The Arches Capital Management collapse is the biggest single-firm meltdown since the crisis. The Arches founder, Bill Hwang, lost US $20bn in 10 days in March 2021.
This impressive feat affected not only his investment management company – Archegos Capital, but also the rest of the financial world, particularly global investment banks. To understand why Archegos fell, we need to know who Bill Hwang is.
Bill Hwang’s Dark Past
Sung Kook “Bill” Hwang, also known as a Tiger Cub, is a Korean-born, New York-based businessman. He built the hedge fund, Tiger Asia Management, after an investment from Julian Robertson. In 2012, he pleaded guilty to using inside information to trade Chinese bank stocks. Hwang and Tiger Asia paid $60 million for civil and criminal charges. After that, they were banned from trading in Hong Kong for 4 years. Eventually, Hwang led to the closure of the firm.
After the Tiger Asia disaster, Hwang got into global banks good graces. Only to let history repeat itself in the case of Archegos Capital.
Arches Capital
In Greek, Archegos means leader. No doubt about that. Arches Capital led the financial world into a $35bn crisis. However, Archegos Capital started as a family office in 2013. Hwang was said to have managed around $10 billion of family money. He specialized in total return swaps.
Total return swaps are a type of derivative that allows investors to take big, levered stakes without disclosing those positions publicly. Using the massive leverage extended by his prime brokers, Hwang likely played a big role in driving up the share prices of his (indirect) holdings himself. He was successful with his risky bets. Until he wasn’t.
Collapse
It all started with a disappointing stock sale by ViacomCBS that triggered margin calls for Archegos. Predictably, considering the risky nature of Hwang’s methods, they could not put up the money. Lenders watched cautiously as shares in ViacomCBS fell by 23% and kept going down.
Few of them, Morgan Stanley, Goldman Sachs and Deutsche Bank sold shares in ViacomCBS, Discovery and other smaller companies a night before the big collapse. The sales approached $30 billion in value and fuelled a 27% plunge in shares of ViacomCBS.
Direct Consequences
Unlike the above-mentioned lenders, some were not able to escape this sinking ship. Credit Suisse lost about $4.7bn from the collapse of Archegos. Nomura shares closed down 16.3%, a record one-day drop, while Credit Suisse shares tumbled 14%, their biggest fall in a year.
Other lenders suffered less significant losses. Morgan Stanley shares fell 2.6% and Goldman Sachs Group dropped 1.7%. ViacomCBS, Discovery and other stocks crashed. The epic firesale wiped out more than half of Viacom’s value in one week. The direct consequences reflect lessons we could learn from Archegos collapse.
Lessons to be Learnt
The first lesson is on regulations. As a family office, Archegos Capital was not as regulated as a hedge fund. Thanks to the swaps, Archegos never filed a 13F quarterly disclosure. They also allowed Archegos to avoid regulatory limits on leverage for stocks. After the Archegos fiasco, family offices can expect greater scrutiny as regulators are, or should be, taking notes.
The second lesson is on risk management. The Arches collapse highlights poor risk management among investment banks. After all, they happily provided lavish leverage for supercharging speculative bets.
The top executives of Credit Suisse, the bank suffering the biggest losses, resigned. However, Morgan Stanley had $18bn with Archegos while Credit Suisse had “only” $10bn. It makes one wonder if Credit Suisse’s risk management system acted too slowly or Morgan Stanley’s suspiciously quickly.
Conclusion
Bill Hwang once again took the world by storm. However, his risky plays could only take him that far. The Arches collapse sheds some light on the issues with risk management. It also invites greater scrutiny of total return swaps and family offices.
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