Archegos Capital Management Explained

Archegos Capital
Type:Private
Foundation:2013
Fate:Defaulted on margin calls
Founder:Bill Hwang
Location:New York City, New York[1]
Industry:Investment management

Archegos Capital Management was a limited partnership family office that managed the personal assets of Bill Hwang,[2] [3] at one time managing over $36 billion in assets.[4] On April 27, 2022, Hwang was indicted and arrested on federal charges of fraud and racketeering.[5]

On March 26, 2021, Archegos defaulted on margin calls from several global investment banks, including Credit Suisse and Nomura Holdings,[6] [7] as well as Goldman Sachs and Morgan Stanley.[8] [9] The firm had large, concentrated positions in ViacomCBS, Baidu, Vipshop, Farfetch, and other companies,[10] and the firm's use of total return swaps had helped to hide its high exposure from lending banks.[11] Its derivative contracts "exposed the firm to severe losses when the trades went bad." The Wall Street Journal reported that Hwang lost $8billion in 10 days,[12] while Bloomberg News reported that Hwang lost $20billion in 2 days.[13] The fate of Archegos has been compared to the meltdown caused by Long Term Capital Management.[14]

History

Formerly of Tiger Cub fund Tiger Asia Management, Hwang created the Archegos family office in 2013,[2] with $10 billion under management as of 2020. Its name is Greek for "leader."[15] Tiger Asia Management had previously pleaded guilty to insider trading of Chinese bank stocks in 2012 and paid a $44 million fine.[7] [16] [17] In 2014, Hwang "was banned from trading in Hong Kong for four years."[14] [18]

Archegos' holdings were primarily in the form of total return swaps, a financial instrument where the underlying securities (stocks) are held by banks. This meant that Archegos did not need to disclose its large holdings, while if it had transacted in regular stocks it would have had to. The fund was also heavily leveraged and did business with multiple banks which were likely unaware of Archegos' large positions held by other banks.

March 2021 losses

CompanyLoss (US$ mln)
Credit Suisse
Nomura
Morgan Stanley
UBS
Mitsubishi UFJ Financial
On March 26, 2021, banks offering prime brokerage services to Archegos started to liquidate billions of dollars' worth of various stocks after it had failed to meet a margin call. The stocks were reportedly tied to the total return swaps held by Archegos. This sale was reported to be the cause of a 27% plunge in share price of ViacomCBS and a similar fall in the price of Discovery, Inc.[7]

On March 29, the share price of Credit Suisse was down by 14%, while Nomura Holdings shares declined by 16%.[6] A press release from Credit Suisse said that "the loss resulting from this exit... could be highly significant and material to our first quarter results."[19] According to The Wall Street Journal, Goldman Sachs and Morgan Stanley were able to limit their losses relating to Archegos by acting more quickly than Credit Suisse and Nomura Holdings. Other banks, such as Deutsche Bank, were able to close their substantial positions quickly and avoid any losses.[20] [21]

On March 30, Mitsubishi UFJ Financial (MUFG) securities arm declared a $300 million loss in its EMEA operations linked to Archegos. Baidu was added to the list of affected stocks. Also on March 30, the Securities and Exchange Commission stated it was conducting an investigation into the matter.[22]

The demise of Archegos helped drag the Nikkei 225 Index down by 0.77% on March 30, 2021, triggering a worldwide sell-off in banking stocks.[23] [24]

On April 5, 2021, the Chair of the US Senate banking committee, Sherrod Brown, wrote to Crystal Lalime general counsel at Credit Suisse, as well as Nomura, Goldman Sachs and Morgan Stanley to inquire about "the implosion of Archegos Capital" and gave the lenders 14 days to reply. Credit Suisse was mentioned by the Financial Times as "allowing the family office (of Hwang) to make highly leveraged bets on US and Chinese stocks". The Securities Exchange Commission and the Financial Conduct Authority also have requested information about the implosion from the lenders, as well as the NGO Self-regulatory organization Finra.[25]

