What is a hedge fund and how does it work?

Smiling muslim woman in a business meeting shaking someone’s hand.
Despite being called “hedge” funds, these investment vehicles are quite risky.

  • Hedge funds are pooled investment funds that aim to maximize returns and protect against market losses by investing in a wider array of assets.
  • Hedge funds charge higher fees and have fewer regulations, which can make them riskier.
  • Individuals, large companies, and pension funds may invest in hedge funds as long as they meet asset requirements.
  • Visit Insider’s Investing Reference library for more stories.

A hedge fund is a type of investment that’s open to accredited investors. The goal is for participants to come out ahead no matter how the overall market is performing, which may help protect and grow your portfolio over time. But hedge funds come with some risks, which you’ll need to consider before diving in.

What is a hedge fund?

A hedge fund is a private investment that pools money from several high-net-worth investors and large companies with the goal of maximizing returns and reducing risk. To protect against market uncertainty, the fund might make two investments that respond in opposite ways. If one investment does well, then the other loses money – theoretically reducing the overall risk to investors. This is actually where the term “hedge” comes from, since using various market strategies can help offset risk, or “hedge” the fund against large market downturns.

Understanding how hedge funds work

Hedge funds have a lot of leeway in how they earn money. They can invest both domestically and around the world and use just about any investment strategy to make active returns. For instance, the fund may borrow money to grow returns – known as leveraging – make highly concentrated bets, or take aggressive short positions.

But that flexibility also makes these investment vehicles risky, despite being called “hedge” funds. “There’s no transparency in hedge funds, and most of the time, managers can do whatever they want inside of the fund,” says Meghan Railey, a certified financial planner and co-founder/chief financial officer of Optas Capital. “So they can make big bets on where the market’s going, and they could be very wrong.”

The elevated risk is why only accredited investors – those deemed sophisticated enough to handle potential risks – can invest in this type of fund. To be considered an accredited investor, you’ll need to earn at least $200,000 in each of the last two years ($300,000 for married couples) or have a net worth of more than $1 million.

Hedge funds vs. the S&P 500

It’s tough to compare hedge funds to the S&P 500 because there are so many different types of hedge funds, and the markets they invest in might be global-oriented, says Chris Berkel, investment adviser and founder of AXIS Financial. “However, we can say that a broad index of hedge funds underperformed the S&P 500 over the last 10 to 15 years,” Berkel says.

Berkel points to data compiled by the American Enterprise Institute (AEI) from both the S&P 500 and the average hedge fund from 2011 to 2020. The data shows that S&P 500 index outperformed a sample of hedge funds in each of the 10 years from 2011 to 2020:

Year Average hedge fund S&P 500 Index
2011 -5.48% 2.10%
2012 8.25% 15.89%
2013 11.12% 32.15%
2014 2.88% 13.52%
2015 0.04% 1.38%
2016 6.09% 11.77%
2017 10.79% 21.61%
2018 -5.09% -4.23%
2019 10.67% 31.49%
2020 10.29% 18.40%
Source: American Enterprise Institute

“The S&P 500 is a systematic risk, which cannot be diversified away,” Berkel says. A hedge fund may provide some safeguards to your portfolio, which you won’t get with the S&P 500.

Hedge funds pay structure

Investors earn money from the gains generated on hedge funds, but they pay higher fees compared to other investments such as mutual funds. “The management fee is charged every year, regardless of performance, and the incentive fee is charged if the manager performs in excess of a specific threshold, typically its high-water mark,” Berkel says.

The fee is typically structured as “2% and 20%.” So in this example, participants pay an annual fee of 2% of their investment in the fund and a 20% cut of any gains. But recently, many hedge funds have reduced their fees to “1.5% and 15%,” says Evan Katz, managing director of Crawford Ventures Inc.

Once you put money into the fund, you’ll also have to follow rules on when you can withdraw your money. “During market turmoil, most hedge funds reserve the right to ‘gate,’ or block, investors from redeeming their shares,” Berkel says. “The rationale is that it protects other investors and helps the fund manager maintain the integrity of their strategy.”

Outside of these lockup periods, you can usually withdraw money at certain intervals such as quarterly or annually.

Are hedge funds regulated?

