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.
What we Take
- Bill Hwang built a fortune of around $20 billion but lost it in a matter of days, Bloomberg reported.
- His hedge fund Archegos Capital Management ballooned on successful bets on global tech firms.
- But it all came crashing down when Hwang’s highly leveraged bets started to go awry.
Banks are facing billions of dollars in losses after a little-known US investment firm, Archegos Capital Management, defaulted last week on margin calls, forcing a brutal near US$30 billion (S$40.4 billion) stock fire sale.
In an era of easy money, Archegos was able to borrow so much that its failure created shockwaves large enough to ripple across global financial markets.
Here’s how it happened
Bill Hwang and the family office
New York-based Archegos was set up by Bill Hwang, formerly a stock analyst with storied hedge fund Tiger Management, founded by the legendary fund manager and US billionaire Julian Robertson.
Robertson closed his fund in 2000 but handed Hwang, one of his proteges or “Tiger cubs”, about US$25 million to launch his own fund, Tiger Asia Management, in 2001. Hwang grew his firm’s assets to over US$5 billion at its peak.
But Hwang shut the fund in 2012 after pleading guilty to US insider trading, paying US$60 million to settle charges of manipulating Chinese stocks. He was also banned from trading securities in Hong Kong for four years in 2014.
So Hwang went private. He converted Tiger Asia into a single-family office, Archegos, in 2013 to manage his personal wealth. These firms that manage the money of wealthy families are generally outside regulatory scrutiny in the US and most of their information is not in the public domain.
Archegos had assets of around US$10 billion but its real exposure to stocks was much more, with some reports putting it at US$50 billion.
What Hwang did was that he did not buy stocks directly – he bought complex “derivative” instruments or swaps from banks called contracts-for-difference or CFDs.
CFDs allow traders to place a directional bet on the price of a security without actually buying or selling the underlying instrument. If the price went up, the seller pays the buyer the difference, and vice versa.
Under US rules, investors who own a stake of more than 5 percent in a US-listed company usually have to disclose their holdings and subsequent transactions. But using CFDs, Hwang did not have to declare his holdings.
CFDs are also “leveraged” bets, where investors can use borrowed money at a fraction of the cost of the underlying asset, typically around 10-20 percent. So you can get a position worth US$1 million on stock and only need US$200,000 in the margin.
Using the swaps, Hwang built huge and highly leveraged positions in listed companies like Viacom CBS Corporation, Discovery Communications, along with Chinese giants Baidu and Tencent.
When margin calls
Archegos’ meltdown was triggered last week after some of its portfolio stocks witnessed a significant price fall.
This in turn triggered margin calls from the banks. Archegos’ failure to meet those calls forced big banks, including Nomura, Credit Suisse, UBS, Deutsche Bank, Goldman Sachs and Morgan Stanley, to liquidate their stock holdings at deep losses.
Banks’ losses have been estimated at US$6 billion to US$10 billion. Shares of Archegos’ portfolio stocks, meanwhile, were battered by the banks’ giant block trades in the selling spree.
What now?The collapse of Archegos is another strike against the lightly regulated non-bank or “shadow banking” sector and has renewed calls for tighter regulation.
Despite managing US$10 billion and reportedly being leveraged to the tune of around US$50 billion, Archegos was not directly regulated as it was a single-family office. It also quietly amassed outsized positions through the use of derivatives.
While regulators around the world are monitoring the fallout, US Treasury Secretary Yellen is meeting the Financial Stability Oversight Council under the new Biden administration this week. It is set to discuss hedge fund activity, among other issues, and analysts expect it will address Archegos too. – The Straits Times/Asia News Network
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.
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