Archegos Capital Management, a seemingly run-of-the-mill family investment office, caused reverberations rippling outside of the financial industry. The firm held “big, concentrated positions” (Chung & Patrick, 2021) in total return swaps (“TRS”). In total, Archegos had USD 30 billion allocated to major stocks, such as Viacom CBS Inc., and defaulted on margin calls (Li, 2021). Archegos’s default triggered an unprecedented wave of stock sales as involved banks hurried to close their positions, which affected numerous stakeholders.
All About Archegos
As a family office, Archegos manages investments for ultra-high net-worth individuals. The founder, Bill Hwang, is no stranger to this business. Hwang originally worked at Tiger Management, a prominent hedge fund, before founding his own fund in 2001 named Tiger Asia Management. Following Tiger Asia’s losses and a criminal fraud charge, due to insider trading, Hwang created Archegos Capital Management in 2013. Archegos’s activities span multiple markets including: the United States, China, Japan, and South Korea. According to Archegos, the team utilises a “disciplined research-driven approach to fundamental stock selection” and takes a “multi-year approach” investment strategy.
Part of Archegos’s strategy involved TRS, which enables the exchange of a specific asset’s total economic performance for another cashflow. For Archegos, these swaps are off-balance sheet transactions that enable a higher leverage on capital; Archegos receives returns without the need for direct asset ownership. In an equity total return swap, for example, Archegos would receive dividend payments and reimbursements for appreciation depending on the movement of a stock. For the banks, TRS offered a steady cashflow stream, consisting of fees and depreciation reimbursements, from Archegos and an opportunity to hedge risks. As the underlying stocks, such as Viacom, of Archegos’s TRS saw falling stock prices, Archegos was unable to cover the large payments and defaulted (Armstrong, 2021). In response, Archegos’s counterparties, such as Goldman Sachs, liquidated their positions by selling stocks.
Effect on Multiple Stakeholders
A less prescient bank, Credit Suisse, suffered incredible losses amounting to USD 4.7 billion (Scuffham & Neghaiwi, 2021). Prior to Archegos, the Swiss bank had already seen losses from supply chain finance funds that invested in bonds issued by the now insolvent Greensill Capital. Following these two considerable misjudgements, Credit Suisse is facing a lawsuit filed by the Michigan pension fund. The pension fund argues that Credit Suisse “concealed material defects in the company’s risk procedures and compliance oversight functions” (Jeffrey & Burton, 2021). Indeed, Credit Suisse’s chief risk officer, Lara Warner, and investment banking chief, Brian Chin, have taken responsibility and will leave the firm.
Apart from the Michigan pension fund, the stock sell-of affected multiple companies. Media stocks in the United States, such as Viacom and Discovery, faced “severe selling pressure” and saw their share prices decline more than 27% (Li, 2021). Chinese internet giants, such as Baidu and Tencent, also faced the repercussions of the banks’ liquidation efforts. For example, Tencent Music saw a 37% decline in their share price and is planning to buy back shares (Fioretti, 2021).
In response to the stock sell-off, multiple regulators have started investigations. According to the Financial Times, both the U.S. Securities and Exchange Commission and the United Kingdom’s Financial Conduct Authority “have requested information” from the involved banks (Lewis, 2021). Requested information concerns the banks’ risk management practices and how Archegos was able to secure these substantial positions. The banks have also been contacted by FINRA, which is Wall Street’s self-regulatory body. Regulatory involvement has cooled the frantic sell-off. The banks are also inclined to avoid a disorderly unwind that “would be mutually damaging” for each other (Lewis, 2021).
Moving Forward
As the case of Archegos demonstrates, financial upheavals affect multiple stakeholders. Apart from those directly involved, such as Credit Suisse and Goldman Sachs, the stock sell-off negatively impacted the Michigan pension fund and numerous companies. By extension, investors who invested in the pension fund and companies are shouldering financial burden. With such a wide societal effect, the stock sell-off has drawn the added attention of regulators. It is likely that the commotion generated by Archegos will increase the pressure for stricter regulations surrounding derivatives and risk management. Clearly, Archegos has taught all affected stakeholders a costly lesson.
References
Archegos Capital Management, LP. (n.d.). Archegos Capital Management, LP. https://www.linkedin.com/company/archegos-capital-management-lp/about/.
Armstrong, R. (2021, April 1). Archegos debacle reveals hidden risk of banks' lucrative swaps business. Financial Times. https://www.ft.com/content/fb364689-9b04-47cb-aba9-5eb15d1cea85.
Chung, J., & Patrick, M. (2021, April 6). What Is Archegos and How Did It Rattle the Stock Market? The Wall Street Journal. https://www.wsj.com/articles/what-is-archegos-and-how-did-it-rattle-the-stock-market-11617044982.
Fioretti, J. (2021, March 29). Tencent Music Plans $1 Billion Buyback After Archegos Selloff. https://www.bloomberg.com/news/articles/2021-03-29/tencent-music-plans-1-billion-buyback-after-archegos-selloff.
Jeffrey, P., & Burton, K. (2021, April 17). Credit Suisse Is Sued Over Greensill Capital and Archegos. BloombergQuint. https://www.bloombergquint.com/onweb/credit-suisse-group-is-sued-over-greensill-capital-and-archegos.
Lewis, L. (2021, March 30). Banks face regulators' scrutiny on handling of Archegos fire sale. Subscribe to read | Financial Times. https://www.ft.com/content/c771ad24-24ca-4002-ab8f-17719e4c32da.
Li, Y. (2021, March 29). How Archegos' $20 billion move to flee certain names led to banks' share prices tumbling. CNBC. https://www.cnbc.com/2021/03/29/the-archegos-blowup-and-its-ripple-effect-across-markets.html.
Scuffham, M., & Neghaiwi, B. (2021, April 5). Credit Suisse overhauls management as it takes $4.7 bln hit on Archegos. Reuters. https://www.reuters.com/business/credit-suisse-investment-bank-head-chief-risk-officer-depart-sources-2021-04-05/.
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