Hedge funds are regulated, but to a lesser degree than other investments such as mutual funds. Most hedge funds aren’t required to register with the Securities and Exchange Commission (SEC), so they lack some of the rules and disclosure requirements that are designed to protect investors. This can make it difficult to research and verify a hedge fund before investing in this type of product. However, hedge fund investors are still protected against fraud, and fund managers still have a fiduciary duty to the funds they manage.

The financial takeaway

Investing in hedge funds could help your portfolio grow, but you wouldn’t want to concentrate your entire nest egg here. Hedge funds are illiquid, require higher minimum investments, are only open to accredited investors, and have fewer regulations than other types of investments, making them a risky endeavor.

“Start by consulting a financial professional who’s not incentivized to sell you a hedge fund,” Railey says. “Read the offering memorandum, ask some critical questions about past performance, and ask what their strategy is going forward.” Then, she suggests, allocate no more than 5% to 10% of your overall investable assets into a hedge fund.

If you’re not an accredited investor or you’d rather look at different investments, you still have options outside of your retirement accounts. For instance, you might decide to open an online brokerage account. Keeping your money in the market over time – instead of trying to buy and sell based on market conditions – can be a good strategy, Railey says. “Just start simple, stay simple, and add on complexity as time goes and you have more experience to be able to understand the difference.”

What is net worth? How it can be important indicator of your financial well-beingWhat are the safest investments? 7 low-risk places to put your money – and what makes them soHow to invest in the S&P 500 – a guide to the funds that mimic the influential index’s makeup and movesHow to diversify your portfolio to limit losses and guard against risk

Read the original article on Business Insider

What is a hedge fund and how does it work?

Smiling muslim woman in a business meeting shaking someone’s hand.
Despite being called “hedge” funds, these investment vehicles are quite risky.

  • Hedge funds are pooled investment funds that aim to maximize returns and protect against market losses by investing in a wider array of assets.
  • Hedge funds charge higher fees and have fewer regulations, which can make them riskier.
  • Individuals, large companies, and pension funds may invest in hedge funds as long as they meet asset requirements.
  • Visit Insider’s Investing Reference library for more stories.

A hedge fund is a type of investment that’s open to accredited investors. The goal is for participants to come out ahead no matter how the overall market is performing, which may help protect and grow your portfolio over time. But hedge funds come with some risks, which you’ll need to consider before diving in.

What is a hedge fund?

A hedge fund is a private investment that pools money from several high-net-worth investors and large companies with the goal of maximizing returns and reducing risk. To protect against market uncertainty, the fund might make two investments that respond in opposite ways. If one investment does well, then the other loses money – theoretically reducing the overall risk to investors. This is actually where the term “hedge” comes from, since using various market strategies can help offset risk, or “hedge” the fund against large market downturns.

Understanding how hedge funds work

Hedge funds have a lot of leeway in how they earn money. They can invest both domestically and around the world and use just about any investment strategy to make active returns. For instance, the fund may borrow money to grow returns – known as leveraging – make highly concentrated bets, or take aggressive short positions.

But that flexibility also makes these investment vehicles risky, despite being called “hedge” funds. “There’s no transparency in hedge funds, and most of the time, managers can do whatever they want inside of the fund,” says Meghan Railey, a certified financial planner and co-founder/chief financial officer of Optas Capital. “So they can make big bets on where the market’s going, and they could be very wrong.”

The elevated risk is why only accredited investors – those deemed sophisticated enough to handle potential risks – can invest in this type of fund. To be considered an accredited investor, you’ll need to earn at least $200,000 in each of the last two years ($300,000 for married couples) or have a net worth of more than $1 million.

Hedge funds vs. the S&P 500

It’s tough to compare hedge funds to the S&P 500 because there are so many different types of hedge funds, and the markets they invest in might be global-oriented, says Chris Berkel, investment adviser and founder of AXIS Financial. “However, we can say that a broad index of hedge funds underperformed the S&P 500 over the last 10 to 15 years,” Berkel says.

Berkel points to data compiled by the American Enterprise Institute (AEI) from both the S&P 500 and the average hedge fund from 2011 to 2020. The data shows that S&P 500 index outperformed a sample of hedge funds in each of the 10 years from 2011 to 2020:

Year Average hedge fund S&P 500 Index
2011 -5.48% 2.10%
2012 8.25% 15.89%
2013 11.12% 32.15%
2014 2.88% 13.52%
2015 0.04% 1.38%
2016 6.09% 11.77%
2017 10.79% 21.61%
2018 -5.09% -4.23%
2019 10.67% 31.49%
2020 10.29% 18.40%
Source: American Enterprise Institute

“The S&P 500 is a systematic risk, which cannot be diversified away,” Berkel says. A hedge fund may provide some safeguards to your portfolio, which you won’t get with the S&P 500.