On April 6, 2021, Credit Suisse reported losses of $4.7 billion linked to its involvement with Archegos. The bank's chief risk and compliance officer, and head of the investment bank were reported to have departed as a result of the losses caused by Archegos and Greensill crises.[26] Later, the bank announced that it would have to raise up to $2 billion in fresh capital to support its equity base.[27] [28] Reported losses increased to $5.5 billion in late April on a notional exposure of over $20 billion, or more than half of the bank's capital at the time.[29]

On April 16, 2021, Morgan Stanley reported a loss of nearly $1 billion related to the Archegos collapse, $644 million by selling stocks it held related to Archegos' positions, and another $267 million trying to "derisk" them. Credit Suisse Group AG and Japan's Nomura Holdings Inc took the main hit, with reported losses of $5.5 billion and $2 billion, respectively.[30]

On April 27, 2021, UBS Group AG, Switzerland's biggest bank by assets, reported that it lost $774 million in connection with Archegos’ failure.[31] [32] Nomura, which initially reported the losses of around $2 billion the previous month, increased its total loss to $2.85 billion.[33] [34]

On April 27, 2022, Hwang and former Archegos CFO, Patrick Halligan, were arrested and charged with racketeering conspiracy, securities fraud, and wire fraud in connection the company's 2021 collapse.[35] [36] In a 59-page indictment, Manhattan federal prosecutors alleged that Hwang and Hallligan schemed to manipulate stock prices. Lawyers for Hwang and Halligan stated that they were innocent of the charges in the indictment. In July 2023, Credit Suisse (which had been acquired by UBS) was fined a sum of $387 million by US and British financial authorities for mismanagement related to Archegos.[37]

