Archegos (pronounced “Ar-Khay-Gos”) is the family office of Bill Hwang. Archegos Capital Management last week unwound an estimated U$30bn of positions in major stocks.
A Tiger Cub
Hwang was a former employee of Julian Roberston’s Tiger Management. Robertson now 88, was a successful Hedge Fund manager, running Tiger Management. Hwang went on to become known as one of several “Tiger cubs” and founded Tiger Asia in 2001, growing to over U$5bn in 2008, before suffering losses from shorting Volkswagen. In 2021 Tiger Asia pleaded guilty to insider trading in Chinese bank stocks and was shut down. Hwang later formed Archegos a family investment vehicle believed to have no external money.
What happened?
Archegos invests in stocks in the US, Asia and Europe. It typically held big concentrated positions and also used a series of Total Return Swaps. In simple terms, this enables an investor to leverage the position, but importantly remain anonymous on the share register. Archegos is said to have run U$10bn but due to the leverage it is estimated that U$30bn of trades were unwound (on 25-26 March 2021).
Hwang’s strategy started to unwind as stock prices began to fall in positions like China’s Baidu, Discovery, Fartech and after Viacom announced a sale of common stock. As Hwang’s firm defaulted on margin calls with the major banks, they started to sell large block trades of shares in the market at a discount to the prevailing price.
Swapping a Total Return
A Total Return Swap is a way to use derivatives contracts to supercharge trades. Swaps allow investors to take large positions without requiring the equivalent amount of upfront capital. “A total return swap is a swap agreement in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. In total return swaps, the underlying asset, referred to as the reference asset, is usually an equity index, a basket of loans, or bonds. The asset is owned by the party receiving the set rate payment.” – source Investopedia.
Warren Buffett wrote about the risks of swaps in his 2003 letter to investors.
Who owned the stock?
The counterparties to the Total Return Swaps are known as Prime Brokers. Basically, they help hedge funds trade and importantly are the source of capital for the leverage (margin lending). It is believed that Archegos was estimated to have more than 10% exposure to multiple companies.
One stock GSX Techedu was at the epicentre of the Archegos liquidation, nowhere can you see Archegos on the register, instead Goldman Sachs, Morgan Stanley, UBS, Nomura, Credit Suisse etc. It looks like they own it but all the economic rights are passed to these hedge funds.
We wait to hear the destiny of Bill Hwang and Archegos, and the broader fall out from the huge liquidation of stocks. Credit Suisse and Nomura warned investors on Monday that they would suffer significant losses as a result of the debacle. Reuters reported on Tuesday that lenders around the world could end up losing more than $6 billion in all as a result of the Archegos fall out.
It’s Greek
Archegos comes from the Greek word for leader, in the new testament it was used as a reference to Jesus. Hwang once said that he invests “with God’s perspective, according to his timing”.
Read about another scandal involving Blackstone and KKR.
Is there a lesson?
If you are going to use it, make sure you understand leverage. More importantly, understand the counterparties you are dealing with. Control your own destiny and watch the movie when it is released.
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