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  • Writer's pictureEmily Dow

old habits die hard - HK to NYC - Bill Hwang

Bill Hwang (pictured below) has had his moments in the limelight in the finance industry. Back in 2001, Hwang founded Tiger Asia Management and traded through a hedge fund called Tiger Asia. This quickly grew to be a multi-billion dollar hedge fund, and Bill was nicknamed a 'Tiger Cub'. However, in 2012 Bill (along with Tiger Asia itself) pled guilty to wire fraud (the type of fraud that is electronically transmitted), insider trading and manipulation of Chinese stocks. This led to criminal and civil settlements to the SEC (Securities and Exchange Commission - securities market regulators) of $44m, as well as being banned from trading in Hong Kong in 2014.

Like the industry - relentless and remorseless by nature - Hwang didn't spend long out of action or lying low. By 2013, he had closed and transformed the Tiger Asia fund into a New York based family office called Archegos Capital Management, where he has since traded his personal wealth from. A family office is a privately owned company which is the sole investment and wealth manager for ultra high net worth individuals or families. They manage no external money, and the exact definition is hard to pinpoint, reflecting the regulatory issues that arise with them, as will be explored later. It is estimated Archegos' wealth in early 2021 had reached over $10bn, essentially reflecting Hwang's own wealth.

Now, none of this is new news. But just last week there was a mystery fire sale of shares causing the share price of some large media companies to fall 50% from their record highs. You guessed it, Archegos Capital are at the centre of this. The trades, which peaked on Friday 26th March 2021 involved unusually large block trades (a trade involving a large number of securities) by banks such as Morgan Stanley and Goldman Sachs, totalling over $19bn at discount prices. This was in an attempt to try and gain the money owed to them by Archegos. These sales slashed $33bn worth of value off of the companies involved, mainly Chinese tech and US media firms.

A couple of days prior, one of Archegos' prime brokers (who lend money, structure and process trades for hedge funds, in Archegos' case Goldman Sachs, Morgan Stanley, Nomura, Deutsche Bank, Credit Suisse) issued a margin call (this happens when the value of an investor's margin account dips below the broker's required amount), leaving Archegos with the choice of either depositing more money or selling some of their assets. This was triggered because Archegos' fund was highly exposed to Chinese tech and US media firms whose stocks had fallen substantially in the days prior, requiring action by Archegos. The margin call prompted Goldman Sachs and Morgan Stanley, who were managing the sales, to inform counterparties about a "forced deleveraging", says the FT. Archegos couldn't meet the margin call, thus triggering calls across other prime brokers who were then forced to liquidate their holdings. This caused a large knock on impact, explaining the batches of trades occurring across the market last Friday.

Large banks tried to find a solution rather than making such a large margin call, however it was Hwang's own purchases of the stock that had triggered bench-mark traders (a benchmark is a standard which the performance of other stocks can be measured against) and exchange-traded funds (type of investment fund very similar to mutual funds, however they're traded throughout the day on stock exchanges rather than at their price at the end of the day like a mutual fund) to purchase stock as well. In other words, without his purchases creating force and such demand in the market, the stocks involved were unlikely to rebound - leaving banks with no choice but to impose the margin call.

Before the collapse of Archegos, the shares of ViacomCBS Inc., who own Paramount Pictures, MTV, Nickelodeon, to name a few, had increased by almost 300% in a matter of weeks. External speculators assumed the stock was just greatly undervalued (like the Gamestop battle against hedge funds in January), however Wall Street executives knew the substantial increase was due to a large firm (now known to be Archegos) accumulating and building a sizeable position in ViacomCBS Inc. Banks across the world continued to provide Bill Hwang with the leverage he needed (meaning he borrowed a large sum of money to place these positions on), allowing him to collect over $10bn of Viacom and considerable positions of other firms too, with at least nine stocks placing him as the largest holder.

As would be expected, the SEC are launching an investigation regarding the events. This involves digging deeper into a potential phone call held by some of the large banks before these large block trades, as well as (unsurprisingly) Bill Hwang himself. This is to be expected, however, when unprecedented and extreme events like last Friday take place, so it cannot be said right now as to whether anything will come from these investigations.

One positive outcome to this market event is there may now be a greater focus on the relationship prime brokerages have with highly leveraged hedge funds, Sheila Bair (former chairman of the Federal Deposit Insurance Corp.) revealed. This is necessary to avoid future events such as this one; prime brokerages only had visibility of Hwang's total borrowings and the trades they themselves finance. Everything else is somewhat fuzzy. Although too much transparency could be detrimental when it comes to competitiveness, protection of intellectual capital, as well as client confidentiality, the opacity experienced here meant banks were unaware (until it was too late) Hwang was requesting liquidation of his same positions from multiple banks - their rivals - too, allowing the reported accumulation of leverage on the same stocks.

In my opinion, this is an extreme example of what happens when there is a lack of regulation of family offices. In the US, the Investment Adviser Act 190 covers firms with fewer than 15 clients, and therefore family offices do not need to register with the SEC, meaning they are significantly less regulated. This means that Archegos, for example, are not under any obligation to report financial information, such as the type and size of their assets, information on equity holdings, etc. Campden Research reports that as of 2019, family offices managed almost $6tn in assets. Maybe in the past, monitoring and trying to evaluate the systematic risk (events of one company causing instability and in extreme cases, collapse of entire industries and economies) and threat of family offices would have been a waste of resources (graph below by the FT depicts the increase in family offices), however now they hold such a high value of assets in the market (over 7000 family offices with AUM (assets under management) of a large $5.9tn), the threats they pose can cause shockwaves, as experienced on the 26th. The systematic impacts of this event are undeniable. Two large investment banks, Credit Suisse and Nomura experienced 14% and 16% drops in their stock respectively due to connections with the impromptu sale of assets that Archegos' fund was forced into. This relates to an actual loss for Credit Suisse of potentially $4bn, while Nomura have reported a potential $2bn loss.

After researching my opinions on regulation of family offices, I found Dan Berkovitz at the US Commission Futures Trading Commission (CFTC) has voiced too that family offices can cause extreme events in financial markets, concluding monitoring of family offices "must be strengthened". The business school Insead stated family offices are "growing faster than global wealth", only emphasising their increasing prominence in the financial sector. Regulation and monitoring should evolve with the industry, and if new regulations are not put in place, there will be a forever larger proportion of trades left unregulated, creating huge a systematic risk. In a report by the FT, it was flippantly said "The information required [to operate under a family office] would fit on a Post-it note" and further adding, "the CFTC estimated the annual cost of the filing [to become a family office] to be merely $28.50". This exemplifies the accessibility (once you are a HNWI, of course) of becoming a family office. Likely when there was a smaller volume of family offices in the economy, this was not on the SEC's list of threats, understandably, and therefore they left theme effectively unregulated. The cost of regulation was more than any threat they could bring to the markets. However, Archegos' collapse should be a warning that family offices pose large systematic risk to the financial industry and can causes multi-billion dollar losses for large investment banks, with unknown domino effects, calling for increased regulation, communication and transparency.

Sources used:

How Bill Hwang got into bank's good books - then blew them up

Investors hunt for source of fire sale that sent stocks tumbling

Leveraged Blowout: How Hwang's Archegos Blindsided Global Banks

'They can do what they want': Archegos and the $6tn world of the family office

SIMPLY PUT: The ripple effect of Archegos Capital's collapse may cost global banks $6 billion

What is Bill Hwang's Net Worth? Archegos Capital Founder's Wealth Explored

'One of the greatest losses of wealth ever': Archegos Capital Management boss Bill Hwang reels after meltdown

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