Hedge funds pay structure

Investors earn money from the gains generated on hedge funds, but they pay higher fees compared to other investments such as mutual funds. “The management fee is charged every year, regardless of performance, and the incentive fee is charged if the manager performs in excess of a specific threshold, typically its high-water mark,” Berkel says.

The fee is typically structured as “2% and 20%.” So in this example, participants pay an annual fee of 2% of their investment in the fund and a 20% cut of any gains. But recently, many hedge funds have reduced their fees to “1.5% and 15%,” says Evan Katz, managing director of Crawford Ventures Inc.

Once you put money into the fund, you’ll also have to follow rules on when you can withdraw your money. “During market turmoil, most hedge funds reserve the right to ‘gate,’ or block, investors from redeeming their shares,” Berkel says. “The rationale is that it protects other investors and helps the fund manager maintain the integrity of their strategy.”

Outside of these lockup periods, you can usually withdraw money at certain intervals such as quarterly or annually.

Are hedge funds regulated?

Hedge funds are regulated, but to a lesser degree than other investments such as mutual funds. Most hedge funds aren’t required to register with the Securities and Exchange Commission (SEC), so they lack some of the rules and disclosure requirements that are designed to protect investors. This can make it difficult to research and verify a hedge fund before investing in this type of product. However, hedge fund investors are still protected against fraud, and fund managers still have a fiduciary duty to the funds they manage.

The financial takeaway

Investing in hedge funds could help your portfolio grow, but you wouldn’t want to concentrate your entire nest egg here. Hedge funds are illiquid, require higher minimum investments, are only open to accredited investors, and have fewer regulations than other types of investments, making them a risky endeavor.

“Start by consulting a financial professional who’s not incentivized to sell you a hedge fund,” Railey says. “Read the offering memorandum, ask some critical questions about past performance, and ask what their strategy is going forward.” Then, she suggests, allocate no more than 5% to 10% of your overall investable assets into a hedge fund.

If you’re not an accredited investor or you’d rather look at different investments, you still have options outside of your retirement accounts. For instance, you might decide to open an online brokerage account. Keeping your money in the market over time – instead of trying to buy and sell based on market conditions – can be a good strategy, Railey says. “Just start simple, stay simple, and add on complexity as time goes and you have more experience to be able to understand the difference.”

What is net worth? How it can be important indicator of your financial well-beingWhat are the safest investments? 7 low-risk places to put your money – and what makes them soHow to invest in the S&P 500 – a guide to the funds that mimic the influential index’s makeup and movesHow to diversify your portfolio to limit losses and guard against risk

Read the original article on Business Insider

The three dimensions of investing today are risk, return, and impact. Experts say investors concerned about ESG need to ‘do their homework’

"Future of Finance," an Insider virtual event, was presented on June 8, 2021.
“Future of Finance,” an Insider virtual event, was presented on June 8, 2021.

  • When it comes to data on sustainable investing, asking the right questions is key.
  • Execs from Bridgewater and LGIM outlined policies that could encourage better ESG disclosure.
  • The conversation was part of Insider’s virtual event, “Future of Finance,” presented by Grayscale on June 8, 2021.
  • See more stories on Insider’s business page.

As financial institutions grapple with the steep risks posed by the imminent global climate crisis, ESG (environmental, social, and governance) investing has emerged as a potential solution. While these sustainable investment strategies have gained popularity with investors, data and reporting surrounding ESG factors can be opaque and confusing.

Karen Karniol-Tambour, co-chief investment officer for sustainability at Bridgewater Associates, the world’s largest hedge fund, said that sorting through that data and making sense of it is part of an investor’s job. She said answering questions about an investment’s sustainability merits may feel like a new challenge, but is not any different than answering familiar macroeconomic questions about a country’s growth rate, for example.

Karniol-Tambour made these comments during Insider’s recent virtual event, “Future of Finance,” presented by Grayscale, which took place on June 8, 2021.

