How the collapse of Archegos Capital roiled markets?
Archegos (a Greek word for one who leads the way) Capital, a New York-based family office was founded by Bill Hwang, who spent some part of his career with Tiger Global Fund Management as an equity analyst. In the past, Bill Hwang has managed hedge funds at Tiger Asia Management and Tiger Asia Partners but had to pay US$ 44 million in fines and shutter the funds owing to allegations of insider trading in the past. He then converted his fund to a family office to manage money for the wealthy.
The trouble occurred when Archegos was forced to sell stocks worth US $20 billion last week in a fire sale (i.e. selling stocks at very low prices). This forced selling was due to the fact that some of Archegos' stocks lost as much as one-third of their value. Archegos also had large exposure to stocks via swaps. Swaps are a type of derivative instrument that allows investors to take large exposure to companies’ shares without having to invest the entire sum in them. Swaps only require an investor to have an upfront margin payment. However, when the price of a share declines, a swap investor is required to post additional margins to keep his positions open. In the event, the investor can’t post the margins; instead, the counterparty, usually an investment bank, will liquidate its positions.
Archegos Capital in this case failed to post the margin requirements and as a result, the investment banks, which were holding shares as an additional security margin, were forced to sell these shares to pay for the positions. Leverage or debt in Archegos case was at US$40 billion as it operated with a capital of US $10 billion while having exposure to stocks worth US $50 billion. Unfortunately, for Archegos, all the shares the family office owned fell in value and caused further selling thereby, imposing losses on banks. While Nomura has stated that it may take losses of US $2 billion, Credit Suisse has also stated that it would take further losses.
Interestingly, family offices are unregulated pools of capital while Archegos fiasco has made investors ask for more regulations for such entities.