
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Nomura is reportedly tightening financing for some of its hedge fund clients in the wake of the $20 billion collapse of Archegos Capital.

Japan’s largest brokerage is facing an estimated $2 billion loss due to the family office blowup, according to unnamed Bloomberg sources.

The Archegos collapse started when the family office, run by Bill Hwang, used total return swaps to take on leverage and place concentrated bets on a handful of stocks like ViacomCBS and Discovery.

Then a decline in share prices sparked a massive margin call that Archegos was unable to meet, leading banks to liquidate the family office’s assets.

The result was combined losses of $10 billion for global banks, according to estimates from JPMorgan.

Now in order to prevent similar blow-ups in the future, banks are taking action to reduce risk associated with hedge fund clients. The Securities and Exchange Commission has also opened an investigation into the matter.

Specifically, Nomura is tightening leverage for some clients that were previously granted exceptions to margin financing limits, Bloomberg said, citing people with direct knowledge of the matter.

The Japanese firm is the second bank to take action after the Archegos collapse.

Credit Suisse said earlier in the week that it will change margin requirements on swap agreements to dynamic from static after the collapse. Dynamic margin requirements force clients to post more collateral as positions move down, rather than setting a fixed margin requirement at the onset of the leverage contract.

Before the Archegos implosion, Nomura had been hitting on all cylinders with net income reaching a 19-year high for the nine months ended in December.

Now though, the bank has been forced to cancel the planned issuance of $3.25 billion in senior notes and share prices are down roughly 20% from March 26 highs.

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Archegos chief Bill Hwang donated huge amounts of Amazon, Netflix, and Facebook stock to his private foundation. Those gifts would be worth $950 million today

Bill Hwang
Bill Hwang of Archegos Capital Management.

  • Bill Hwang donated Amazon, Netflix, and Facebook shares to his private foundation.
  • The Archegos chief’s Grace and Mercy Foundation cashed them in for $325 million.
  • Grace and Mercy could have sold the shares for nearly $950 million today.
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Bill Hwang, the investor who lost $20 billion in two days when his family office imploded in March, donated technology stocks to his private foundation that would be worth almost $950 million today.

The Archegos Capital Management boss – whose portfolio was swiftly dismantled when his leveraged stock bets soured and he defaulted on his lenders’ margin calls – is the cofounder of the Grace and Mercy Foundation, a Christian charity that helps the poor and oppressed.

Grace and Mercy’s tax filings, reviewed by Insider on ProPublica, show Hwang donated around 121,000 Amazon shares, 945,000 Netflix shares, and 51,000 Facebook shares to the foundation over the past decade. Grace and Mercy sold those shares for about $325 million in total between 2017 and 2018, scoring a handsome $186 million gain.

However, if the foundation had kept the gifts instead of selling them, they would fetch around $946 million today, reflecting the three stocks’ price gains in recent years.

Grace and Mercy also bought shares in Amazon, Netflix, Apple, Expedia, and other companies, its tax filings show. It cashed them in for a total of $200 million between 2014 and 2016, notching a $103 million gain.

Those shares would be worth $722 million today, including Amazon stock worth $449 million and Netflix shares worth $219 million.

Grace and Mercy, which boasted nearly $500 million in assets at the end of 2018, may have cashed in Hwang’s stock gifts because it needed to finance grants to charities and fund its operations. But it undoubtedly left money on the table by selling them.

Hwang is one of several “tiger cubs” who left billionaire investor Julian Robertson’s Tiger Management to start their own funds. He shut down Tiger Asia Management in 2012 after pleading guilty to insider trading in federal court, and launched Archegos in 2013.

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The Archegos meltdown will result in a $10 billion loss for global banks, JPMorgan says

Wall Street.
Big Tech recovers after a rough day Wednesday on Wall Street.

  • Global banks are expected to lose up to $10 billion from the Archegos meltdown, JPMorgan said.
  • This is 5x the normal loss level for a collateralized daily mark-to-market business, JPMorgan added.
  • It however cited three lessons the industry could take away from the implosion that has roiled the markets.
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Global banks are expected to lose up to $10 billion following the Archegos Capital Management meltdown, JPMorgan said Monday – raising its estimate from an initial $2 billion-$5 billion – with Credit Suisse Group and Nomura Holding hardest hit.

