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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The man at the heart of the Archegos fiasco is a ‘Tiger cub’ and devout Christian who pleaded guilty to insider trading. Meet Bill Hwang.

Bill Hwang
Archegos co-CEO Bill Hwang.

  • Bill Hwang’s Archegos fund was reportedly hit by margin calls, sparking a brutal sell-off.
  • The “Tiger cub” is deeply religious and believes he’s doing God’s work by investing.
  • Hwang previously pleaded guilty to insider trading and was slapped with a trading ban.
  • See more stories on Insider’s business page.

Bill Hwang is the talk of the financial world after several Wall Street banks reportedly slapped his family office with margin calls last week, declared him in default when he didn’t pay up, and executed a $20 billion fire sale of his positions that hammered stocks including ViacomCBS and Discovery.

The deeply religious founder and co-CEO of Archegos Capital Management has run into trouble before. He pleaded guilty to insider trading in 2012, forked over $60 million to settle related charges, and closed down his fund. He was also banned from trading securities in Hong Kong for four years in 2014.

Here’s a quick look at Hwang’s life so far.

A religious upbringing

Hwang was born in the mid-1960s and raised as a devout Christian. His father was a church pastor and his mother served as a missionary in Mexico, he said in a 2018 interview promoting communal bible readings.

The fund manager smiles a lot, cracks jokes, and comes across as humble in the interview. He doesn’t take himself too seriously, but clearly feels a burning desire to spread the gospel.

Faith has guided Hwang’s entire career. He sees investing as his calling, and believes God “loves” when he backs companies that contribute to humanity’s progress. “It’s not all about money,” he said in another 2018 interview.

Hwang gave the example of one of his larger investments, Linkedin. He suggested that God loves the social-media group’s goal of helping people to find jobs and realize their potential.

“I’m like a little child looking for what can I do today, where can I invest, to please our God,” he said. Inspired by Jesus Christ tirelessly working for his father, Hwang added, “I’m not going to retire until he pulls me back.”

Hwang is involved in several Christian organizations. He’s the cofounder of the Grace and Mercy Foundation, a contributor to Focus on the Family, and a trustee of the Fuller Theology Seminar, the three groups’ websites show.

Becoming a tiger cub

Hwang holds an economics degree from UCLA and a MBA from Carnegie Mellon, an online biography shows. He worked as a stock salesperson at Peregrine Securities and Hyundia Securities early in his career, until he caught the eye of one of his clients, Julian Robertson. He soon went to work under the veteran investor at his storied hedge fund, Tiger Management, and became one of his protégés.

Robertson closed his fund in 2000, but handed Hwang about $25 million to launch his own fund, Tiger Asia Management. One of several “Tiger cubs,” Hwang grew his firm’s assets to over $5 billion at its peak, The Wall Street Journal says, and delivered an annualized return of 16%, according to Bloomberg.

However, Hwang shuttered the fund in 2012 after pleading guilty to insider trading in federal court that year. He paid a total of $60 million to settle civil and criminal charges of manipulating Chinese stocks, and his fund forfeited about $16 million in related profits.

Going private

Hwang converted Tiger Asia into a family office, Archegos, in 2013. The switch meant he no longer managed any outside money, slashing the regulatory disclosures required of him.

Archegos roped in several major banks to place leveraged bets on multiple stocks. However, the markets turned against the fund last week, prompting brokers to issue “margin calls” or demand more money as collateral. When Hwang failed to comply, the banks liquidated over $20 billion worth of his positions to recover their money, sparking a brutal sell-off across a dozen stocks.

The full scale of the fallout from Archegos blowing up won’t be known for a while. Yet it’s safe to say that Hwang is at the center of another fiasco that he would have preferred to avoid.

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