A massive margin call last Friday targeted a little-known family office that caused billions in losses for certain participating banks and shook the general volatility of the broader market.
Archegos Capital Management’s leveraged bets on ViacomCBS blew up a wave of $ 20 billion in forced liquidations with a number of Wall Street banks, some of which could suffer losses that could be “highly significant” .
Who is behind Archegos?
Archegos Capital Management is a family investment vehicle founded in 2013 by former Tiger Management analyst Bill Hwang. He was a protégé and one of the so-called Tiger Cubs of legendary hedge fund manager Julian Robertson, who looked after and supported some of the highest performing investors, including Stephen Mandel, Lee Ainslie and Chase Coleman.
Hwang started out as a stock seller at Hyundai Securities in the early 1990s.
Prior to Archegos, Hwang built New York-based hedge fund Tiger Asia Management, which focused on Asian investments. In 2012, Hwang pleaded guilty to insider trading in Chinese bank stocks and agreed to pay $ 44 million to pay fees to the Securities and Exchange Commission. The agency alleged that he used confidential information from private placement offers to short three Chinese bank stocks. Short selling is a strategy in which an investor sells borrowed stocks in order to buy them back in the future at a lower price.
After the settlement, Hwang closed Tiger Asia Management and Archegos was born.
Archegos is a Greek biblical word for leader or prince.
“This is a challenging time for the Archegos Capital Management family office, our partners and employees,” Archegos spokeswoman Karen Kessler told CNBC. “All plans are discussed while Mr. Hwang and the team determine the best way forward.”
What went wrong?
Archegos held large and leveraged bets on US media stocks ViacomCBS and Discovery, as well as some Chinese Internet ADRs, including Baidu, Tencent and Vipshop. Some of the positions were held via total return swaps, a type of derivative that allows investors to take large amounts of leverage without making these positions public.
Those bets started going south after Morgan Stanley and JPMorgan broke up ViacomCBS’s $ 3 billion stock offering earlier last week. It set off a domino effect with prime brokers rushing to get out of positions on Archegos’ behalf and resulted in a massive margin call.
With a margin call, brokers require an investor to add additional money or securities to the account if a position is depreciating significantly. Brokers usually sell the securities in block trading, often at a discount to the current share price to offset losses.
Nomura, a prime broker for Archegos, warned Monday of a “substantial loss” valued at $ 2 billion from the deal’s execution.
Credit Suisse said the loss from this exit could be “highly significant and material” to its first quarter results.
$ 500 million for charity
Hwang also has a charity called The Grace and Mercy Foundation, with assets of $ 500 million. This is evident from recent tax returns discovered by CNBC’s Robert Frank.
Despite its enormous size, the foundation has made a name for itself in the charity world.
The charity took generous tax write-offs on Hwang’s investments.
For example, Hwang donated $ 20 million in profits to Amazon stock last year, which allowed him to avoid capital gains tax and receive a tax deduction.
Hwang donated $ 16 million to Korean Christian causes last year.
– CNBC’s Robert Frank contributed to the coverage.