Archegos – how a massive fund bust has hit banks

The collapse of Archegos Capital Management has caused big losses at the banks that lent it money to bet on stocks. Matthew Partridge reports

Shares in investment banks Credit Suisse and Nomura sank by more than 10% this week after they warned of “substantial losses” , says Quentin Webb in The Wall Street Journal. Credit Suisse says its loss could be “highly significant and material” to its first-quarter results, while Nomura reckons it could lose up to $2bn (it made $2.82bn between April and December 2020). The losses stem from “fire sale of stocks” involving around $30bn of assets that occurred after Archegos Capital Management, a family investment vehicle managed by Bill Hwang, failed to meet a margin call. The banks, which lent the fund money to bet on stocks, had to sell off the stricken fund’s losing positions. 

Both banks should have been more alert to the risks, say Antony Currie and Jennifer Hughes on Breakingviews. While the amount of leverage Hwang used wasn’t “excessive”, there were “plenty of other warning signs”. The fund’s concentrated positions in high-risk technology stocks “such as Baidu, Discovery and GSX Techedu” were a red flag, as was the use of derivatives, possibly to mask his positions. Hwang himself was also a “walking risk factor”: he was “banned from trading in Hong Kong for four years” after one of his previous funds, Tiger Asset Management, was involved in “wire fraud”.

Who else is affected?

Nomura and Credit Suisse are unlikely to be the only banks involved, says Erik Schatzker and Sridhar Natarajan on Bloomberg. Goldman Sachs appears to have “fuelled a pipeline of billions of dollars in credit” for Hwang to make “highly leveraged bets” on tech stocks; the bank has admitted that it was involved in selling at least $10.5bn of Hwang’s portfolios last week. However, it seems to have gotten off lightly, since it has reportedly told clients and shareholders that it believes that any losses sustained as a result of the sales “are likely to be immaterial”. Whatever happens to the banks involved, the collapse of Archegos Capital Management is also likely to be bad for the shares of the companies it was betting on, says Edmund Lee in The New York Times. A case in point is the media company ViacomCBS, which fell by 50% last week after rising nearly tenfold in the past year. Part of this decline was due to the decision to “offer new shares to raise as much as $3bn”, which prompted a number of analysts to downgrade its price. But the sale of 30 million shares by Archegos Capital Management on Friday was undoubtedly key. 

At least ViacomCBS was sensible enough to use the share-price boom to raise cash before the bottom fell out of its shares, says Lex in the Financial Times. However, the collapse of Archegos Capital Management is a reminder that record stockmarket valuations mean that “altitude sickness exacerbated by leverage” is an “ever-present risk”. Investors need to ponder whether the “reckoning” over high equity valuations will spill over “into other stock and investment funds”. 

Recommended

Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
The MoneyWeek Podcast: how to not lose money to inflation and financial repression
Investment strategy

The MoneyWeek Podcast: how to not lose money to inflation and financial repression

Merryn talks to Peter Spiller of the Capital Gearing Trust about how he navigated the last extraordinary year; what he's buying now; and how he plans …
16 Apr 2021
UK mid-cap stocks look forward to life after lockdown
UK stockmarkets

UK mid-cap stocks look forward to life after lockdown

The FTSE 250 hit an all-time high at the end of last week, as investors look to a post-lockdown recovery.
16 Apr 2021

Most Popular

China owns a lot more gold than it’s letting on – and here’s why
Gold

China owns a lot more gold than it’s letting on – and here’s why

In a world awash with money-printing, a currency backed by gold would have great credibility. And China – with designs on the yuan becoming the world’…
21 Apr 2021
“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
House prices in the UK are still surging – here’s why it’ll probably continue
Property

House prices in the UK are still surging – here’s why it’ll probably continue

The latest UK house price data shows no letup in the country’s booming property market, with the biggest yearly rise since 2014. And there’s no end in…
22 Apr 2021