Sunday, April 4, 2021

The Archegos Hedge Fund Blow Up and the Big Picture Meaning

Bill Hwang

Keith Snyder emails:

Dear Sir,

I am confident you have heard of this hedge fund meltdown. I have not looked into it but did catch a radio show (ric Edelman for the record) who did a cursory explanation. He did not make any judgements or ideological observations; just gave some basic information that I trust was somewhere near the truth haha.

Perhaps an in-depth look at this through the free market lens would be a teachable moment. Obviously gov regulation failed here? Or perhaps this exact scenario is exactly how a free market solves the problem?

Here is my issue and it is admittedly narrow. This hedgie Hwang the head of Archegos essentially runs a casino set up floating all this on loans from large banks who then call his margin and he is caught out. People lose lots of money. This guy was previously sanctioned as recently as 2014 or something. Why am I pretty confident that this guy is not going to be living in a one room apartment and wondering how he is going to pay the rent next month anytime soon?

Yeah, I understand that concern is not constructive but it is a factor in the disconnect that causes those to see the legitimacy of government control, regulation, etc.

So far this meltdown hasn’t had a ripple effect even if it is supposedly the largest hedge default since Long Term 1998. That point I took on trust. Not sure if that is 100% true.


Keith Snyder

RW response:

You are correct in calling Archegos a casino. 

It was a very aggressive hedge fund run by Bill Hwang. And very aggressive, that is highly leveraged, hedge funds can blow up if positions move against them.

Reports indicate that Hwang had between $10 billion and $15 billion in assets under management, but he held total leveraged positions in various securities of $100 billion or more.

Some positions moved against him big time.

My initial reaction was, and continues to be, "So what?"

It appears that many of the banks that provided him with the leveraged vehicles also required enough collateral so that they could close out the positions, as the positions moved against Archegos, without the banks facing losses. The collateral covered the hedge fund's losses. In some other cases, banks didn't have enough collateral protection and so the banks themselves took losses.

There is no real big picture message here about government and regulations, other than that the Fed is fueling a lot of this type of speculation with the money printing that they are doing.

I have no idea where Hwang lives, though most of these guys do the prudent thing and shelter themselves just in case things go wrong. Again perfectly legal.

You have to wonder about the people who put money with Hwang.

I would never recommend such an investment for anyone who doesn't appreciate Salvator Dali paintings as an investment road map.

Salvator Dali's “The Temptation of St.Anthony“

So I have to wonder about some of the advisers that put people, who should never be in this kind of investment, into Archegos. Halle Berry, Naomi Campbell, Paris Hilton, and Rush Limbaugh were reportedly all invested.

All that said, there are almost always opportunities when waves of selling hit the markets.

This is what I advised EPJ Daily Alert subscribers as the Archegos margin liquidations were going on:
I reported last night at EPJ that Archegos, the family office of former Tiger
Management trader Bill Hwang, was forced by its banks to sell more than $20
billion worth of shares after some positions moved against it. It was a
massive margin call-related liquidation.
Bank stocks that brokered for Archegos are getting hit hard today on the news.
Indeed, financial stocks led stock market declines on the fear that global banks
that dealt with the firm could face sharp losses. 
Credit Suisse Group and Nomura Holdings said Monday they could incur
substantial losses... 
Nomura plunged 16%. In Europe, Credit Suisse plummeted 15% and Deutsche Bank dropped 3%.
It is not clear to me that this is anything other than a one-time hit to some
banks. In this environment of massive money printing, it won't mean much.
If you are a short-term risk-oriented trader, the banks look like buys to me.
Trade the bank index or a US bank from the long side.
Shares of companies that were liquidated by the margin call have also been hit
ViacomCBS and Discovery, which were among the stocks subject to big block
sales last week, continue falling as well today. ViacomCBS fell 6.4%, and Discovery
dropped 1%, among others.
None of these are current EPJ recommendations but if you own any of the half dozen or so stocks (also including Tencent Music Entertainment Group, Baidu
and IQIYI) hit hard by the liquidations and you like the stocks, BUY
I have seen a number of times throughout my career these types of liquidations
that aren't related to the fundamentals of a corporation. If the fundamentals are
strong, the stocks rebound very quickly.

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