It is now a few months since the market was ratt§led by the fire-sale closure of international banks’ risk positions held as collateral for the trades of Archegos Capital, a private family office. Archegos ran a concentrated portfolio of total return swaps across a small group of companies, and when the markets turned against these positions, the banks “pulled the rug” on Archegos.
It is time to stop pretending that the market volatility around the margin calls and the ultimate collapse of Archegos Capital had anything to do with the discredited Bill Hwang, other than his family office’s poor call on the direction of the shares in their portfolio. The market did not crash as a result of any direct action by Mr Hwang, in fact, from the leaked details, it is clear that Archegos actually sought to secure an orderly wind-down of its positions.
In a way, the actions around the closure of the Archegos Capital positions is somewhat ironic. “Archegos” can be translated as “one who leads the way”, an apt description on how some of the bulge bracket banks sought to implement their risk-mitigation strategies. As talks stalled on the orderly wind-down of the massive (some say more than US$ 50 billion) positions the family office was allowed to build, certain banks unilaterally chose to lead others in unwinding their own exposure before the market opened.
Archegos Capital Management, a “family office”, was founded by Sung Kook “Bill” Hwang in 2001. From 2013, instead of running outside money, Bill had to focus on managing his own wealth, after an insider trading and market manipulation case related to trades made in 2008 and 2009 was brought against his previous hedge fund, “Tiger Asia”, by the US Securities and Exchange Commission (SEC) and settled in 2012.
Bill and “Tiger Asia Management”, the management company of the hedge fund, admitted to breaking the law and agreed to pay $44 million in fees and penalties to the SEC. Tiger Asia returned outside capital to investors (it was banned from managing outside money) and restructured as a private “single family” office. In 2014, the Hong Kong authorities prohibited Bill from trading there for four years (the ban ended in 2018).
After settling the fees, Bill used what remained of US$500m to quietly amass shares in high-flying technology companies. Bill’s style of exhaustive research paid off as he invested a huge chunk of his net worth in Netflix shares around 2013. He held on to his position.
His “hedged”-positions made him a good client of many of the prime brokerage divisions of investment banks operating in Manhattan. Over the next few years, the assets of the family office massively increased in size, as returns sky-rocketed and the use of leverage increased, with its assets under management reportedly reaching $10bn by end-2020.
Insiders hint that the prime brokers allowed Archegos to run market positions that could have been higher than US$50bn, at its peak. This was achieved by using Total Return Swaps (TRS), which allowed Archegos to build its large exposure, without paying the full price for the underlying shares or posting any initial margin. Bill’s investment style dictated that the positions were spread across only a few shares.
The details of the Archegos holdings are scant, due to limited disclosure. Our knowledge of the holdings in the portfolio is currently largely due to the enormous volumes (block trades) that were transacted at discounted prices later in the week and over the next few weeks.
The holdings seem to have included single equity TRS related to ViacomCBS, Discovery Inc., Farfetch Ltd, Baidu, Tencent Music and Entertainment Group, GSX Techedu Inc, Vipshop Holdings Ltd and iQIYI, Inc.
but single stocks in the portfolio of TRS seemed to be doing well, as ViacomCBS shares and Discovery Communications shares rallied 174% and 144% respectively to Monday 22 March, from the start of the year.
But ViacomCBS shares started dropping after Tuesday 23 March, as Morgan Stanley helped to price an issue of new equity and preference shares in ViacomCBS. The discounted dilutive new share issue put downward pressure on the share price, sending it down as much as 25% in a couple of days.
And shares in the other companies of the concentrated Archegos portfolio also dropped sharply. Over the course of Tuesday and Wednesday, share prices of Baidu, Tencent Music and Entertainment Group, Discovery Communications, Viacom CBS and GSX Techedu dropped 22%, 36%, 19.4%, 27% and 9% respectively.
The share price drops likely triggered variance margin calls by one or more of the prime brokers and caused further pressure on the portfolio and sales of some of the shares. Traders have noted that at least Credit Suisse and Morgan Stanley were actively unloading small batches of shares (likely to fund the variance margin calls) before Thursday.
Then on Thursday, representatives from Goldman Sachs, Morgan Stanley, Credit Suisse, UBS and Nomura were invited to a conference call with Archegos Capital to discuss their predicament. The aim of this meeting was to inform the banks of the mounting losses and to secure an agreement for the orderly wind-down of positions, thereby minimising market volatility and the banks’ balance sheet impact.
But “unacceptable terms” of the “standstill” lead to a breakdown in cooperation. And very soon the trickle of exits became a sprint to the door, with Morgan Stanley and Goldman Sachs leading with high volume discounted placements to their global clients.
“If you are going to panic, panic first” – anonymous.
In risk mitigation strategies, it has always been important to be the leader. Those who panicked first, cut their losses most.
Late Thursday, March 25th, with the consent of Archegos Capital, Morgan Stanley sold about $5 billion in shares at discounted prices to a handful of hedge funds, branded as part of a “margin call” to help “prevent the collapse” of an unnamed client.
Before the U.S. market opened on Friday, March 26th, Goldman Sachs sold US$6.6 billion worth of shares of Baidu Inc, Tencent Music Entertainment Group and Vipshop Holdings Ltd. Goldman Sachs also later that day sold US$3.9 billion worth of shares in ViacomCBS Inc, Discovery Inc, Farfetch Ltd, iQIYI Inc and GSX Techedu Inc.
The big volumes and discounted prices of the placements of that Friday have been the focus of the news flow, but the prices of Discovery Communications and ViacomCBS tumbled about 50% in the week, while U.S.-listed shares of Baidu and Tencent Music also dropped as much as 33.5% and 48.5%, respectively (all from Tuesday’s closing levels).
The banks discounted these blocks aggressively in order to get the trades done. The other prime brokers then exercised their rights under default, seizing the firm’s collateral and sold the rest of the assets over the next few days. This action was taken independently of Archegos and so, can the price moves really be blamed on the family office?