Archegos Capital: The little-known family office of Bill Hwang convinced almost every big bank to lend enormous sums to it. One of the so-called Tiger Cub veterans of Julian Robertson’s Tiger Management fund, Hwang was a man who had run into trouble before, having been banned from trading in Hong Kong and fined millions in the US to settle illegal trading charges in 2012. Hwang used to run a hedge fund called Tiger Asia, but he returned outside money after his trading misadventures. Now he is the man behind Archegos Capital, the family office that has become a stark example of what happens when banks give out too much leverage and call it back all at once.
Welcome back everyone a quick video today on the blow up of archegos capital let’s talk about who the issues of leverage and the total return learn something useful from the situation. now the reason i didn’t rush to make a video on this topic is that there’s nothing i find more annoying than the type of person who
Steps in after a disaster like this to kick a guy while he’s down. it’s a bit like when you’re watching a sporting event with a friend and an athlete fumbles the ball and your friend says “what an idiot i wouldn’t have made that mistake” and you think “well of course you wouldn’t have made that mistake you’re sitting
On a couch eating cheetos” “the biggest mistake you’re gonna make today is to spill beer on my couch” you know it’s a it’s a different thing so while i could make a video where i make all sorts of jokes about the losses lessons that we could take away from this story this loss that happened over a day or two has
To be one of the greatest losses of personal wealth is he a dummy well he started out his career working for julian robertson who’s one of the most legendary fund managers julian robertson ran tiger management which was one of the best performing hedge funds in history and he’s simons he’s one of the greats
I think he turned 8.8 million dollars into 22 billion dollars over a 20-year period and robertson used to cede the funds of his top traders when they left his firm and those funds went on to have great returns and they were known as tiger cubs they often had the word tiger in their name and bill huang is one
Of the people seated by julian robertson so it’s probably reasonable to say that he’s not a dummy so bill started up a fund that was called tiger asia management in 2001 which went on to be one of the biggest asia-focused hedge funds managing more than 5 billion at its peak he took a beating in 2008 during the volkswagen
Short squeeze but overall had good returns now of course in 2012 he was accused of insider trading in chinese bank stocks he pled guilty to a criminal fraud charge and paid 44 million dollars to settle his case with the securities regulators he then wound up his fund and he was no longer eligible to take outside
Money so in theory at that point bill might have found himself permanently blacklisted by the investment banks that’s kind of what you would expect but a year later he’s back in the game with a family office meaning that he now managed only his own money and he called this uh archigos capital management so he was now
Just managing 200 million dollars of his own money back in 2012 i think most of the brokers wouldn’t touch him but equally when you have 200 million dollars there is always someone who will help out and hold it for you for a small fee and soon many of the world’s top investment banks were competing for his
Business so bill was back up and running it’s worth being clear that this was not a hedge fund that’s being reported in the press it’s a wealthy individual who traded like a hedge fund because he was a former hedge fund manager and he used the prime brokerage services of the banks to do so service version of brokerage at
An investment bank and it’s reserved for the biggest clients being a family office he’ll have gotten much more privacy than a hedge fund would and that’s why he had a reported net worth of over 10 billion dollars without anyone really hearing much about him at all so he ran his family office for eight years
Million dollars into 10 billion dollars that’s an annualized return of around 63 percent a year over eight years which is just a massive return the returns might have been even higher as it would appear that he donated 500 million dollars to one charity and possibly donated to many more charities some of the news are
Reporting that he was in business for nine years but i don’t think that’s true because it took him a year to wrap up his fund and get going again if the nine year number is correct it means he returned around 55 percent a year and of course over the last week it would appear that he lost all of that money and
And nomura warned their investors and banking regulators this week that they face billions of dollars in losses after archigos defaulted on billions of dollars for highly levered bets on u.s and chinese stocks nomura warned yesterday that they’re facing a two billion dollar estimated loss and the financial times
Reports that credit suisse has losses of three to five billion dollars the people at softbank obviously must be kicking themselves that they weren’t involved there they’re slipping so you get anyhow a pretty good understanding of the way that the prime brokers look at the way goldman behaved in this case
All due to his history of insider trading then suddenly they’re doing everything they can to get him as a client and lend him money when he was a 200 million dollar client the fees they generated would have been small and when he’s a 10 billion dollar client who trades a 60 to 80 billion dollar line greed trump’s fear
