The downfall of Archegos

published 2 April 2021

I wish I knew what a margin call was, but I’m too embarrassed to ask

Late last week, stockmarkets were rattled as the share prices of a handful of big-name tech and communications stocks – including Chinese tech giant Baidu and US media group ViacomCBS – plunged, as huge blocks of their shares were sold into the market. It turned out that a family office called Archegos Capital Management, run by former hedge-fund manager Bill Hwang, had run into trouble in the wake of a “margin call” (see below) from its lenders, triggering the sale of more than $20bn-worth of shares. So what happened, and is it anything that you need to worry about?

Archegos’s problems appear to have been triggered by ViacomCBS specifically. Between the start of the year and 22 March, shares in the media conglomerate almost tripled in value. Viacom decided to take advantage by issuing new shares. The share price fell, partly because existing shareholders would be diluted, but also because it had already seen such extraordinary gains, and no doubt some investors were looking for excuses to take profits. The decline appears to have triggered the margin call, and the resulting share sale exacerbated the decline.

Investment banks Goldman Sachs, Morgan Stanley, Credit Suisse and Nomura all provided “prime brokerage services” (the lending of cash and securities) to the fund. However, it looks as though the latter two have borne the brunt of the liquidation, by being later to sell than the former two. Both Credit Suisse and Nomura saw double-digit share-price falls early this week as they warned of potentially hefty first-quarter losses.

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This is all very well, but what does it mean for you? Previous big fund blow-ups include LTCM in 1998 (which was much more systemically important and was bailed out as a result), and Amaranth in 2006 (which lost billions betting on natural gas but had little wider market impact). So far it looks as though Archegos is more like the latter. It’s embarrassing for the banks involved to have enabled such extraordinary levels of leverage – as Robin Wigglesworth puts it in the Financial Times, Hwang’s strategy looks “like a Reddit day trader got access to a Goldman Sachs credit card and went bananas” – but so far losses are contained.

But wary investors might note that past blow-ups have occurred closer to market tops than bottoms. One reason Hwang could borrow and bet so heavily is that investors are fear missing out on gains more than losing money. But when that mood turns, profits can evaporate fast. The biggest risk, says Wigglesworth, may be that “a debacle of this magnitude encourages the entire investment banking industry to scale back how much leverage they offer”. The main consolation is that would most likely hit the most expensive parts of the market hardest.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.