This panel, titled “Sustainable Investing Pays Off?” was moderated by Bradley Saacks, senior finance reporter at Insider, and featured Karniol-Tambour along with John Hoeppner, head of US stewardship and sustainable investments at Legal & General Investment Management (LGIM) America, a division of the $1 trillion global asset manager.

Karniol-Tambour said that the key question for Bridgewater in evaluating ESG investments is what they are trying to get out of the data.

“Don’t think about what is presented to you, but [think about] what concept are you actually trying to capture,” Karniol-Tambour said.

Hoeppner said in analyzing sustainable investments, LGIM is trying to “create [its] own points of view and rely less on others.”

The firm has two key goals in mind when it looks to ESG investing, Hoeppner said. The first is to raise standards across the board with regard to disclosure and the second is to find an investment advantage by looking at subsets of ESG data that are closely linked to mispricings in the market.

Karniol-Tambour said her clients want to make the highest returns with the lowest risk possible. She said that there are many areas in which ESG factors are material to making money in a particular market.

“For example, if we’re going and deciding whether or not we think the price of copper is going to go up or down, you really just can’t do that analysis without looking at what’s the pace going to be in which it will transition away from carbon,” Karniol-Tambour said.

“Investing is not two-dimensional risk and return. It’s actually three-dimensional risk, return, and impact -or risk, return, and sustainability. And that third dimension, deserves just as much care, attention, analysis, customization.”

Multiple strategies are available to investors seeking to maximize impact. Hoeppner said that divestment, or opting out of investing in certain assets because they are not sustainable, is “overused” as a strategy. He said that LGIM, as a major investor in many public companies, prefers to use its access to have “constructive engagements” with their portfolio companies through discussions and proxy votes on how to navigate risk.

Moderator Bradley Saacks asked the panelists about the regulatory environment for ESG investing. Hoeppner mentioned that in the US today, if you are participating in a 401k or pension as part of your corporation, it is legally unclear whether or not you can have a sustainability fund in your lineup.

He said he is optimistic that regulators will sort out the issue, which he attributed to an “incorrect assumption” that ESG strategies were deployed for non-financial benefits, whereas he believes most ESG research is actually performed with the goal of reaping financial benefits.

He also expressed the hope that the Securities and Exchange Commission (SEC) enforces some sort of mandatory disclosure for climate risk for all companies, arguing that information is the basis for a free market.

Karniol-Tambour pointed to Australia’s policy of making companies report their potential exposure to modern slavery and eradicate it as an example of sound policy based on a robust data ecosystem.

Without disclosures and data, Hoeppner said, it is difficult to discern companies’ credibility on ESG issues.

“All investment managers see ESG and sustainable investing as a commercial opportunity,” Hoeppner said.

“How do you tell one asset manager from another one when everyone says that they have the best sustainability credentials? The hard answer is that you have to do your homework.”

Read the original article on Business Insider

A hedge fund pointed out the ridiculousness of a New Jersey deli trading at a $100 million valuation. Now the newly minted meme stock is popping as trading volumes explode.

Your Hometown Deli
  • A New Jersey deli with a $100 million valuation flew under the radar until Greenlight Capital’s David Einhorn pointed to the company as a sign of excess in his quarterly letter.
  • Prior to Einhorn’s letter, Hometown International was a rarely traded stock on the over the counter exchange.
  • But with increased attention from Einhorn’s letter, trading volume in Hometown International is surging, only adding to the absurdity that Einhorn was trying to emphasize.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

To Greenlight Capital’s David Einhorn, Hometown International represented just one of many signs of excess that’s been building in the stock market over recent months.

Hometown, which owns a single deli in New Jersey and recorded annual revenue of just $14,000 in 2020, sports a market valuation of about $100 million. The stock had mostly flown under the radar since it went public in late 2019, rarely trading hands on the over the counter exchange with daily average volume of a few hundred shares.

That is, until Einhorn mentioned Hometown International in his quarterly letter.

“The pastrami must be amazing,” Einhorn quipped. He pointed to Hometown as the kind of company that amateur stock-pickers could lose their money in, and called for regulators to do more to protect investors.

Einhorn’s observation did little to deter trading in the thinly-held stock, whose single largest shareholder acts as CEO, CFO, treasurer, one of its directors, as well as the local high school wrestling coach.

Instead, the stock has moved higher on an explosion in trading volume.