It would appear that huang had prime brokerage arrangements with goldman sachs morgan stanley credit suisse nomura and deutsche bank and maybe more now the full picture of his positions is still emerging and it’s not yet clear what the catalyst was for this liquidation or what his hedges were but you can
Clearly see what the big positions were based on the block sales that we saw in the market stocks but he did it through total return swap so he didn’t buy the actual stocks he invested in total return swaps and total return swaps are a derivative that’s also known as contracts for difference and they allow you to get the
Returns reference asset without actually having to own it you enter this agreement typically with a bank which will usually have a funding cost advantage of capital upfront and thus the position is leveraged the bank will usually borrow money at its funding cost and buy the underlying stock as a hedge
And you can see that banks like goldman and morgan were the largest holders of some of the stocks that were liquidated and they probably held these positions in order to hedge the swaps total return swaps can be used to hide your ownership of a stock but that doesn’t mean that you can use them to break the law there was a
Fund called the children’s investment fund which despite its name was not run by children and they got in trouble a few years ago for using them to avoid disclosing that they built a position of greater than five percent in csx corp another interesting feature of these swaps is that while they give you the economic
Exposure of owning the stock they don’t give you the voting rights and that means that in theory you could buy a stock sell total return swaps and be left with voting rights without being exposed to the returns of the stock anyhow it would appear that bill huang mostly just used these things for leverage and to maintain
His privacy and intrude mostly just for leverage so do i feel bad for the brokerages that lost billions in this not really i feel that they knew who they were dealing with they knew how much leverage they had given him and they made their bet and they lost the news tells us that he was levered between five
Times and eight times his returns were in the range of between 55 a year to as high as possibly 70 a year for eight or nine years and to me this is like letting lewis hamilton borrow your ferrari and then getting upset that he drove it a bit fast what were you expecting it’s what he does right we’ll probably learn more
As more news comes out but it’s somewhat surprising that he wiped out in this market environment over his career he’ll have traded through the ltcm meltdown the dot-com boom and bust september 11th attacks the financial crisis and the coronavirus meltdown a year ago earlier of the volkswagen short squeeze
And survived that that was sort of the old version of the gamestop short squeeze and i’m kind of situations and then got carried out last week the story bloomberg is reporting that the a call in the middle of last week during which coordinate to slowly unwind their positions apparently this was agreed upon
And the story then goes that first goldman and then morgan broke the deal and began dumping their positions that’s the the big block trades that we saw on friday and then hearing that one of these banks once they’d exited their positions leaked the story and that’s why credits reason no more are left holding the
Bag representatives of the banks declined to comment to bloomberg when asked about this but i would think that if that deal actually did occur it strikes me as possibly illegal so what is prime brokerage it’s it’s a business that got big in the early 2000s at the start of the hedge fund boom back then the brokerages
Were earning high fees from these clients and competed with each other for business they would help a hedge fund find an office that’d help you find staff they’d introduce you to potential investors along with providing brokerage services i have a friend who jokes that being an investment banker today is
A bit like being a stewardess it used to be highly paid and glamorous but it’s no longer either of those things today prime brokerage is a low margin business it uses lots of capital and it leaves the bank with a lot of tail risk for some of the banks this blow up will have wiped out obvious to me why some of them are
Even in that business anymore i think they just like being able to say that they deal with the biggest and brightest hedge fund clients it’s more about the prestige than the return on capital years ago trading desks that traded like hedge funds politicians then passed laws that shut down prop trading and now
The banks are just exposed to these risks through their clients like we see in this event that not only are they exposed to these risks but they don’t earn any of the returns if it goes well and as a friend of mine said to me this morning we need smart well-paid people in government who make better rules so for bill
Huang it looks like he’s lost everything he made a big bet and he lost and this is really almost just a huge scale version of the stories you hear about a trader a wall street bets trader levering up their robinhood account and wiping out one of my first big videos here on youtube was a video on leverage
And position sizing and it explains why trading too big is almost guaranteed to wipe you out even if you have an edge and i’ll put a link to that video in the description below if you haven’t watched it it’s kind of worth watching i guess the final part of today’s video is that bloomberg the legendary fund manager julian
Robertson very kindly of him he said that he was a good guy who made a terrible mistake and hurt himself more than anyone see you guys later bye
Transcribed from video
Archegos Capital Blowup | Bill Hwang's Margin Call By Patrick BoyleliveBroadcastDetails{isLiveNowfalsestartTimestamp2021-03-30T222708+0000endTimestamp2021-03-30T224129+0000}