Stocks Archegos Capital Management Gamble

Stocks Archegos Capital Management Gamble

Who Is Archegos Fund Manager Bill Hwang?

Tiger Asia’s billionaire founder, a protégé of hedge fund tycoon Julian Robertson, is charged with securities fraud and racketeering.

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Who Is Archegos Fund Manager Bill Hwang?

On Wednesday, Bill Hwang, the founder of Archegos Capital Management, and Patrick Halligan, the company’s chief financial officer, were indicted on securities fraud and racketeering charges for what prosecutors say was a massive fraud and manipulation scheme that nearly jeopardized the U.S. financial system.

In March 2021, Archegos imploded in one of Wall Street’s most catastrophic meltdowns in decades, leaving banks with more than $10 billion in losses and prompting calls for increased regulatory monitoring. In a few days, more than $100 billion in stock market value evaporated.

The defendants and their co-conspirators allegedly misrepresented themselves to banks to obtain billions of dollars in loans, which they then used to boost the stock values of publicly traded firms, according to Manhattan U.S. Attorney Damian Williams.

Mr. Williams stated at a news conference that “lies fueled inflation and inflation fueled more falsehoods.” “Last year, the music ceased to play. The bubble popped. The costs decreased. When this occurred, billions of dollars vanished instantly.

Mr. Hwang and Mr. Halligan, who were arrested on Wednesday morning, face multiple accusations, including securities fraud, wire fraud, and racketeering conspiracy.

According to The Wall Street Journal, losses at Archegos Capital Management prompted the liquidation of positions worth close to $30 billion and sent the shares of two major investment banks plunging.

Who is Bill Hwang?

Mr. Hwang is a former protégé of hedge-fund tycoon Julian Robertson, who founded Tiger Management in 1980 and grew an initial $8.8 million investment from family and friends into nearly $22 billion before resigning nearly a decade later. A handful of Mr. Robertson’s students who went on to establish their own hedge fund firms became known as “Tiger cubs” on Wall Street.

Mr. Hwang is a Christian and has talked publicly about his faith. In a 2018 YouTube interview, he stated that one of his ambitions was “trying to be a great investor.” Additionally, he stated that he was investing in enterprises that benefited society.

He recalled being a major investor in LinkedIn, which he regarded as helping individuals realize their employment potential. “Do I believe God enjoys it?” Obviously! “he exclaimed. “I’m like a youngster wondering what I can do today and where I can invest to satisfy our God.”

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Hedge Fund Mogul Julian Robertson Says He’s a Great Fan of Bill Hwang

Mr. Hwang, who is estimated to be in his late 50s, came from South Korea to the United States following his senior year of high school. He obtained an MBA from Carnegie Mellon University after attending UCLA. According to an interview Mr. Hwang gave to the South Korean publication Kukmin Ilbo in 2018, his pastor father passed away at age 50.

In the interview, the billionaire stated that his business misfortunes a decade ago reignited his interest in Christianity and that he used his foundation to finance churches in the United States and South Korea. As seen by its tax filings, the foundation has supported a number of Christian, Korean, and Asian-American initiatives in recent years.

In a 2018 interview, he stated, “I’m limiting the amount of money under my name in order to accomplish things that God loves.” “I do it because God is more important to me than money.”

Archegos Capital Management

After paying $44 million, Bill Hwang turned a hedge fund, Tiger Asia Management, into a family office capital management firm and renamed it Archegos Capital Management. This was a well-considered move, given that such investment vehicles are subject to minimal regulatory oversight. As of 2020, Archegos Capital Management, which was founded in 2013, managed $10 billion in family assets. The company used complicated financial instruments known as total return swaps to wager on stocks.

Total Return Swaps 

A Total Return Swap refers to a contract between two parties, the payer and the receiver, to exchange the return on a financial asset. Large institutions, like investment banks, lease the assets to the receiver, which is usually a hedge fund that wants to increase its exposure to certain assets.

Using total return swaps, hedge funds can increase their exposure to high returns by leveraging their investments. However, since they do not own the assets but rather lease them, they do not have to pay the entire price. On the other hand, LIBOR-based payments bring in extra money for the asset owner, which is usually an investment bank.

By utilizing swaps, investors receive a stock’s entire return that has been leveraged and augmented. Total Return Swaps are a very valuable financial instrument until everything goes as expected. The markets become a double-edged sword once they begin to behave in the opposite direction of what was anticipated. In a similar vein to the Archegos instance, market participants incur enormous losses instead of enormous returns.

How did Mr. Hwang become affiliated with Tiger Asia?

Mr. Hwang co-founded Tiger Asia Management LLC with Mr. Robertson in 2001. The New York-based firm grew to become one of the largest Asia-focused hedge funds, managing over $5 billion at its peak. In 2008, it was one of a large number of funds that lost money due to the rising share price of Volkswagen AG.

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Archegos’ Huge Positions

Archegos Capital Management primarily used total return swaps to increase exposure and possible rewards. Without really owning the underlying securities, the family office could make massive, huge wagers on them with major aid from investment banks that purchased and owned the equities. This form of excessive leverage is conceivable because of the Federal Reserve’s ultra-low borrowing rates.