“One line of argument which could explain why the scale of losses suffered by [Credit Suisse] and Nomura was higher could be a higher level of leverage extended by these banks compared to [Goldman Sachs and Morgan Stanley], which seem to have suffered smaller losses if any,” JPMorgan analysts led by Kian Abouhossein said in a research note Monday.

JPMorgan clarified that there may also be additional considerations that determined the sizable difference between the scale of losses suffered, such as the timing of the sale of positions, among others. Nonetheless, the entire episode affects the industry overall, given that global banks could end up losing five times the normal loss level for a collateralized daily mark-to-market business.

JPMorgan cites three lessons the industry could take away from the fund’s implosion.

First, investment banks in general are in better shape today and are more focused on high-volume execution platforms.

“There is no excessive leverage in the [investment banking] or [private banking] industry,” JPMorgan said. “Although [private banking] leverage has been increasing, it is nowhere near prior peaks.”

The bank also said it sees no excessive equity-swap growth, a simple instrument all parties will benefit from.

Second, US regulatory frameworks like Basel III and the Dodd-Frank Act have improved the risk profile of investment banks. JPMorgan, however, noted that there is still weak oversight for non-bank entities, especially when it comes to family offices.

Archegos, a family office founded in 2012, did not have to disclose investments, unlike traditional hedge funds. JPMorgan also pointed to the lack of transparency when it came to equity-swap filings.

The Archegos sell-off exposed the fragility of the financial system, especially those involving lesser-known practices such as total return swaps, a derivative instrument that enabled Bill Hwang’s office not to have ownership of the underlying securities his firm was betting on and the secrecy of family offices. Typically, family offices enjoy the “private adviser exemption” provided under the Advisers Act to firms as these usually advise less than 15 clients, among other conditions.

But JPMorgan said, “filing requirements would have applied to Archegos given its sizable exposure to some US securities. However, the fact that Archegos did not file with the [Securities and Exchange Commission] can be explained by the usage of total return swaps, which seems to be the primary method through which the sizable positions were built by Archegos.”

Dan Berkovitz, a Democratic commissioner on the Commodity Futures Trading Commission, denounced family offices and their ability to skirt some oversight.

“A ‘family office’ has nothing to do with ordinary families,” he said in a statement on April 1. “Rather, it is an investment vehicle used by centimillionaires and billionaires to grow their wealth, reduce their taxes, and plan their estates.”

Third, JPMorgan said private banks, specifically those linked to Archegos, moving forward could improve their onboarding, especially with clients with backgrounds such as Hwang, who has run into trouble in the past. Private banks could also strengthen their risk management by giving less leverage to non-transparent family offices with concentrated positions and ensure checking the clients’ rehypothecation risk, among others.

Archegos in late March used borrowed money to make large bets on some stocks until Wall Street banks forced Archegos to sell over $20 billion worth of its shares after failing to meet a margin call. Hwang grew his family office’s $200 million investment to $10 billion. Reports say the former Tiger Management trader lost $8 billion in 10 days.

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Bill Hwang lost around $20 billion in 2 days when his Archegos fund imploded, report says

Bill Hwang
Bill Hwang’s Archegos Capital Management imploded in March.

Bill Hwang built up a fortune of around $20 billion through savvy investments, but then lost it all in 2 days in March as his Archegos investment fund imploded after some of his bets went awry, a report has said.

Hwang, an alumnus of famed hedge fund Tiger Management, took around $200 million in 2013 and turned it into a $20 billion net worth by betting successfully on technology stocks, Bloomberg said in the most detailed look at Archegos’ finances yet.

But it all came crashing down at the end of March when some of Hwang’s highly leveraged bets started to go wrong and his banks sold huge chunks of his investments. The sales knocked around $35 billion off the value of various US media and Chinese tech firms in a day.

Bloomberg reported that Hwang’s early investments through his Archegos Capital Management family office included Amazon, travel-booking company Expedia, LinkedIn and Netflix, the latter of which reaped a $1 billion payday. Bloomberg cited people familiar with Hwang’s investments.

Hwang’s bets at some point shifted towards a broader range of firms, in particular media conglomerates ViacomCBS and Discovery. He also loaded up on Chinese tech companies such as Baidu and GSX Techedu.

Archegos’ investments powered it to a strong final quarter of 2020, with many of the stocks it held jumping more than 30%.