Since the release of Einhorn’s letter, Hometown International surged as much as 17% to a record high of $15.75 on Monday. The move higher was accompanied by a 5,906% surge in daily trading volume.

On Friday, 42,762 shares traded, well above its one-year average daily trading volume of just 712 shares. And on Monday, more than 12,000 shares had exchanged hands as of 2:33 pm ET.

Einhorn’s spotlight on Hometown International didn’t deter the type of risky trading behavior that’s been seen in GameStop and Dogecoin this year, instead it exacerbated it.

Read more: A 29-year-old self-made billionaire breaks down how he achieved daily returns of 10% on million-dollar crypto trades, and shares how to find the best opportunities

Read the original article on Business Insider

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.

Read the original article on Business Insider

Credit Suisse warns of a $4.6 billion charge after Archegos blow-up – and says several top executives are leaving

Credit Suisse

Credit Suisse warned on Tuesday it expects to suffer a $4.6 billion charge to its first-quarter profits following the failure of a US-based hedge fund to meet its margin requirements.

The European lender sees an overall loss of $958 million for the first quarter after two significant crises this year. The Archegos blow-up led to major losses for the bank’s unit that services hedge funds, according to media reports. Prior to that, Credit Suisse terminated $10 billion of supply-chain finance funds linked to troubled financier Lex Greensill.

“The Board of Directors has launched two investigations, to be carried out by external parties, into the supply chain finance funds matter and into the significant US-based hedge fund matter,” the bank said in a statement.

It has now proposed a cut to its dividend and waived bonuses for the 2020 financial year. Further, Chairman Urs Rohner is giving up his “chair fee” of 1.5 million francs ($1.6 million).

Credit Suisse CEO Thomas Gottsein will remain at the bank’s helm. But the lender’s chief risk officer, Lara Warner, is departing on Tuesday. The head of its investment bank, Brian Chin, will leave by the end of April. Joachim Oechslin has been appointed as Warner’s interim replacement, while Christian Meissner will take over Chin’s role.

Insider has learnt that Paul Galietto, head of equities sales and trading, is also stepping down. He will be temporarily replaced by Anthony Abenante, global head of execution services.

Thomas Grotzer, who previously served as general counsel and an executive board member, has been appointed as the bank’s global head of compliance with immediate effect.

Archegos Capital, the highly-leveraged family office of former “Tiger cub” Bill Hwang, triggered a $20 billion forced liquidation of its holdings last month. Archegos had borrowed from a host of banks including Goldman Sachs, Credit Suisse, and Nomura using leverage – or buying stocks on credit.

The fund collapsed after bets it made in stocks such as ViacomCBS, Tencent, and Baidu tumbled below a certain level, leaving its bankers with collateral that wasn’t worth as much. Its lenders, fearing that Archegos could default on its margin obligations at any moment, exited their positions.

“The significant loss in our Prime Services business relating to the failure of a US-based hedge fund is unacceptable,” Gottstein said in a statement. “In combination with the recent issues around the supply chain finance funds, I recognize that these cases have caused significant concern amongst all our stakeholders.”

Read the original article on Business Insider

Carl Icahn names a former GE executive as CEO of Icahn Enterprises: WSJ

FILE PHOTO: Billionaire activist-investor Carl Icahn gives an interview on Fox Business Network's Neil Cavuto show in New York, U.S. on February 11, 2014.  REUTERS/Brendan McDermid/File Photo
Carl Icahn.

  • Billionaire fund manager Carl Icahn has named Aris Kekedjian as CEO of Icahn Enterprises, the WSJ reported.
  • Kekedjian, who will assume the CEO post on Monday, previously spent three decades at GE.
  • See more stories on Insider’s business page.

Billionaire fund manager Carl Icahn has named a former General Electric executive as CEO of Icahn Enterprises, the Wall Street Journal reported Sunday.

In an interview with the Journal, the activist investor said Aris Kekedjian will take over as CEO and chief operating officer on Monday. Kekedjian spent three decades at GE, and was the company’s chief investment officer until 2019, the Journal reported.

Icahn Enterprises current CEO, Keith Cozza, and chief financial officer, SungHwan Cho, are leaving the firm, which consists of Icahn’s investment fund and other companies he controls, the WSJ said.

Icahn told the newspaper the pair of top executives were leaving on excellent terms. The decision was partly precipitated because neither planned to relocate to the Miami area, where Icahn Enterprises moved last year, he said.

