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Blow Up Of Archegos

· Investing

Blow Up Of Archegos

invArchegos Capital Management, LP is a family investment office specializing in public equities primarily in the United States, China, Japan, and Korea.

In March 2021, the US hedge fund Archegos Capital Management burst its position due to a leverage of over 10x on $10 billion in equity. This massive catastrophe has attracted the attention of investors and regulators all over the world. Many well-known international securities companies and investment banks lost tremendous sums of money and wall street found itself the at the center of conversations about regulation again. Senator Elizabeth Warren, a member of the powerful Senate banking and finance committees said,“Regulators need to rely on more than luck to fend off risks to the financial system: we need transparency and strong oversight to ensure that the next hedge fund blowup doesn’t take the economy down with it.”

It is understood that on March 26th, Archegos Capital Management was forced to close its positions due to excessive financing and an abnormal fluctuation of heavy stocks, which failed to make up the trading margin in time. The scale of its compulsory closing position, or what it needed to sell at first to cover the initial margin call reached $20 billion US dollars, this in turn like a set of dominoes led to a sharp drop in the stock prices of some companies including Discovery Networks, Tencent Music Entertainment and ViacomCBS. The banks that provided margin financing to Archegos Capital Management suffered great losses. ViacomCBS for instance traded up to $101 before the collapse only to settle at $40 per share a few weeks later.

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After the initial blow up, Japanese securities giant Nomura Holdings said in a statement that its U.S. subsidiary could have suffered huge losses in its March 26 deal with U.S. customers. At first Nomura Holdings believed it would only be a $2 billion loss, but that estimate swelled to $2.850 billion in losses from its Archegos margin. This resulted in the largest drop to Nomura’s stock price in 9 years, with a daily drop of 16%.  

After Nomura Holdings, Credit Suisse also said that the failure of a large US hedge fund to meet the margin call issued by the company last week would have a significant impact on its first-quarter performance. Losses related to the incident are expected to reach billions of dollars, the total price tag coming to over $5 billion. Then, Mitsubishi Tokyo UFJ also announced potential losses related to US customers, with an estimated loss of US $300 million. And UBS revealed a loss of $774 million related to Archegos trading while Morgan Stanley suffered from a $911 million dollar loss. In addition, JPMorgan Research revealed that Wells Fargo was also involved in the incident, however Wells Fargo announced “We had a prime brokerage relationship with Archegos. We were well collateralized at all times over the last week and no longer have any exposure.”

“The reason for this burst is the unreasonable operation of high leverage,” said Qunyi Futures (Hong Kong) to the reporter of Futures Daily that from the current situation, the incident rate is probably single. The forced deleveraging of Archegos resulted in a ripple effect in the financial markets. However, the impact on the whole financial market was relatively limited, and it will not have a diffusion effect like that of Freddie Mac and Fannie Mae. Deutsche Bank, for example, told the media that it had sold a lot of shares related to Archegos Capital Management, but the loss was small. On the other hand, Morgan Stanley said that it had not suffered significant losses related to the incident. At the same time, the person reminded that both investors and brokers should be rational in the use of leverage, always alert to market risks, and focus on the balance between profit and risk management.

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Blow Up Of Archegos : Sung Kook “Bill” Hwang

Some analysts believe that the incident may cause financial institutions to reduce the amount of financing provided to funds and other investors, promote the deleveraging of the capital market, and then increase market volatility. The Securities and Exchange Commission (SEC) said on March 29 that it has started to monitor the margin default of Archegos Capital Management and maintain communication with market participants. Some people in the market also said that the incident caused serious losses to many big banks. Although banks and other financial institutions have self-hedging systems, the market may not be affected too much, but the SEC’s response and handling of the incident are relatively “weak” and failed to play a preventive role in the market. Once small and medium-sized investors are affected by such incidents, it is difficult to safeguard rights and interests.

As of May, the aftermath of the burst has not dissipated, and Wall Street banks are considering tightening the loan conditions for some hedge fund clients. Institutions such as Credit Suisse Group, Morgan Stanley, and UBS Group are evaluating the financing of hedge funds and family offices to identify potential loopholes and prevent a recurrence of events similar to those of Archegos, according to bankers and hedge fund managers quoted by the Wall Street Journal. Meanwhile, the Wall Street Journal also quoted several fund managers as saying that banks such as Goldman Sachs Group, Morgan Stanley, and UBS are focusing on hedge funds with very concentrated positions, including those trying to improve returns by borrowing a lot of money. Some banks are conducting stress tests to find out how much they may lose if a fund’s position drops sharply. The newly authorized credit risk unit is assessing clients whose portfolios are much more diversified than Archegos.  

The collapse of Archegos Capital Management easily reminds people of the 2008 Lehman Brothers incident. Although the scale and influence of Archegos Capital Management are not as large as that of Lehman Brothers, this incident also exposed the problems of financial supervision in the United States and the risk exposure of Wall Street, and sounded the warning bell of leverage supervision for people.

Blow Up Of Archegos Written by Xinying Lai

Edited by Jimei Shen & Jay Devonicles

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