Archegos Capital Management increased its buying power by implementing total return swaps. The firm used money from investment banks to open large holdings in a few American and Chinese stocks, including ViacomCBS and Discovery. Archegos owned $20 billion worth of ViacomCBS stock in mid-March 2021, making it the company’s largest stakeholder.

However, because Archegos’ position was based on complicated financial instruments, few people grasped the extent of its risk. Unlike conventional stock exchanges, total return swap transactions are not subject to regulatory supervision, and the family office was not required to declare its stock holdings. Furthermore, it’s possible that many banks were unaware of Archegos’ true exposure and the size of its other bank holdings.

Sale of ViacomCBS Stock

The impending decline was precipitated by the announcement of a $3 billion share sale by ViacomCBS following a spectacular stock price surge. As its stock price virtually tripled over the course of the year, the corporation intended to maximize its holdings. As a vast number of shares were placed on the market, the price initially decreased by 9 percent and then by 30 percent from Monday’s high.

Banks’ Call for Margin

Investment banks that had Archegos’ position in ViacomCBS equities and other companies were alerted by the substantial decline in the stock’s value. As a result of the increasing exposure to the total return swaps, Wall Street banks initiated a procedure known as a margin call, which required Archegos to provide additional collateral.

According to Investopedia, a margin call occurs when an investor’s margin account falls below the broker’s required amount. It especially refers to a broker’s demand that an investor deposit extra funds or securities into the account to bring it to the minimum value. If an investor fails to pay, regardless of the market price, a broker may compel a trader to close open positions or liquidate assets without the investor’s permission.

Archegos Capital Management’s Liquidity Problem

Archegos Capital Management lacked sufficient liquid assets to satisfy Wall Street lenders’ margin calls. Bill Hwang, attempting to prevent a market meltdown, reportedly held a conference call with investment banks on March 25 to convince them to postpone selling the shares involved in his total return swap swaps in the hope that prices would rise.

Reportedly, several investment banks, like Credit Suisse, were willing to delay stock sales, but Goldman Sachs and other brokers were unwilling to do so and liquidated Archegos’ positions in order to seize collateral, so initiating a fire sale of the family office’s equities.

Friday’s massacre

Goldman Sachs, Morgan Stanley, and Deutsche Bank liquidated Archegos Capital Management’s positions by selling large blocks of shares in Viacom, CBS, Discovery, and other companies, causing their stock prices to drop by 27 percent each.

Goldman Sachs sold a block of $3 billion to $4 billion worth of Archegos’ holdings before the market opened on Friday, and later in the day the bank unloaded more than $10.5 billion of ViacomCBS, Tencent Music Entertainment Group, and Baidu Inc, among others, while Deutsche Bank and Morgan Stanley sold $4 billion and $8 billion of shares backing the Archegos swaps, respectively.

According to Dow Jones Market Data dating back to 1990, the stock values of ViacomCBS and Discovery fell by a record-breaking 27 percent intraday. This was the greatest intraday percentage drop ever recorded. Tencent Music’s U.S.-listed shares and Baidu’s Chinese shares fell by 48 and 33 percent, respectively.

By the time Credit Suisse and Nomura Holdings decided to sell their stocks, the prices had dropped so much that the brokers lost a lot of money.

Block Trades in Securities

The banks were so worried by the possibility of losses that they not only wished to dispose of the shares as soon as possible but also decided to acquire the Archegos stock that had been pledged as security.

Both Goldman Sachs and Morgan Stanley chose to offer stock blocks in various companies to avoid losses. Goldman Sachs justified the firesale with the involuntary deleveraging of the fund and offered preference to their investors who could purchase as much stock as possible, whereas Morgan Stanley did not allow buyers to bid on individual companies in the block.

Different blocks of shares in the same company were sold at different periods and prices, which angered certain dealers when the stock price fell below their purchase price.

Goldman Sachs sold 100 million shares of Tencent Music for $1.8 billion on Friday morning. Morgan Stanley followed suit by selling 36 million shares of the same firm for around $600 million.

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Bottom Line :

Bill Hwang is the founder of Archegos Capital Management, which was founded in 2013 and managed $10 billion in family assets. The company used complicated financial instruments known as total return swaps to wager on stocks. Bill Hwang is the co-founder of Tiger Asia hedge fund, managing over $5 billion at its peak. In 2008, Tiger Asia was one of a large number of funds that lost money due to the rising share price of Volkswagen AG’s shares during the financial crisis. Archegos Capital Management’s position in ViacomCBS equities led to the company being required to provide additional collateral to Wall Street lenders.

Bill Hwang, attempting to prevent a market meltdown, held a conference call with banks to convince them to postpone selling the shares involved in his total stake. Goldman Sachs sold a block of $3 billion to $4 billion worth of Archegos’ holdings before the market opened on Friday. The bank unloaded more than $10.5 billion of ViacomCBS, Tencent Music Entertainment Group, and Baidu Inc shares.

References :

Business Powerhouse

WSJ

Online UC Edu

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