US family office defaults as investment banks bleed billions

Swiss lender Credit Suisse and Japan’s largest investment bank, Nomura have issued statements signalling significant losses attributed to a US client. This comes after Friday’s multi-billion dollar fire-sell, where US media giants ViacomCBS and Discovery Communications fell over 27%, shedding $18bn in value between the two businesses. Chinese internet giant, Baidu, also fell sharply in trade on Friday before recovering to end the trading day flat.

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Archegos Capital Management, a US-based family office headed up by long-standing Wall Street veteran and controversial businessman Bill Hwang is the alleged culprit. The company was forced to sell-off more than $20bn in stock on Friday, as a colossal margin call prompted brokers to exercise their rights in liquidating positions as trading positions moved unfavourably. The US-based family office defaulted on the margin call and as a result a number of investment banks are in the process of exiting its positions. A margin call occurs when the value of an investor’s margin account falls below the broker’s required amount.

Archegos Capital Management were taking extremely risky positions using swaps, a financial instrument that gives easy access to leverage. The swaps are also disclosed on the investment banks balance sheet and not that of Archegos. A closer look into the major shareholders of ViaComCBS and Discovery Communications, showed a host of investment banks as its largest shareholders.

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Archegos CEO, Bill Hwang, has had somewhat of a checkered past on Wall Street, having admitted to insider trading in 2012 which forced him into closing down his hedge fund Tiger Asia Management. Archegos, being a family office, was not required to disclose its holdings in regulatory filings to the securities and exchange commission, despite its size.

Given the number of investment banks involved and the financial contagion that events of this magnitude can cause, it’ll be interesting to see if further lenders disclose its positions in the saga such as Credit Suisse and Nomura. To put the estimated $20bn sell-off into perspective, a company of that size would be the 10th largest company on the JSE and larger than South Africa’s biggest bank by market capitalisation, being FirstRand.

Once High-Flying Tiger Cub Stumbles Again on Leveraged Bets

By Katherine Burton, Hema Parmar and Crystal Tse

(Bloomberg) – He was a hot-shot disciple of the hedge-fund legend Julian Robertson – one of the stars to strike out on his own from the vaunted Tiger empire. Now Bill Hwang is at the center of an extraordinary spree of giant stock trades that’s reverberated through financial markets and set Wall Street abuzz.

Morgan Stanley and Goldman Sachs, along with other major banks, forced the liquidation of more than $20bn of holdings for Hwang’s New York-based Archegos Capital Management on Friday, according to people familiar with the transactions. Among the sales were shares of ViacomCBS, GSX Techedu, Farfetch and Discovery.

The unprecedented selloff is the latest twist in Hwang’s long and controversial career. About two decades ago, he was a peer at Robertson’s firm of Chase Coleman, who was Wall Street’s highest-earning hedge fund manager last year. Today, having long ago stopped managing outside money, he’s facing his second major scandal.

How and why marquee-name banks embraced Hwang after his first stumble – an insider trading plea in 2012 – and enabled him to run up so much leverage is an open question on Wall Street, though his frequent trading and use of borrowed money meant he was a profitable client.

Much of the leverage was provided by the banks through swaps, according to people with direct knowledge of the deals. That meant that Archegos didn’t have to disclose its holdings in regulatory filings, since the positions were on the banks’ balance sheets. Swaps are also an easy way to add a lot of leverage to a portfolio.

Market participants estimate that his assets had grown anywhere from $5bn to $10bn and total positions may have topped $50bn.

Hwang didn’t reply to multiple emails since Friday’s market moves, and other Archegos employees reached by phone declined to comment on the liquidation of its positions or on the losses.

Quiet name

Despite his roots at Robertson’s Tiger Management, Hwang was never a well-known name on Wall Street or in New York social circles.

A devout Christian, he’s a trustee of the evangelical Fuller Theology Seminary in California and the co-founder of the Grace and Mercy Foundation, according to Fuller’s website. The charity is dedicated to the areas of Christianity, art, education, justice and poverty.

After leaving Tiger Management as Robertson wound down the firm, Hwang, who is in his mid-50s, spent a decade running his Tiger Asia Management – backed by his former boss – and building it into a multi-billion firm with top returns.

In 2012, he closed the hedge fund after he admitted on behalf of the firm in federal court in Newark, New Jersey, to trading on inside information. According to the Justice Department, Tiger Asia reaped $16m of illicit profits in 2008 and 2009.

Hwang bounced back almost immediately, opening a family office named Archegos – Greek for ‘one who leads the way.’

Best salesman

After earning a degree in economics from the University of California at Los Angeles in 1988, and getting an MBA from Carnegie Mellon University, Hwang became an institutional stock salesman. He was at Hyundai Securities in the early 1990s when he caught the eye of Robertson, who was one of his clients. One year, Tiger Management awarded Hwang $50,000 for the charity of his choice – an annual prize for the person outside the firm who Robertson deemed had benefited Tiger the most.

“He was the best salesman we had,” Robertson said in a 2006 interview. “He introduced us to Korea. No one was focusing on Korea back then and we hired him soon after.” After Tiger Management shut down, Robertson seeded Hwang with about $25m for his own firm. “He’s had a meteoric rise,” Robertson said at the time.

As a manager of his own fund, Hwang didn’t provide much transparency to investors about his positions or what contributed to returns, said a person who invested with him. Even so, clients stayed because he was a money-maker, with an annualised return of 16% over the life of the fund.

At Archegos, his fortune grew with his outsized bets and rapid trading, a style that Hwang never spoke about.

“It’s not all about the money, you know,” he said in a rare interview with a Fuller executive in 2018, in which he spoke about his calling as an investor and his faith. “It’s about the long term, and God certainly has a long-term view.”

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