JP Morgan: Rogue LTCM-Like Hedge Fund Manager Hwang Lost Up To $10B, Had Up To $80B Of Equities Exposure
When it comes to spectacular hedge fund blow-ups, Archegos Capital Management could shape up to be the biggest one since the collapse of Long-Term Capital Management in 1998.
Archegos erupted publicly after Goldman Sachs and Morgan Stanley on Friday started dumping multibillion-dollar positions in U.S. and Chinese stocks on behalf of a then-unnamed investment fund that had failed a margin call.
The fund is Archegos, founded by former Tiger Management equity analyst Bill Hwang. Much of the leverage the Archegos hedge fund used was provided by banks. 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 total hit to banks from the Archegos blowup could be as much as $10 billion, JP Morgan analysts wrote in a note — twice its previous estimate.
Zurich-based Credit Suisse, Japan’s largest investment bank, Nomura, and other banks were affected. Nomura warned Monday of a potential loss of $2 billion and “significant” hits to first-quarter results, CNBC reported.
JP Morgan said it revised its estimates after considering Nomura’s $2 billion potential claim, Mitsubishi UFJ Securities Holdings announcing a potential $300 million loss, and media speculation of a $3 billion-to-$4 billion loss for CSG.
“In normal circumstances as we discussed in our note, we would have suspected industry losses of $2.5-5bn. We now suspect losses in the range of $5-10bn,” JP Morgan said.
Archegos was highly leveraged “at 5-8x,” JP Morgan said, to the tune of $50-billion-to-$80 billion of exposure for $10 billion of equity. “…and the use of equity-swaps increased the inability of PBs to see the concentration risk in holdings within the hedge fund in question, in our view.”
Hwang had a reputation for going rogue. He paid $44 million in fines to settle U.S. illegal trading charges in 2012, and in 2014 he was banned from trading in Hong Kong.
“What on earth were some of the world’s biggest investment banks thinking when they enabled an opaque family office whose founder had a history of regulatory issues to rack up multibillion dollars worth of leverage?” Robin Wigglesworth wrote for Financial Times.
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.
Archegos is a reminder that loosely regulated firms have the power to destabilize markets.
Long-Term Capital Management (LTCM) was a large hedge fund, led by Nobel Prize-winning economists and renowned Wall Street traders, that was wildly successful from 1994 to1998. It also dealt in swaps and attracted $1 billion+ of investor capital with the promise of an arbitrage strategy that theoretically reduced the risk level to zero. LTCM blew up in 1998, forcing the U.S. government to intervene to prevent financial markets from collapsing.
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