Hedge Fund Blows Up After $30B Of Forced Liquidations, Top Banks Could Lose Billions

Avatar
Written by Dana Sanchez
hedge fund
Bill Hwang, founder of Archegos Capital Management. Image: Hawaiian Islands Ministries 2018 Clips: Q & A with Bill Hwang, YouTube

Lack of transparency helped to exacerbate the 2008 financial crisis and regulators have introduced a whole new body of rules governing assets since then, Bloomberg reported.

Even so, loosely regulated firms that have the power to destabilize markets are getting a lot of attention in 2021. First, the GameStop hedge-fund short squeeze happened.

Now all eyes are on the forced liquidation of more than $30 billion in large stock sales linked to investment firm Archegos Capital Management.

Founded by former Tiger Management equity analyst Bill Hwang, the Archegos hedge fund was provided with much of the leverage it used by banks. This leverage from Nomura Holdings and Credit Suisse Group was provided through swaps or contracts-for-difference, according to people with direct knowledge of the deals. That means Archegos may not have owned most or any of the underlying securities.

 The Archegos hedge fund defaulted on margin calls last week. A margin call happens when the value of an investor’s margin account falls below a broker’s required amount. The account contains securities bought with borrowed money (usually a combination of the investor’s own money and money borrowed from the broker). A margin call usually means that the securities held in the margin account have decreased in value. The investor must choose to either deposit more money in the account or sell some of the assets held in the account. 

Investors who build a stake of more than 5 percent in a U.S.-listed company usually have to disclose their position and subsequent transactions. That didn’t apply to the type of derivatives apparently used by Archegos, according to Bloomberg. The products, which are made off exchanges, allow managers like Hwang to amass stakes in publicly traded companies without having to declare their holdings.

Credit Suisse and Nomura warned Monday of “significant” hits to first-quarter results after they began exiting positions with an unnamed large U.S. hedge fund that defaulted on margin calls last week. Archegos is the firm connected to the fire sale, CNBC reported.

Zurich-based Credit Suisse said a number of other banks were also affected and had begun exiting their positions with the unnamed firm. Credit Suisse shares closed down nearly 14 percent on Monday following the announcement.

Japan’s largest investment bank, Nomura also issued a trading update on Monday warning of a “significant loss” at one of its U.S. subsidiaries resulting from transactions with a U.S. client. It said it was evaluating a potential loss of $2 billion. Its shares fell more than 16 percent on Monday.

Some of the selling pressure in certain U.S. and Chinese media stocks and internet stocks on Friday was due to the forced liquidation of positions held by Archegos, a source told CNBC. ViacomCBS closed down more than 50 percent for the week last week while Discovery was down 45 percent. The companies have been heavily shorted amid investor skepticism about their long-term prospects in a crowded media landscape. Baidu was down more than 18 percent for the week, Tencent more than 33 percent and Vipshop more than 31 percent.

Listen to GHOGH with Jamarlin Martin | Episode 73: Jamarlin Martin Jamarlin makes the case for why this is a multi-factor rebellion vs. just protests about George Floyd. He discusses the Democratic Party’s sneaky relationship with the police in cities and states under Dem control, and why Joe Biden is a cop and the Steve Jobs of mass incarceration.

A Reddit-fueled frenzy for Gamestop shares earlier this year resulted in a $6 billion loss for Melvin Capital hedge fund and triggered scrutiny from U.S. regulators and politicians.

The chain of events set off by the massive unwinding of Archegos “is yet another reminder of the role that hedge funds play in the global capital markets,” Bloomberg reported.