But the ViacomCBS bet would become particularly problematic for Hwang. It started to tumble during the week starting March 22, causing Archegos’ prime brokers – the major banks who lent it money and processed its trades – to demand more money as collateral, known in the business as a margin call.

With Hwang unable to put up the cash, Morgan Stanley sold around $5 billion of Archegos’ holdings at a discount, according to Bloomberg. Goldman then followed suit, selling billions of dollars of companies’ stock.

Some banks weren’t so fast, however, with Credit Suisse and Nomura left nursing estimated losses of $4.7 billion and $2 billion respectively.

A key reason that Hwang’s wealth collapsed so spectacularly is that he used large amounts of leverage. That is, Archegos borrowed lots of money to fund his investments, meaning it faced large losses when they went bad.

Gerard Cassidy, US bank analyst at RBC Capital Markets, told Insider in March: “Leverage is always a two-edged sword. In a bull market when prices are rising it enhances your returns. And then in a falling market, like you just saw in this particular case, it cuts your head off.”

Archegos was unavailable for comment but spokesperson Karen Kessler told Reuters at the end of March: “This is a challenging time for the family office of Archegos Capital Management, our partners and employees.”

“All plans are being discussed as Mr. Hwang and the team determine the best path forward,” she said.

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Morgan Stanley sold $5 billion in Archegos’ stocks just before wave of sales hit rivals, report says

Barclays Traders NYSE
Traders work on the floor of the New York Stock Exchange.

  • Morgan Stanley sold about $5 billion in shares that Archegos Capital had to unload, with the sales made the night before a massive securities sale, CNBC reported Tuesday.
  • Sources told CNBC the investment bank didn’t tell the buyers that the shares it was selling would be the start of an unprecedented wave of securities sales by some investment banks.
  • Archegos collapsed after Wall Street banks forced the firm to sell more than $20 billion worth of shares after failing to meet a margin call.
  • See more stories on Insider’s business page.

Morgan Stanley sold about $5 billion in shares of now-collapsed hedge fund Archegos Capital Management the night before a massive securities sale took place, CNBC reported Tuesday, citing unnamed sources familiar with the matter.

Archegos’ biggest prime broker sold shares in US media and Chinese tech names to a small group of hedge funds late Thursday, March 25, the report said, adding that Morgan Stanley sold the shares at a discount and told the hedge funds that they were part of a margin call that could prevent the collapse of an unnamed client.

According to the report, sources said the investment bank didn’t tell the buyers that the basket of shares would be the start of an unprecedented wave of tens of billions of dollars in securities sales by Morgan Stanley and five other investment banks starting the next day, on Friday.

The sources told CNBC that Morgan Stanley had Archegos’ consent to shop around its stock late March 25.

European lender Credit Suisse said Tuesday it will likely suffer a $4.7 billion charge to first-quarter profits after Archegos failed to meet its margin requirements.

Bill Hwang, who in 2013 founded Archegos as a family office, used borrowed money to make large bets on some stocks until Wall Street banks forced the firm to sell more than $20 billion worth of shares after failing to meet a margin call.

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Bill Hwang lost $8 billion in 10 days during the Archegos meltdown, reports say

Bill Hwang
  • Bill Hwang lost $8 billion dollars in 10 days during the Archegos meltdown, The Wall Street Journal reported.
  • Traders and investors said this is one of the fastest losses they have ever seen.
  • The fiasco exposed the fragility of the financial system and shed light on more obscure practices such as the use of total return swaps.
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Amid the largest melt down of a firm Wall Street has witnessed since the global financial crisis, it wasn’t just banks that lost billions. Bill Hwang, the man behind Arcehgos Capital Management, also suffered a staggering $8 billion dollars in 10 days – one of the fastest losses of that size traders have ever seen, The Wall Street Journal reported.

The massive selloff was largely felt on Friday last week when shares of media conglomerates and investment banks dropped off, sending shockwaves through the market and sparking fears of wider spread contagion.

Japanese firm Nomura Holdings said it could suffer a possible loss of around $2 billion, while Credit Suisse Group, which has declined to provide a numerical impact, could see around $3 billio-$4 billion, according to reports.

