Bill Hwang's Archegos Capital faced margin calls and liquidated $20 billion in positions including Viacom, Discovery, and Baidu. Nomura and Credit Suisse each lost about $2 billion holding the shares. The collapse reveals how leverage in a low-rate environment can turn gains toxic fast.
Chapters
Okay, very good morning to everyone and welcome back. It is Monday, 29th of March, and I'm joined by Eddie to talk about one of the main headlines in the equity space, um, this morning, and that is about Archegos, the family fund, and the impact that that's had subsequently on Nomura and Credit Suisse in overnight and European trade so far. So Eddie, how's it going? And get us up to speed.
Yeah, good. Been very busy, but always good to be back chatting with you. But yeah, let's, let's get straight into it. So essentially what's happened is another hedge fund blow-up. Um, so a heavily leveraged long-short family office, they're basically a hedge fund. This is Archegos. I think we had a joke earlier, us saying it, you know, that's going to cause some problems. I think Credit Suisse and Nomura have more problems trying to unwind this trade, but Essentially, this firm is headed up by quite a famous guy called Bill Hwang. He's an ex-Tiger Capital Management trader. And his firm was forced to sell $20 billion of stock this Friday. So they had big positions in names such as Viacom, Discovery, Baidu, Tencent Music that we were just talking about was down 34% last week. So this basically started to unravel. Kind of Tuesday, Wednesday last week, so earlier in the week. And it's now being reported basically that Goldman and Morgan Stanley were unwinding these big blocks. Um, and then obviously Nomura and Credit Suisse are really kind of struggling to unwind these blocks. And then as the positions fell, margin calls came in, and then Archegos, uh, basically, you know, this was a forced liquidation by the prime brokers Credit Suisse and Nomura. So what's—
I mean, I know it's hard to get the exact detail on what happened here, but with hedge funds and filings, I know in previous conversations this morning you were saying that this might not necessarily be the case for that transparency with this specific firm in question.
Yeah. So this is where it gets a little bit misty, is the fact that basically what's happened is the brokers have become involuntary principals here. So they own the shares outstanding on these leveraged swaps, uh, and this was to firms like Archegos. So when the client can't meet the margin calls, the brokers take huge losses essentially. So Nomura now owns these shares. So I'm not totally sure at the moment if it's a, you know, a filing and a kind of transparency, but because there's lots of derivatives going on here, it's not immediately clear, you know, why these— why this wasn't seen basically, because these were taking you know, these were down like 26%, 27% on Tuesday and Wednesday in terms of the prime brokerage positions, uh, but this has just got away from them massively.
Yeah, so, so would this be something then, you know, we've got a holiday-shortened week, you've got month-end, you've got quarter-end, there's a lot going on. You've also got all the employment data with non-farm still coming out on Good Friday. So this is another— has this run its courses yet, or are you looking for more, do you think, to information to come out and be potentially impactful? Today, tomorrow?
Exactly. It always depends, right? Of course. But, and it's always on a case-by-case basis. But of course, if we take— if we zoom out and look at the macro environment, this has always been the case, right? Macro liquidity has just been flooded in. Interest rates are at, you know, all-time lows. This is why we've seen equity markets and, uh, you know, risk-taking basically. And this is what has been— has been encouraged by global central banks and these fiscal policies being kind of injected into the market. So risk-taking is at all-time high, and leveraged— leverage, you know, in retail, right, leverage in hedge funds and institutional clients is basically at all-time high. So when these positions start to go against individuals and firms, then this is where it can get really ugly. So it does, of course, depend on the kind of positions, right, and the companies. So for example, the Chinese internet companies that were involved here can be tricky to sell because there's not much institutional backing. And this has been reported by Bloomberg. Gross leverage at Goldman Prime was last week was at an all-time high. So what we can take from this is that, you know, everyone's really speculatively long, right, the markets. And we've seen this, so momentum's getting hit as we've seen with the tech stocks and ARK funds and things like this. So you know, this could be a systemic issue if things get out of hand. Um, what we need to watch is how this position obviously unwinds, and this is going to have a big impact on the indices and things like that. But it's more about gross leverage within the whole system, but then it's actually those individual firms that are, you know, leveraged to the eyeballs basically, um, and positioned that way that if we do see an unwind, then it's definitely firms to look at. But if we look at who's actually getting burnt on this, of course, we mentioned Nomura, Credit Suisse. They're down 10%, 15%, respectively. And this is a $2 billion loss for each of these firms. So what actually is happening here? Prime Brokerage, they basically loan cash securities to hedge funds. They process hedge funds' trades. So with Archegos, they were basically on the wrong side of this trade. But Credit Suisse, Nomura, if it's a risk management problem, if it's a compliance problem, and they do— they get dinged on this and they basically let this position run, this is a kind of incompetence really from whoever was involved in the sense of they maybe ignored compliance, we don't know yet, or risk management, but they failed to correctly acknowledge the losses that were incurring basically early last week. Um, so someone in the risk management department is going to be in serious trouble. But I think if we can kind of take any— anything away from this, it's about leverage, right? And how dangerous it is. And I guess for all the people that tune into this channel and the retail, that, you know, leverage can amplify gains, but it can also, you know, amplify losses as well. So unfortunately, stonks don't always go up. Um, so if you can take anything from this, it's maybe reduce your leverage if you are leveraged, because things don't always go to plan. I guess that would be the warning, but it's also a factor of the liquidity in this market. If they can't unwind this trade, maybe it's a liquidity problem with the specific names, or maybe systemically. But I think with Bill Hwang, still, now is time to look at how much has he still got to liquidate. Does he have positions to liquidate? Do the banks still have big positions to unwind. So that could have a knock-on effect. But I think with Bill Hwang, I think the one thing to also note is this is not the first time he's been margin called. He actually got margin called with Volkswagen in the 2008 crisis. So he seems like a bit of a character. But this is not the first time he's been hurt with a margin call.
OK, cool. Well, with that, we'll wrap it up. Thank you, Eddie, for your insights. And yeah, we'll catch up again. We have further updates.