In 2019, Icahn told staff he was shutting down offices in New York and opening up in early 2020 in Miami. Those who stayed with the company received moving expenses. Those who didn’t want to move to Florida got severance, Reuters and the New York Post reported.

Over the past year, a number of other powerful tech titans and Wall Street heavyweights have also made the move to Florida, drawn by lower taxes and other perks. Remote work during the COVID-19 pandemic also spurred some companies and powerful individuals to consider the move.

Icahn Enterprises did not immediately respond to Insider’s request for comment about Kekedjian.

Read the original article on Business Insider

Goldman beat Nomura to the punch during the Archegos liquidation – and then downgraded the Japanese bank’s stock

GettyImages 526244118
Goldman Sachs was quick off the mark in selling Archegos’ holdings

  • Goldman Sachs managed to sell its Archegos positions quicker than others, including Nomura.
  • Its analysts then downgraded Nomura’s stock after the Japanese bank flagged a potential $2 billion hit.
  • One market analyst said the Archegos affair showed the “cutthroat nature of the business.”
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Goldman Sachs was quicker than its rivals at offloading billions of dollars of stock held by the imploding investment fund Archegos. Japanese banking giant Nomura wasn’t so fast, according to reports, and is facing losses of around $2 billion in one of its arms.

Now, Goldman analysts have downgraded Nomura’s shares, pronouncing on Tuesday: “We now think upside for the stock looks limited.”

The analysts, led by Shinichiro Nakamura, also lowered their earnings forecasts for Nomura, saying: “We assume the company would look to adopt a generally more risk-focused or cautious approach.”

The major banks that lent to Archegos Capital Management tried to reach an agreement last week when it became clear that Bill Hwang’s fund was struggling to come up with cash to cover its bets, according to reports in the Financial Times and Bloomberg.

Yet those talks broke down, the reports said, and Goldman started selling huge blocks of Archegos’ holdings in companies such as ViacomCBS on Friday, causing stock prices to tumble.

Michael Brown, senior market analyst at Caxton FX, said it was a case of “every bank for themselves.” He added: “Unsurprisingly, [any agreement] quickly fell apart, such is the cut-throat nature of the business.”

On Monday, it became clear Nomura had not been fast enough when it said it was facing “a significant loss arising from transactions with a US client.”

Goldman, itself the heart of the action, swiftly downgraded Nomura’s stock from “buy” to “neutral” on Tuesday.

“We lower our [earnings] estimates given Nomura’s March 29 disclosure that it could book losses/provisions [of] approximately $2 billion,” the analyst said.

Nomura Holdings was down around 19% for the week on Wednesday at 581 Japanese yen, roughly $5.25. Goldman’s new 12-month target price is 630 yen.

Goldman said that if losses in the bank’s prime brokerage business rise to $3-$4 billion, “we would see a possibility that the company could rein in shareholder distributions.”

Nomura and Goldman Sachs both declined to comment.

JPMorgan now reckons the losses at certain banks involved with Archegos, such as Nomura and Credit Suisse, could be as high as $10 billion.

A person with knowledge of the situation said Goldman had “proactively managed” its risk and that its losses were “immaterial.”

Brown said: “For now, it’s a point to GS in this one.”

Read the original article on Business Insider

Mohamed El-Erian says the Archegos blow up is a ‘one-off’ but it may lead to tightening financial conditions as banks become more cautious

Mohamed El-Erian
Mohamed El-Erian, Chief Economic Advisor of Allianz and Former Chairman of President Obama’s Global Development Council, speaks during the Milken Institute Global Conference in Beverly Hills, California, U.S., May 1, 2017.

  • Mohamed El-Erian said the Archegos blow-up is a “one-off” in a CNBC interview Monday.
  • The Allianz chief economic adviser added he doesn’t believe it will lead to a “fast-moving contagion” in the markets.
  • El-Erian did warn investors about “tightening financial conditions” if banks become more cautious as a result.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Mohamed El-Erian says the Archegos blow-up is a “one-off,” but it may lead to a tightening of financial conditions as banks become more cautious.

Over the weekend reports came out that showed Archegos Capital Management had been behind roughly $20 billion worth of block sales of companies like ViacomCBS and several Chinese tech stocks including Tencent and Baidu.