Hwang, who founded Archegos as a family office in 2013, used borrowed money to make large bets on some stocks until Wall Street banks forced his firm to sell over $20 billion worth of shares after failing to meet a margin call, hammering stocks including ViacomCBS and Discovery.

The fiasco exposed the fragility of the financial system, especially those involving lesser-known practices such as a total return swaps, a derivative instrument that enabled Hwang’s office not to have ownership of the underlying securities his firm was betting on.

It also revealed the lack of oversight of family offices, which manage more than $2 trillion, The Wall Street Journal reported. Family offices don’t have to disclose investments, unlike traditional hedge funds.

“The collapse of Archegos Capital Management and the billions of dollars in losses to investors and other market participants is a vivid demonstration of the havoc that errant large investment vehicles called ‘family offices’ can wreak on our financial markets,” Dan Berkovitz, a Democratic commissioner on the Commodity Futures Trading Commission, said in a statement, Thursday.

“A ‘family office’ has nothing to do with ordinary families. Rather, it is an investment vehicle used by centimillionaires and billionaires to grow their wealth, reduce their taxes and plan their estates,” Berkovitz said.

The founder grew his family office’s $200 million investment to $10 billion, but he did not need to register as an investment advisor since he was only managing his own wealth.

But this isn’t the first time the devout Christian founder, who is known for his risky investments, has run into trouble. In 2012, Hwang pleaded guilty to insider trading and closed down his Tiger Asia Management fund. He was banned from managing clients’ money in the US for five years. In Hong Kong, he was also banned from trading securities in 2014 for four years.

Yet, in spite of the huge losses as a result of his fund’s implosion, some have praised Hwang’s abilities.

Tom Lee, head of research at Fundstrat Global Advisors, in a tweet on Tuesday, said investors should be cheering hedge fund successes not jeering their failures. Lee said Hwang, who he has known for many years, is “easily in the top 10 of the best investment minds” that he knows.

Meanwhile, billionaire hedge fund pioneer Julian Robertson, who founded Tiger Management in 1980, maintained that he is a “great fan” of former Tiger cub Hwang and would invest with him again despite the recent turn of events.

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Chinese tech firms hammered by the Archegos blow-up announce share buybacks

Bill Hwang
  • Three Chinese tech firms will buyback $1.55 billion in shares after their stocks fell due to the Archegos’ blow-up.
  • Hedge fund Archegos Capital Management was forced to liquidate its positions due to margin calls from banks.
  • Vipshop, Tencent Music, and GSX Techedu all announced share buybacks in the past week.
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The Chinese tech firms Vipshop, Tencent Music Entertainment, and GSX Techedu all announced share buybacks after getting hammered by the hedge fund Archegos’ blow-up at the end of last week.

Tencent Music Entertainment’s board approved a $1 billion buyback program of its class A shares over the next 12 months on Sunday.

Vipshop followed suit this week authorizing a $500 million share buyback program over the next 24 months on Tuesday. Both companies plan on using their existing cash balances for the repurchases.

Larry Xiangdong Chen, the founder, chairman and CEO of GSX Techedu, said he would use personal funds to buy back $50 million worth of his education technology company over the next 12 months in a Tuesday press release as well.

The three Chinese firms were hurt by the forced liquidation of Archegos’ Capital Management, a hedge fund that failed to meet margin calls from big banks including Goldman Sachs, Morgan Stanley, Credit Suisse, Nomura, UBS, and Deutsche Bank.

Archegos’ had placed leveraged bets on the Chinese tech firms, among others. When it was forced to rapidly liquidate its positions to pay back banks, shares of its holdings plummeted.

In the past week alone, as of Monday’s closing price, Vipshop fell over 37% while Tencent Music Entertainment and GSX Techedu fell 36% and 56%, respectively.

The Archegos blow-up didn’t just hurt the hedge fund’s holdings either. Banks like Credit Suisse and Nomura have said they are facing significant losses stemming from the event.

Archegos’ was run by Bill Hwang, a former protégé of the hedge-fund titan Julian Robertson, who founded Tiger Capital Management.

Hwang used “total return swaps” to borrow huge sums from banks in relative anonymity without having to put down as much collateral. “Total return swaps” allow users to take on the profits and losses of a portfolio in exchange for a fee.

The tactic has been widely criticized by economists and investors including Warren Buffett. The “oracle of Omaha” said in a 2002 letter to investors that these types of “derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

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