Tag Archives: Archegos

Archegos Used Swaps to Hide Positions; Other Funds Are Too

Bill Hwang, founder of Archegos Capital Management, was charged yesterday with racketeering and securities fraud. How Hwang hid his positions teaches us a lot about how markets work today.

How Total Return Swaps Work

Archegos Capital Management controlled a majority of the shares of several large public companies without making any of the usually required disclosures. It was able to do this because it used a derivative called a total return swap.

A total return swap is pretty much like owning a stock. You get the gains if the stock goes up, you lose money if it goes down.

But you don’t technically own any shares.

Instead, you have a contract with a bank to get the gains and pay the bank for any losses. To hedge its risk, the bank will buy the shares, rather than you buying them.


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Hedge funds like Archegos love this arrangement because it lets them hide positions from the market and exempts them from disclosure requirements. Bankers love it because the swap comes with juicy fees.

These swaps even let you trade on huge margin. And they’re easy to get.

What’s a Few Felonies Between Friends?

Hwang had been convicted of fraud for actions at his prior fund, Tiger Asia. He was also banned from continuing to trade in Hong Kong, so he switched to US stocks.

But why let a few felony convictions get in the way of a great deal? Credit Suisse booked $16 million in fees from Archegos in 2020, likely leading to fat bonuses for the bankers involved.

How Hedge Funds Can Use Swaps to Hide Short Positions

Hwang used total return swaps to hide bets that stocks would go up. But they could just as easily be used to hide huge short positions.

If a hedge fund wanted to short a stock without anyone knowing how big their exposure is, a swap would be the natural choice. The fund could do numerous swaps with different banks, as Archegos did.

With the hedge fund’s bets split between various banks, no one would know how vulnerable the fund is to a short squeeze.

Had Melvin Capital been smart enough to do this last year, retail traders might never have known how exposed it was to GameStop Corp. shares. But they did know, and they used that knowledge to squeeze Melvin.

You can bet that other funds have learned from Melvin’s mistake.

What Investors Should Know

The bottom line is that it’s extremely easy for hedge funds to hide their positions today. It’s happening every day, and we only heard about Archegos because it blew up.

But you can be sure that other funds are out there hiding massive positions at this very moment.

What trades do you think hedge funds may be hiding? Leave a comment at the bottom and let me know!

More on markets:

Melvin Capital Faces Investor Revolt

Citadel Under Federal Investigation

FBI Raids Short Sellers

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This Is Why Credit Suisse Keeps Getting Punched in the Face

Credit Suisse keeps getting smacked. Let’s review a few of their recent scandals:

  • $4.7 billion charge for losses in trades with Archegos Capital Management, the imploding hedge fund
  • $1.5 billion loss likely in dealings with collapsed supply chain finance company Greensill Capital, just three weeks prior
  • Bonus scandal: Former CEO Tidjane Thiam spied on employees and was forced out in February 2020

So they’ve been busy! Why is this one company stumbling from cliff to quagmire?

A major factor appears to be its bifurcated business, which focuses on both asset management and investment banking, but is too small to be a big player in either market. So, in order to win business from its bigger competitors, it has to offer better terms and do worse deals.

In reality, the asset-management unit, which brought in Greensill, and the investment bank, which handled Archegos, were too small to square off with Wall Street giants. The bank tried to make more money from fewer clients than rivals with larger balance sheets and ended up overlooking risks, the executives said.

There were clear warning signs on both Archegos and Greensill.

There were clear warning signs on both Archegos and Greensill. Archegos founder Bill Hwang had been sanctioned by the SEC for insider trading and banned from handling client money, which is the entire reason he started Archegos in the first place. It was a family office, managing just his own family’s money, due to that SEC ruling. Credit Suisse thought the risk was limited because he wasn’t managing client money, but failed to consider what would happen to its own funds!

Greensill too had come under scrutiny early enough to avert problems, but nothing was done:

In 2019, members of the credit-structuring team escalated its alerts about Greensill to the bank’s reputational-risk committee, the person familiar with the funds said. They had become concerned Greensill might be taking operational shortcuts.

Interestingly, the dynamic of Credit Suisse agreeing to anything in order to win business from larger competitors was played out by its client Greensill as well:

Mr. Greensill signed up some big, credit-rated companies. To wrest those customers from big banks, Greensill had to offer competitive terms that didn’t make it much money, according to people familiar with Greensill’s business.

Credit Suisse seems to lack any internal controls whatsoever, and I strongly recommend investors avoid

Credit Suisse seems to lack any internal controls whatsoever, and I strongly recommend investors avoid it. We can also gain a broader lesson from this fiasco. If you’re a smaller company trying to get into a market, don’t do disadvantageous deals just to get some market share. You expose yourself to too many problems that will blow you up before you ever get a chance to compete with the big boys.

For more on Archegos, check out these posts:

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Photo: “Punch to the Face” by Ninja M. is licensed under CC BY-NC-SA 2.0

How to Lose $8 Billion in 10 Days

Archegos Capital Management, run by Bill Hwang, is imploding, racking up losses at a record pace:

Mr. Hwang alone lost approximately $8 billion in 10 days, a person familiar with the matter said, in what traders and investors say was one of the fastest losses of such a large sum they had ever seen.

Archegos borrowed massive sums of money to invest it in just a few stocks. Like addicts that get 10 oxycontin prescriptions from 10 different doctors, Hwang never revealed how deep in debt he was to the banks he dealt with:

Archegos was regularly putting up $15 of collateral to borrow $85, on the high end of leverage for stock-trading firms with similar strategies, said a banking executive familiar with the borrowing.

Archegos’s lenders say they were unaware of the extent of trades he was making with other banks, information that would have encouraged them to curb their lending.

The fact that Archegos used swaps, rather than owning shares directly, further obscured his activities. In the “contract for difference” swaps he used, the bank owns the shares while Hwang’s firm pays for the losses or receives the gains on the stock.

This is important because investors have to disclose to the SEC when they own over 5% of a company. Hwang would have had to make several such disclosures. But because he used swaps instead, none of that information was public, making it harder for banks to find out how heavily leveraged he was. This may have been by design.

A further odd wrinkle is that Hwang, the son of a pastor, suffused Archegos with religious fervor:

Mr. Hwang returned clients’ money in 2012 and turned his firm into an office to manage his family’s wealth. He named it Archegos, which, translated from Greek means “leader” or “prince of Christ.” A Christian ethos permeated the firm, with voluntary Friday morning Bible studies where a recording of Bible readings would play to music.

He tended to view gains as signs of God’s favor:

“Do I think God loves it? Of course!” Mr. Hwang said in a video, referring to his early investment in LinkedIn. “I’m like a little child looking for, what can I do today, where can I invest, to please our God?”

If Hwang had a religious certainty about his positions, he’d be all the more likely to hold them even as he lost money, expecting to be vindicated.

It strikes me how incredibly simple this one-time billionaire investor’s strategy was. Borrow a bunch of money and invest it in a few well-known stocks like Viacom. Anyone could do that if they had access to capital. There was no special sauce, and now Hwang is paying the price for his recklessness.

For more on Archegos and financial markets, check out these posts:

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Photo: “Gamble” by jetglo is licensed under CC BY-ND 2.0