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

That’s how Hwang was able to amass huge positions so quietly. And because lenders had details only of their own dealings with him, they, too, couldn’t know he was piling on leverage in the same stocks via swaps with other banks. ViacomCBS Inc. is one example. By late March, Archegos had exposure to tens of millions of shares of the media conglomerate through Morgan Stanley, Goldman Sachs Group Inc., Credit Suisse, and Wells Fargo & Co. The largest holder of record, indexing giant Vanguard Group Inc., had 59 million shares.

There’s no evidence Archegos did anything improper. The atmosphere maintained in its offices was notably sober. One former employee says there was no cursing tolerated, a policy borrowed from Robertson’s Tiger that stands in stark contrast to the profanity common on most trading floors. The same source also recalls Hwang toting a backpack like a college student and praising Uniqlo, the fast-fashion brand, because it’s cheap and comfortable-a utilitarian ideal.

The clash of humility and audacity played out on the 38th floor of 888 Seventh Ave., high above Central Park. On one side was Grace & Mercy, on the other Archegos. People familiar with Hwang’s investments the first few years he ran Archegos say they included Amazon; Expedia Group, the travel-booking engine; and LinkedIn, the job-search site Microsoft would acquire in 2016. A winning wager on Netflix Inc. netted Archegos close to $1 billion, one former colleague estimates. Hwang appeared to be channeling the same thesis Wood was applying at ARK and which millions of retail investors were beginning to embrace: technological disruption.

He was on a hot streak. By 2017, Archegos had about $4 billion in the capital, according to a former banker who helped oversee its account at his firm. Hwang was sharing few financial details with his lenders, but no one raised any red flags. His leverage at the time was about the same as a typical hedge fund running a similar strategy, or two to two-and-a-half times, this person says.
One problem with stock picking at Hwang’s scale is hedging. Many sophisticated stockpickers try to reduce their risk by balancing long positions with shorts on similar names. That way they’ll make up some losses with profits if the market tanks.

In principle, shorting is simple: You borrow shares and sell them, making money if the stock declines. In practice, it’s often hard to find enough shares or borrow them cheaply. Another way to hedge is what’s known as a portfolio short, a broad bet against the stock market often made through an options or futures contract on the S&P 500. It’s relatively easy to execute, but the hedge doesn’t work if the market doesn’t drop. The ex-banker says he recalls Archegos having a portfolio short.

At some point in the past few years, Hwang’s investments shifted from mainly tech companies to a more eclectic mix. Media conglomerates ViacomCBS and Discovery Inc. became huge holdings. So did at least four Chinese stocks: GSX Techedu, Baidu, Iqiyi, and Vipshop.

Although it’s impossible to know exactly when Archegos did those swap trades, there are clues in the regulatory filings by his banks. Starting in the second quarter of 2020, all Hwang’s banks became big holders of stocks he bet on. Morgan Stanley went from 5.22 million shares of Vipshop Holdings Ltd. as of June 30, to 44.6 million by Dec. 31.

Leverage was playing a growing role, and Hwang was looking for more. Credit Suisse and Morgan Stanley had been doing business with Archegos for years, unperturbed by Hwang’s brush with regulators. Goldman, however, had blacklisted him. Compliance officials who frowned on his checkered past blocked repeated efforts internally to open an account for Archegos, according to people with direct knowledge of the matter.

At the close of every trading day, Archegos would settle its swap accounts. If the total value of all positions in the account rose, the bank in question would pay Archegos cash. If the value fell, Archegos would have to put up more collateral or, in industry parlance, post margin.

The fourth quarter of 2020 was a fruitful one for Hwang. While the S&P 500 rose almost 12%, seven of the 10 stocks Archegos was known to hold gained more than 30%, with Baidu, Vipshop, and Farfetch jumping at least 70%.

All that activity made Archegos one of Wall Street’s most coveted clients. People familiar with the situation say it was paying prime brokers tens of millions of dollars a year in fees, possibly more than $100 million in total. As his swap accounts churned out cash, Hwang kept accumulating extra capital to invest and to lever up. Goldman finally relented and signed on Archegos as a client in late 2020. Weeks later it all would end in a flash.

The first in a cascade of events during the week of March 22 came shortly after the 4 p.m. close of trading that Monday in New York. ViacomCBS, struggling to keep up with Apple TV, Disney+, Home Box Office, and Netflix, announced a $3 billion sale of stock and convertible debt. The company’s shares, propelled by Hwang’s buying, had tripled in four months. Raising money to invest in streaming made sense. Or so it seemed in the ViacomCBS C-suite.

Instead, the stock tanked 9% on Tuesday and 23% on Wednesday. Hwang’s bets suddenly went haywire, jeopardizing his swap agreements. A few bankers pleaded with him to sell shares; he would take losses and survive, they reasoned, avoiding a default. Hwang refused, according to people with knowledge of those discussions, the long-ago lesson from Robertson evidently forgotten.

That Thursday his prime brokers held a series of emergency meetings. Hwang, say people with swaps experience, likely had borrowed roughly $85 million for every $20 million, investing $100 and setting aside $5 to post margin as needed. But the massive portfolio had cratered so quickly that its losses blew through that small buffer as well as his capital.

The dilemma for Hwang’s lenders was obvious. If the stocks in his swap accounts rebounded, everyone would be fine. But if even one bank flinched and started selling, they’d all be exposed to plummeting prices. Credit Suisse wanted to wait.

Late that afternoon, without a word to its fellow lenders, Morgan Stanley made a preemptive move. The firm quietly unloaded $5 billion of its Archegos holdings at a discount, mainly to a group of hedge funds. On Friday morning, well before 9:30 a.m. New York open, Goldman started liquidating $6.6 billion in blocks of Baidu, Tencent Music Entertainment Group, and Vipshop. It soon followed with $3.9 billion of ViacomCBS, Discovery, Farfetch, Iqiyi, and GSX Techedu.

When the smoke finally cleared, Goldman, Deutsche Bank AG, Morgan Stanley, and Wells Fargo had escaped the Archegos fire sale unscathed. There’s no question they moved faster to sell. It’s also possible they had extended less leverage or demanded more margin. As of now, Credit Suisse and Nomura appear to have sustained the greatest damage. Mitsubishi UFJ Financial Group Inc., another prime broker, has disclosed $300 million in likely losses.

It’s all eerily reminiscent of the subprime mortgage crisis 14 years ago. Then, as now, the trouble was a series of increasingly irresponsible loans. As long as housing prices kept rising, lenders ignored the growing risks. Only when homeowners stopped paying did reality bite: The banks all had financed so much borrowing that the fallout couldn’t be contained.

“While people will be talking about how this guy had one of the biggest losses of wealth ever, he will not be defined by that,” says Doug Birdsall, who attended services at Redeemer Presbyterian Church with Hwang and whose nonprofit benefited from his philanthropy. “People will remember the kind of life that he lived, the character that he showed, the courage, humility, and continued generosity.”

The best thing anyone can say about the Archegos collapse is that it didn’t spark a market meltdown. The worst thing is that it was an entirely preventable disaster made possible by Hwang’s lenders. Had they limited his leverage or insisted on more visibility into the business he did across Wall Street, Archegos would have been playing with fire instead of dynamite. It might not have defaulted. Regulators are to blame, too. As Congress was told at hearings following the GameStop Corp. debacle in January, there’s not enough transparency in the stock market. European rules require the party bearing the economic risk of an investment to disclose its interest. In the U.S., whales such as Hwang can stay invisible.