EXPLAINED: Archegos’s margin call, fire sales and the implications for top investment banks, markets
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
On Friday, Archegos Capital Management, run by former Tiger Asia manager Bill Hwang, was forced to unload $20 billion of shares following its inability to meet margin obligations to brokers. The led to prices of stocks like ViacomCBS, Discovery crashing over 25 percent intra-day, and US-listed shares of China-based Baidu and Tencent Music plunging 33-48 …
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On Friday, Archegos Capital Management, run by former Tiger Asia manager Bill Hwang, was forced to unload $20 billion of shares following its inability to meet margin obligations to brokers. The led to prices of stocks like ViacomCBS, Discovery crashing over 25 percent intra-day, and US-listed shares of China-based Baidu and Tencent Music plunging 33-48 percent.
Let us take a look at the players at the centre of activity, the causes, and the implications for global equities
What is Archegos Capital Management?
It is a family office, meaning a private wealth management advisory firm serving ultra-high-net-worth investors.
Who owns it?
Archegos is run by Bill Hwang, who earned his spurs as a fund manager at Julian Robertson’s famous hedge fund Tiger Management in the 90s and the early noughties. Hwang then set up his own fund called Tiger Asia, with Robertson’s backing. In 2012, Tiger Asia and Hwang were charged with insider trading and market manipulation by the Securities Exchange Commission and had to pay $44 million in penalties. Hwang then converted Tiger Asia into a family office.
How much funds does Archegos manage?
According to a report in the Wall Street Journal, Archegos managed around $10 billion of family money and made big bets on public stocks in the US, Europe, and Asia. A report in the South China Morning Post quoting unnamed market players said that Hwang practiced a long-short strategy with exceptionally large leverage. This means that that for every dollar of his own, he would borrow multiple times of it and build positions in stocks.
What went wrong?
Archegos had taken bets on stocks using borrowed money, and pledging shares as collateral with the investment banks/brokers it had borrowed from. In such arrangements, when the value of the pledged shares falls, the broker will ask the client for additional shares as collateral. This is known as a margin call.
If the client is unable to provide additional shares, depending on how much the value of the pledged shares has fallen by, the broker will sell a part or all of it to recover its money. When Archegos was unable to put up the money, its brokers dumped the shares Archegos had pledged with them.
What happened next?
Because of the distress sales, the prices of the stocks nosedived. Typically, in such situations, the steep fall triggers a sell-off by other traders with buy positions in the stock and aggravates the slide.
Who are the banks/brokers dealing with Archegos?
According to media reports, Goldman Sachs, Nomura, Credit Suisse, Morgan Stanley and Deutsche Bank are said to have been handling Archegos trades. According to the South China Morning Post report, Goldman Sachs had not been dealing with Hwang’s firm till 2018, because of the insider trading case. However, Hwang’s fund had become bigger than many hedge funds and Goldman’s rivals were earning huge commissions from Archegos’s trades. Finally, Goldman changes its stance and took on Archegos as a client.
How much losses have Archegos’ brokers suffered?
It is not clear at this point. Without naming Archegos or quantifying the loss, Credit Suisse said the loss could be “highly significant and material” to its results for the first quarter. Nomura too did not name Archegos, but said it faced a potential loss of $2 billion from an unnamed US client. Other brokers have not issued any statements yet.
Which are the important stocks held by Archegos?
Other than ViacomCBS and Discovery, media reports have mentioned US-listed Chinese companies Baidu Inc., GSX Techedu Inc., IQIYI Inc., and Tencent Music Entertainment Group as the stocks in Archegos portfolio.
According to a report in Forbes, there are no securities filings by Archegos on SEC’s repository for such filings, EDGAR (Electronic Data Gathering, Analysis, and Retrieval), despite the huge transactions undertaken by Archegos.
How come?
According to reports by Bloomberg and The Wall Street Journal, Archegos built up these positions through a derivative instrument called total return swaps. According to this Forbes report, family offices are required to report stock and derivative positions above $100 million in 13-f filings on the Securities Exchange Commission’s EDGAR website. However, swaps are excluded from 13-f filings
How have global markets reacted to the fire sales of Archegos’ holdings?
So far, the impact has been limited to the stocks that were part of Archegos portfolio. Major equity indices in US, Asia and Europe have not been affected.
NOTE TO READERS: This copy has been updated with information on why Archegos could avoid disclosing its positions as required by the regulators.
Also read: Why regulators failed to spot the ticking time bomb at Archegos
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