The Implosion of Archegos
In late March, the hedge fund Archegos Capital Management imploded from an unprecedented $30+ billion margin call. The historic margin call was catalyzed by massive wrong-way bets on contracts-for-difference or CFDs.
CFDs are similar to future contracts on an index and allow for directional bets on the price of a security without actually buying or selling the underlying instrument. The buyer and the seller agree on the price of a transaction sometime in the future. At the expiration date or earlier, if they decide to unwind the position in advance, only the difference between the actual and the agreed price is settled.
CFDs, similar to other derivatives, allow for significant leverage of as much as 10x, meaning one can establish a position of $1,000,000 with only $100,000 of equity capital. The required equity capital is known as margin, and when a margin call occurs, the investor must deposit more equity to cover the losses. When an investor cannot deposit the required additional equity, broker-dealers begin selling the client’s securities in order to cover the margin call.
The margin call on Archegos had significant spillover effects, which are most evident in ViacomCBS (VIAC) and Discovery (DISCA). VIAC was trading at roughly $100/share on 3/22/21 and by 3/24/21, the stock was down approximately 60% to roughly $40/share tied to the liquidation of Archegos. Similarly, DISCA was trading at roughly $78/share on 3/22/21 and by 3/24/21, the stock was down approximately 55% to roughly $35/share.
Clearly, these sell-offs are dramatic, but it is even more important to put the stock plunges into perspective. ViacomCBS has approximately 619.6 million shares outstanding, and Discovery has approximately 487.3 million shares outstanding. As such, the stock plunges tied to a single hedge fund’s margin call appear to have destroyed, at least temporarily, $37.2 billion of VIAC’s market cap and $20.9 billion of DISCA’s market cap.
Unfortunately for the markets, the damage did not stop there. The counterparties to the CFDs entered by Archegos included Credit Suisse, Nomura, Goldman Sachs, and Morgan Stanley, among others. While some of the counterparties managed to minimize the collateral damage from the margin call, Credit Suisse and Nomura experienced highly significant negative impacts, which became evident in the stock market’s reaction to the news. Credit Suisse (CS) was trading at roughly $13.10/share on 3/22 and now trades at roughly $10.95/share, down approximately 16.4%. Nomura’s ADR (NMR) was trading at roughly $6.50/share on 3/22 and now trades at roughly $5.30/share, down approximately 18.5%. Similar to VIAC and DISCA, when one considers the among of market cap destroyed in CS and NMR, at least temporarily, this is a tremendous fall-out.
The Archegos implosion becomes even more interesting when one considers that the hedge fund is helmed by Bill Hwang, a former protege of hedge fund legend Julian Robertson. Indeed, prior to the launch of Archegos, Bill Hwang ran Tiger Asia Management and Tiger Asia Partners, with both firm names highlighting their Tiger Cub heritage.
The intrigue is only heightened when one realizes that Archegoes was a family office and that Bill Hwang maintained such an extremely low profile. Given the lack of SEC disclosure requirements for family offices, few on Wall Street realized that Bill Hwang had amassed such a tremendous fortune that is estimated at roughly $10 billion, wealth that rivals much better known hedge fund managers like Ray Dalio, Steve Cohen, and David Tepper. Furthermore, Bill Hwang is known by friends and colleagues as a devout Christian who embraced the concept of the Christian capitalist with the goal of making money in God’s name and then using it to further the faith. Bill Hwang is a generous benefactor to a range of Christian causes, and he eschewed the trappings of extravagant wealth.
We have a historic margin call with a hedge fund founder who certainly captures our attention – a man who amassed an incredible fortune and seems to have lost it all in a sudden, breath-taking fashion. I strongly believe that Bill’s faith will support and serve him well. The bigger question is how the SEC will approach the potential systematic risk now obviously present in the operation of large family offices.