Notes and References

  1. Web site: Archegos Capital Management LP - Company Profile and News . . April 9, 2021 . en.
  2. News: March 29, 2021 . Who is Archegos' Bill Hwang? . finews.asia .
  3. News: Cook . James . March 28, 2021 . Mystery figure behind $20bn stock sell-off unmasked . Telegraph Media Group Limited .
  4. News: Stempel . Jonathan . December 3, 2022 . Archegos' Bill Hwang says prosecutor misconduct justifies indictment's dismissal . Reuters . https://web.archive.org/web/20221203193955/https://www.reuters.com/world/us/archegos-bill-hwang-says-prosecutor-misconduct-justifies-indictments-dismissal-2022-12-03/ . December 3, 2022 . live .
  5. News: Ramey . Corinne . Pulliam . Susan . Chung . Juliet . Archegos Founder Bill Hwang and CFO Charged With Securities Fraud . 27 April 2022 . The Wall Street Journal.
  6. News: Foy . Simon . March 29, 2021 . Credit Suisse and Nomura flag giant losses from hedge fund sell-off . Telegraph Media Group Limited .
  7. News: Chung . Juliet . Farrell . Maureen . March 28, 2021 . Ex-Tiger Asia Founder Triggers $30 Billion in Large Stocks Sales . Dow Jones & Company, Inc . The Wall Street Journal .
  8. News: Papuc . Andreea . Sivabalan . Srinivasan . Investors brace for fallout after hedge fund default reportedly triggered $20 billion fire sale of stocks . National Post, a division of Postmedia Network Inc . Bloomberg News .
  9. 2022-10-23.
  10. News: Benoit . Alexander Osipovich and David . April 1, 2021 . Archegos Blowup Puts Spotlight on Gaps in Swap Regulation . en-US . Wall Street Journal . April 1, 2021 . 0099-9660.
  11. News: 2024 . The Last 72 Hours of Archegos . Bloomberg News.
  12. News: Zuckerman . Gregory . Chung . Juliet . Farrell . Maureen . April 1, 2021 . Inside Archegos's Epic Meltdown . . April 2, 2021.
  13. News: Schatzker . Erik . Shridhar . Natrajan . Burton . Katherine . Bill Hwang Had $20 Billion, Then Lost It All in Two Days . April 10, 2021 . . April 8, 2021 . en.
  14. News: Burton . Lucy . March 29, 2021 . Bill Hwang and the debt-fuelled Archegos implosion that triggered a Wall Street earthquake . Telegraph Media Group Limited .
  15. https://el.wiktionary.org/wiki/%CE%B1%CF%81%CF%87%CE%B7%CE%B3%CF%8C%CF%82 Wiktionary
  16. News: March 29, 2021 . How Bill Hwang got back into banks' good books — then blew them up . Financial Times . March 30, 2021.
  17. News: March 30, 2021 . The Dumbest Financial Story of 2021 . Slate . March 31, 2021.
  18. Web site: Tigers can't change their stripes . March 30, 2021.
  19. Web site: March 29, 2021 . Trading Update . March 30, 2021 . Credit Suisse.
  20. News: March 31, 2021 . Deutsche Bank Dodged Archegos Hit With Quick $4 Billion Sale . en . Bloomberg.com . April 1, 2021.
  21. News: Telford . Taylor . Shaban . Hamza . How Credit Suisse got tangled in the Archegos Wall Street chaos . . April 9, 2021 . April 6, 2021.
  22. News: Burton . Lucy . March 30, 2021 . Japan's biggest bank faces $300m hit from Archegos selloff . Telegraph Media Group Limited . Bloomberg News . subscription . https://web.archive.org/web/20221020170813/https://www.telegraph.co.uk/business/2021/03/30/japans-biggest-bank-faces-300m-hit-archegos-selloff/ . October 20, 2022 . unfit .
  23. News: White . Stanley . March 30, 2021 . Japan shares fall as Archegos fallout hits financials . Reuters . April 6, 2021 . https://web.archive.org/web/20210417071133/https://www.reuters.com/article/japan-stocks-midday/japan-shares-fall-as-archegos-fallout-hits-financials-idUSL4N2LT0I5 . April 17, 2021 . live .
  24. https://www.marketscreener.com/news/latest/Global-banks-brace-for-losses-from-Archegos-fallout--32821362/ Global banks brace for losses from Archegos fallout
  25. News: Fedor . Lauren . US Senate banking chair queries Credit Suisse and other banks on Archegos . The Financial Times . April 5, 2021.
  26. News: Walker . Owen . Morris . Stephen . Credit Suisse removes senior executives after $4.7bn Archegos losses . . April 9, 2021 . April 6, 2021.
  27. Web site: Patrick . Margot . Credit Suisse Taps Investors for Cash After Archegos Loss Widens . . April 27, 2021 . April 22, 2021.
  28. Web site: Neghaiwi . Brenna . Credit Suisse to boost capital ahead of further Archegos hit . . April 27, 2021 . April 22, 2021.
  29. News: Inside Credit Suisse's $5.5 Billion Breakdown. The Wall Street Journal. June 7, 2021. June 14, 2021. Emily. Glazer. Maureen. Farrell. Margot. Patrick.
  30. https://www.reuters.com/business/finance/morgan-stanley-profit-blows-past-estimates-dealmaking-boom-2021-04-16/ Morgan Stanley reveals $911 million Archegos loss as profit jumps
  31. Web site: Goldstein . Steve . Nomura and UBS Become Latest to Record Archegos Losses . . April 27, 2021 . April 27, 2021.
  32. Web site: April 27, 2021. UBS, Nomura push global banks' Archegos losses over $10 bln. April 28, 2021. Reuters.
  33. News: Jones . Sam . Walker . Owen . UBS loses $774m on Archegos trades . . April 27, 2021 . April 27, 2021.
  34. Web site: Patrick . Margot . Webb . Quentin . Archegos Hit Tops $10 Billion After UBS, Nomura Losses . . April 27, 2021 . April 27, 2021.
  35. News: Goldstein . Matthew . 2022-04-27 . Federal agents arrest Archegos owner Bill Hwang and a former top lieutenant. . en-US . The New York Times . 2022-04-27 . 0362-4331.
  36. Web site: Berk . Christina Cheddar . 2022-04-27 . Archegos owner Bill Hwang, former CFO Patrick Halligan charged with fraud . 2022-04-27 . CNBC . en.
  37. News: Copeland . Rob . UBS Is Fined Nearly $400 Million in Credit Suisse's Archegos Mess . 25 July 2023 . The New York Times . 24 July 2023.

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