The sales came after the hedge fund failed to meet margin calls from Credit Suisse, Nomura, and Goldman Sachs.

Queen’s College President and Allianz chief economic advisor told CNBC on Monday that he believes the incident was a “one-off,” caused by Archegos’ “highly concentrated positions”, “massive leverage”, and “derivative overlay on top of that.”

El-Erian said that he doesn’t see a “fast-moving contagion” spilling over and creating a significant market sell-off, adding that “for now it looks contained.”

The Allianz chief economist did say investors should be keeping an eye on “slower-moving contagion forces” which might cause a “tightening in financial conditions” forcing banks to become more cautious.

“There’s been so much liquidity sloshing around the system that there has been excesses and we’ll get fender benders like this one, but what we don’t want is a pile-up, and that’s why it’s really important to look at these slow-moving contagions,” El-Erian said.

El-Erian said he hoped the Archegos blow-up would lead to “better discipline in the marketplace because we’ve lost a lot of discipline.”

He added that Archegos’ positions, overall, are a “small” portion of the market, but said it could cause banks to make changes.

“I can tell you that in a lot of investment houses right now, and banks, people are being asked look how we are positioned, who are we exposed to, do we have enough margin, is the collateral moving or not, and all that causes somewhat of a slowdown in the system,” El-Erian said.

When asked what caused Goldman Sachs to force the liquidation when it did, the Queen’s College President said that “price action”, “how big was the margin overall”, and desire to move first and catch other banks “offsides” was the reason Goldman made its liquidation call.

Goldman Sachs told Bloomberg that its losses from the Archegos liquidation were “immaterial” while Nomura and Credit Suisse both face “significant” losses after the blow-up.

Read the original article on Business Insider

Something weird just went down in the stock market, and Wall Street is speculating it’s the result of a fund liquidation

Trader
Traders work during the closing bell at the New York Stock Exchange (NYSE) on March 18, 2020 at Wall Street in New York City

  • A selling spree on Wall Street erased $35 billion from the values of stocks of major companies Friday.
  • The selloff appears to be in part the result of the “forced liquidation of positions” held by Archegos Capital Management, CNBC reported.
  • Goldman Sachs liquidated $10.5 billion worth of stocks in block trades, Bloomberg reported.
  • See more stories on Insider’s business page.

A selling spree erased $35 billion from the stock values of major Chinese tech and US media companies Friday, and Wall Street is speculating it was in part driven by the forced liquidation of an investment firm’s holdings.

Shares of ViacomCBS and Discovery fell as much as 35% Friday, while US-listed shares of China’s Baidu, Tencent Music, Vipshop and others also plunged this week. The selloff came as the broader US market ended the week higher, with the Dow closing up over 450 points, buoyed by optimism over the pace of coronavirus vaccinations.

The selloff in the Chinese internet ADRs and US media shares was in part due to the “forced liquidation of positions” held by Archegos Capital Management, CNBC reported, citing a source familiar with the situation.

Archegos describes itself as a family investment office focusing on equity investments primarily in the US, China, Japan, Korea and Europe. Archegos is run by Bill Hwang, the founder of the now defunct Tiger Asia Management. Hwang’s fund is “known for employing leverage,” IPO Edge reported.

The group did not immediately respond to Insider’s request for comment and its website appeared to be offline on Saturday.

Goldman Sachs and Morgan Stanley liquidated large holdings this week, the news site IPO Edge was first to report, adding that the two investment banks have ties to Archegos. The move likely came after Archegos was unable to meet a margin call by an investment bank, CNBC and IPO Edge reported, citing sources familiar with the matter.

Bloomberg reported Saturday that Goldman Sachs liquidated $10.5 billion worth of stocks in block trades, where banks look to find buyers for big stock positions. The block trades included $6.6 billion worth of shares of Baidu, Tencent and Vipshop before the US market opened on Friday morning, Bloomberg reported, citing an email to clients.

Goldman then sold $3.9 billion worth of shares in media giants ViacomCBS and Discovery, as well as luxury fashion retailer Farfetch, and others, according to the report.

Goldman Sachs did not immediately respond to Insider’s request for comment.

Morgan Stanley also led share offerings on behalf of an undisclosed shareholder or shareholders, Bloomberg reported. Some of the trades exceeded $1 billion in individual companies, Bloomberg reported, citing its own data.

Read the original article on Business Insider