All the Archegos mess (and the effects on Nomura and Credit Suisse)
What did Archegos Capital, a hedge fund created to manage the assets of Sung Kook (Bill) Hwang, a South Korean with US citizenship, have done. The article by Emanuela Rossi
The securities of some banking giants slide on the stock market and accumulate heavy losses. The reason? The crisis of a hedge fund operating in the United States: Archegos Capital.
WHO IS ARCHEGOS CAPITAL AND WHAT IT DOES
Who is Archegos Capital and what does it do? As reported by the American business magazine Forbes, it is a hedge fund created to manage the assets of Sung Kook (Bill) Hwang, a South Korean with US citizenship. In the past, Hwang was a manager of Tiger Management, a famous hedge fund that accumulated tens of billions of dollars between the 1980s and 1990s. In 2000, when Tiger Management closed, Hwang founded his own hedge fund, Tiger Asia, which closed in 2013 because the SEC, the security Exchange Commission that oversees the US stock exchange, uncovered a case of insider trading on Chinese banks and imposed a $ 44 million fine. It was then that Hwang decided to create Archegos Capital, a vehicle that allowed him the advantage of a lower transparency obligation.
Basically Archegos does what is called margin trading, that is, it asks banks that operate as brokers, that is, that manage the sales and purchases of shares on the operational side, to lend them money. In this way the fund can strengthen its investments, with the amount of the loan remaining fixed and the value of the shares changing according to the market trend. However, in the event that the ratio between the loan and the value of the share package decreases too much, the credit institution asks the fund to inject money. And here the problem arises because – if the fund is unable to do so – the bank takes possession of the shares which it almost always then sells.
“Formally it is a family office with assets under management of approximately $ 10 billion attributable to Hwang himself and his family. – wrote Il Sole 24 Ore – Archegos Capital would have set up very daring speculations in derivatives on the securities of some companies with leveraged positions that would have brought its exposure up to 10% of the capital of some of them. Too risky a bet. A house of cards that fell once the banks asked the family offfice to restore the guarantee margins ”.
WHAT HAPPENED
According to press rumors, Archegos Capital is behind the massive share sales that have taken place in the United States these days. Starting with those – operated by large international banks – of ViacomCbs and Discovery, which lost about 27% on Wall Street, for an estimated value of nearly 30 billion dollars. Not only the New York-based stock exchange but also the major European markets are at the expense. Il Sole 24 Ore reports sources close to Archegos according to which the fund “took important positions concentrated on some companies and held them through swaps”. However, Hwang's strategy has begun to falter in recent weeks "when the stocks of some of the companies he was most exposed to, began to decline." Among these, recalls the Confindustria newspaper, there would be Baidu, which in mid-March was down by more than 20% compared to the maximum, and Farfetch which lost 15% between February and March. However, pressure on Archegos intensified last week when ViacomCBS announced a $ 3 billion share placement. The fund has therefore begun to sell its position to try to offset the losses and its crisis has resulted in heavy losses for some banking giants.
THE ANNOUNCEMENTS OF GOLDMAN SACHS, NOMURA AND CREDIT SUISSE
Meanwhile, some groups of international importance are starting to take into account the impact of the losses. If the American Goldman Sachs – Bloomberg warns – is reassuring shareholders and customers by saying not to expect significant losses, the situation is quite different for Nomura and Credit Suisse . The Japanese giant officially announced that on March 26 "an event occurred" that could entail "a significant loss" for one of its US subsidiaries due to a "transaction with a customer". Nomura, which is still assessing the damages, currently estimates that it can "claim damage from the customer of approximately $ 2 billion". The same goes for the Swiss group Credit Suisse which in a note admits "very significant losses" although it does not expose itself in quantifying the effects on the results of the first quarter of the year. Two people close to the bank, reports the Financial Times , hypothesize a loss between 3 and 4 billion dollars.
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EXTRACT FROM AN ARTICLE FROM THE SUN 24 HOURS ON THE ARCHEGOS CASE:
The problems therefore seem to have been two. On the one hand, Archegos used a lot of "leverage": that is, he borrowed a lot of money to invest in the stock market. A leverage of 5 times means that for every dollar that Archegos put in, the banks put in four. The first problem therefore arises from this: when the shares began to lose, the banks asked Archegos to reinstate the guarantees given (in the jargon "margin call"). But as Archegos failed to meet the demands, the banks began forcibly selling the shares as collateral to recover what they could. In a destructive domino for all: it is said that the banks had to liquidate shares of 20-30 billion dollars on Thursday and Friday to close the positions of Archegos (at a serious loss).
The second problem is concentration: Archegos' investments were likely large on some individual stocks. The most sensational cases concern Viacom and Discovery, protagonists of a very fast race and then a dizzying fall. Viacom was quoted at $ 37 at the beginning of the year, and last Wednesday it was up to $ 100 per share. Also driven by the great bet of Archegos. Then, with forced sales, it dropped to $ 44 in two days. Similar epic for Discovery. What happened is difficult to know. Certainly the consequences have been heavy for many.
Tip of the iceberg?
And here we go to the second question: How much risk is there on Wall Street from investor leverage? Looking at the data from Yardeni Research, the "margin debt" (ie the debt to invest) is at an all-time high: around 800 billion, when at the end of 2019 it was around 650 billion. But this is only a small portion: the visible one. "This figure includes almost exclusively the debt positions of small savers, because those of hedge funds are not easily included in the statistics," observes Maurizio Novelli, Global strategist at Lemanik. A lot of leverage means a lot of potential risk: in fact, a minimal market correction is enough to undermine the positions of many investors and as many banks. As happened in Archegos.
In the immediate future, the greatest danger is that the banks, burned by this case, will apply a “tightening” on the margins (ie on the guarantees) of all. «The risk is that the large banks active in prime brokerage increase the margins to all customers to reduce their risks – observes Novelli -. This would create problems for the market ». The quiet day yesterday on Wall Street seems to mitigate this risk. But the problem remains.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/tutti-i-casini-di-archegos-e-gli-effetti-su-nomura-e-credit-suisse/ on Tue, 30 Mar 2021 06:13:32 +0000.