Hedge Funds are usually a pool of money managed by some experienced fund managers who make use of their knowledge to develop strategies and provide the maximum possible return to the investors of the money. Such funds generally manage billions and billions of money. Today’s story involves one such fund which is technically a “Family Office” – meaning it invests the wealth of a family and its assets, BUT also manages about $10 billion!
Archegos Capital Management is a New-York based family office. It is run by Bill Hwang, who was formerly a protégé of Hedge Fund Veteran Julian Robertson at Tiger Management. It primarily invests the funds in stocks in markets like the US, China, Korea and Japan.
On a side note, in 2012, Bill Hwang was fined by SEC for about $44 million to settle the charges of insider trading at Tiger Asia Management and Tiger Asia Partners, while also agreeing to stay away from the investment advisory business, while also agreeing to stay away from the investment advisory business.
Archegos held huge positions in companies like Viacom CBS, Discovery, Baidu, Tencent Games among others. These positions were held through a derivative instrument called Total Return Swaps(TRS) – which need not be disclosed to the regulators.
TRS is an agreement in which, one party(buyer) makes payment to another(seller) on a set rate(basically interest payment) to hold an asset. The buyer must put forward some collateral to the seller in case the deal goes sideways.
- For the seller, this helps them to get the interest income.
- For the buyer, this enables them to build up position in stocks without the market knowing, without putting up the actual value of the asset to hold them and also benefit from capital gains, if the asset value rises.
But, if the asset value falls after certain period, the seller will ask the swap-buyer to put forward more collateral or lower its position in such asssets. This is called a Margin Call.
Archegos entered into such agreements(TRS) with many different banks for the same basket of stocks. They included Goldman Sachs, Morgan Stanley, Deutsche Bank, Nomura, Credit Suisse among others. According to a WSJ report, Archegos was putting up $15 of its capital, and borrowing $85 against it. That is almost 4x leverage! They invested about $10 billion on such swaps.
Beginning of the End
Things started to go down south starting with Viacom. On March 24, The company announced a fresh issue of shares, which reduced the power of existing shareholders and as a result, its value plummeted. Chinese tech stocks also slumped as the government started slapping regulation and restrictions on the tech companies. * Enter Margin Call *
The banks started asking Bill Hwang to put forward more collateral. He tried to stall them. But the fall in value of teh assets was so significant that some banks started a to go on a selling spree. On Friday, March 26th, Goldman sold about $10.5 billion worth stocks in ViacomCBS, Baidu Inc and others. Morgan Stanley offloaded $8 billion worth of shares and Deutsche Bank sold upto $4 billion worth. For others like Nomura and Credit Suisse, the losses were about $2 billion and $5 billion respectively. JPMorgan analysts estimated that Wall Street’s total losses could reach $10 billion.
Just when we thought we were done with the Gamestop saga, there was another timebomb ticking behind the shades without anyone knowing.