Archegos Implosion

Yes! You read it right! Bill Hwang lost $ 20 billion approximately 17000 crores in INR in just two days. Isn’t that shocking? Just imagine the number of days and efforts he would have put in to earn that sum. The sum aroused curiosity among people to know what exactly happened. Let us understand the entire scene.

About Bill Hwang

He was a South Korean refugee who took up an English name in America and had several years of experience in managing the portfolio of investors. Due to his risk-loving attitude, he faced several difficulties in his career. However, on the other hand, Hwang was a philanthropic person who donated almost all his income to charity and co-founded the Grace and Mary foundation that helped many needy.

About Archegos

Hwang created the Archegos family office for his own family without any outsider in it in 2013 by renaming Tiger Management. As of 2020, The family office had $10 billion under management. A family office is a private company that manages wealth for a wealthy family, intending to transfer huge wealth across generations. The firm was engaged in financing businesses in China, Japan, U.S., and Korea.

The Story Behind the Loss

Bill borrowed heavily from Wall Street banks like Morgan Stanley, Wells Fargo & Co., Goldman Sachs group incorporation to finance bets on few bellwether stocks using deep fundamental analysis to find promising stocks and engage in block trading. His portfolio included Viacom CBS, Discovery, and Chinese giant Tencent and Baidu. Block trade refers to a trade that involves a large number of securities being traded at an arranged price between two parties. The term bellwether stock refers to a stock that is expected to be a leading indicator of the direction of the economy, the market as a whole, or a specific sector. Family office managers are less open to regulations. Hence, the firm increased the leverage. Initially, the leverage was about 2x, but by late March it was 5x or more. He adopted two strategies-

1. A long-short strategy- On every $1 he was having multiple leverages and used the leveraged amount to place position in the stock.
2. Derivative strategy- He entered into contracts for differences i.e., a type of equity swap where the hedge fund enters into the contract with an investment bank and ask to track one of the indices on its behalf for a particular amount where any decrease in value of indices will be made good by the hedge fund.

As lenders were aware of their own dealings only, they had no idea about piling leverage with other banks in the same stocks via swaps. However, the stock price of some of the companies in the portfolio began to fall. Archegos had defaulted on loans that were used to build a $100 billion portfolio. The dilemma for Hwang's lenders was that if the price of the stocks in Hwang’s swap accounts moved up, everyone would be fine. But even if one bank started selling, all would be exposed to loss. Credit Suisse wanted to wait. However, Morgan Stanley initiated step and unloaded $5 billion of its Archegos holdings at a discount. On Friday morning, Goldman liquidated $6.6 billion in blocks of Baidu, Tencent Music Entertainment Group, and Vipshop, followed by $3.9 billion for Viacom CBS, Discovery, Farfetch, Iqiyi, and GSX Techedu. Deutsche Bank AG and Wells Fargo also sold Archegos holdings. This implosion led all the involved financial institutions to suffer huge losses.

Conclusion

Had he cashed his holdings in early March, Hwang would make through the world's billionaires. There are richer men and women, but their money is not liquid but Hwang's $20 billion net worth was almost as liquid as a cheque.

Sources

1. https://www.zeebiz.com/companies/news-large-block-trades-tied-to-archegos-raise-worries-about-trading-this-week-153738
2. https://www.washingtonpost.com/business/2021/04/06/credit-suisse-archegos-capital/
3. https://www.ndtv.com/world-news/bill-hwang-had-20-billion-then-lost-it-all-in-two-days-2409663