Archegos Capital Blowup | Bill Hwang’s Margin Call

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

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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

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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

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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}

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