Course:

COMMODITIES AND
ALTERNATIVE INVESTMENTS
Course Instructors: Umang Somani, CAIA (vf-umang@gim.ac.in)

Session 3: Fall of Archegos Capital

Archegos Capital Management

• About the Firm

• Role of Total Return Swaps
• What prompted the sell off?
• How it roiled the markets?
• Who got hurt?
• Moral of the story
Archegos Capital Management

• Archegos is the family investment vehicle owned by Mr. Hwang, a former

protégé of hedge-fund titan Julian Robertson.

• Family offices are private wealth management advisory firms that serve
ultra-high-net-worth individuals (HNWI).

• They are different from traditional wealth management firms in that they
offer a total outsourced solution to managing the financial and investment
side of an affluent individual or family.

• Family offices have low disclosure requirements and low regulations as

compared to hedge funds and PE funds
Archegos Capital Management

• Mr. Hwang was a so-called Tiger cub, an offshoot of Mr. Robertson’s Tiger
Management.

• Mr. Hwang founded Tiger Asia in 2001. Based in New York, it went on to
become one of the biggest Asia-focused hedge funds, running more than
$5 billion at its peak.

• In 2012, the Tiger Asia pleaded guilty to a criminal fraud charge for using
inside information from investment banks to profit on securities trades.
Archegos Capital Management

• Archegos is estimated to have managed about $10 billion of its own

money.

• But its total positions that were unwounded in March 2021 approached
$30 billion (thanks to leverage Archegos obtained from banks).

• The firm isn’t known to have managed outside capital.

Archegos Capital Management

• About the Firm

• Role of Total Return Swaps
• What prompted the sell off?
• How it roiled the markets?
• Who got hurt?
• Moral of the story
Role of Total Return Swaps

• Archegos took big, concentrated positions in companies and held some

positions via this financial instrument called “total return swaps.”

• A swap is a derivative contract through which two parties exchange the

cash flows or liabilities from two different financial instruments.

• A total return swap is a swap agreement in which one party makes

payments based on a set rate, either fixed or variable, while the other
party makes payments based on the return of an underlying asset, which
includes both the income it generates and any capital gains.
Role of Total Return Swaps

• In total return swaps, the underlying asset, referred to as the reference

asset, is usually an equity index, a basket of loans, or bonds. The asset is
owned by the party receiving the set rate payment.

• Those are contracts brokered by Wall Street banks that allow a user to take
on the profits and losses of a portfolio of stocks or other assets in
exchange for a fee.

• Swaps allow investors to take huge positions while posting limited funds
up front, in essence borrowing from the bank.
Role of Total Return Swaps

• The use of swaps allowed Mr. Hwang to maintain his anonymity.

• Swaps can amplify the size of an investment in a stock by allowing the

investor to put up only limited funds up front.

• When the underlying investments went the wrong way, the banks sold the
shares they held on behalf of the investor.

• This selling reinforces the drop in the shares, which helps explain why the
stocks that Archegos had invested in fell so sharply.
Archegos Capital Management

• About the Firm

• Role of Total Return Swaps
• What prompted the sell off?
• How it roiled the markets?
• Who got hurt?
• Moral of the story
What prompted the sell off?

• Mr. Hwang’s strategy began backfiring in March 2021, as the stock price
of companies in which Archegos had significant exposure, including China
internet-search giant Baidu and Farfetch, began to sell off.

• Baidu’s stock price rose sharply in February 2021, but by mid-March its
shares had dropped more than 20% from its highs.

• ViacomCBS on March 22nd, 2021 announced a sale of common stock,

which put further stress on Archegos.
Archegos Capital Management

• About the Firm

• Role of Total Return Swaps
• What prompted the sell off?
• How it roiled the markets?
• Who got hurt?
• Moral of the story
How it Roiled the Markets?

• ViacomCBS on March 22 announced a sale of common stock, which put

further stress on Archegos, with news of the deal sparking a slide in the
shares and adding to Archegos’s mounting losses.

• The fund by that time had started selling some of its position in
ViacomCBS to try to offset losses, adding to pressure on the stock.

• But once the stock prices started to fall, Archegos’s banks started selling
huge chunks of shares in the market in what are known as block trades.
Archegos Capital Management

• About the Firm

• Role of Total Return Swaps
• What prompted the sell off?
• How it roiled the markets?
• Who got hurt?
• Moral of the story
Who all got hurt?

• Credit Suisse said it will take a $4.7 billion hit and two top executives will
leave their roles. Though they ended up loosing more than $5.5bn.

• Nomura warned investors of a $2 billion loss.

• Mitsubishi UFJ Financial Group Inc. of Japan said it could lose $300 million
from its exposure to a U.S. client
Who got hurt?

• Deutsche Bank said it has sold off its exposure and will emerge unscathed.

• Goldman Sachs and Morgan Stanley were quick to move large blocks of
assets before other large banks that traded with Archegos Capital
Management, as the scale of the hedge fund’s losses became apparent
Archegos Capital Management

• About the Firm

• Role of Total Return Swaps
• What prompted the sell off?
• How it roiled the markets?
• Who got hurt?
• Moral of the story
Lessons from the fall of Archegos
• Leverage and opacity amplify risks in the global banking system.

• In response, as a starting point, the following steps should be taken:

• Require greater public disclosure for family funds, so that market

participants and regulators can understand the risks they pose;

• Maintain the current supplementary leverage ratio*, which provides a

critical cushion of capital to the largest banks

• The biggest lesson from the Archegos implosion – and the one that
will most impress bankers – is that in the event of a fire sale, those
who don’t get out quickly end up getting badly singed.
*The supplementary leverage ratio is the US implementation of the Basel III Tier 1 leverage ratio, with which banks calculate the amount of common equity capital they must hold
relative to their total leverage exposure.
Questions?