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Archegos Wipeout Fiasco

In this week's FinMail we look at one of the biggest personal wealth wipeouts that sent shockwaves around the globe.

The Context:

Bill Hwang, a name that was probably been wiped off the minds of the Finance Industry Participants came ringing back a few weeks back to the Stock Markets and this time with a much bigger fiasco. Bill Hwang, after settling an insider trading case with the SEC in 2012 at $44 Million, was quietly and steadily building his Investment Portfolio later on since 2013. Reports suggest that he accumulated more than $10 Billion before things haywire.

As it is said that "All it needs is a Push" and so it happened - A Push. But with Bill, it proved to be his worst nightmare. This week's FinMail is going to be filled with lots of lessons about Money, Finance, and Personal Finance and, it is going to be a hell of a ride. So strap on your seat belts and let's ride out.

The Story of Bill Hwang can be presented totally in Bollywood style because there are flashbacks, rise, fall, comebacks, and bloodbath everything that you expect. A mind-boggling fortune made in stealth and then wiped out publicly in a blink. Flashback to 2012 - Bill Hwang pleaded guilty to Insider Trading for his Hedge Fund - Tiger Asia Management and paid $44 Million towards the fees. He then went on to create a Family Office to manage his assets named Archegos Capital Management.

What is a Family Office?

Think of A Family Office as a Hedge Fund but private to families. These Family Offices manage the wealth that can be as high as Billion Dollars. They manage the private wealth of the rich families as it is nearly impossible to track investments in different asset classes of such huge numbers. So to manage this wealth, they appoint a Private Fund Manager or a team who has only one task - To ensure proper management of the Family's Wealth and to see that it sustains through various generations. (Kitna Struggle Hai!)

Bill being a former hedge fund manager was managing his own private wealth through his Family Office. There is no such report that can provide a strong lead about the number of the Asset that Bill was managing but some suggest that it can go up to $10 Billion at least. So what happened is Bill was slowly and stealthily growing his assets by purchasing shares of some finite companies and was heavily optimistic on the same. These selected stocks include - Discovery Communications, Viacom CBS, RLX Technology, GSX Techedu, Baidu Inc., etc. His optimism on such stocks was so high that he was even ready to buy these stocks on leverage. Leverage as high as 8-10 times. This means that if you have a ₹100 on hand, the brokers are ready to give you a leverage of up to₹1000 which essentially means that you will be able to buy stocks worth ₹1000 by just depositing ₹100. By taking this extra leverage he was betting on the stocks to rise in prices and earn extensive profits from them. Basically, greed took over him to the extent that he was ready to borrow to buy more stocks. And this is when things started going south for Hwang.

How was Bill Hwang able to obtain more leverage?

Through Private Swap Deals. What is this deal? In simple words, Bill reached out to the brokers with a deal that he would be giving them a fixed rate of interest (let's say 6%) every year in exchange that the brokers would buy the shares of his choice on his behalf. For example, if Bill wants to buy shares worth $8 Million, he would give $1 Million and the brokers would pay the rest ($7 Million) and Bill would provide $420k at the end of the year to the brokers. If the shares appreciate, then the brokers would be liable to provide the appreciated money, and if they decline, then Bill would pay the balance at the end of the year. Simple, Risk-Free Deal, at least that is what the brokers thought. Goldman Sachs was hesitant to provide leverage to Bill because of his history but eventually gave up to the greed of earning more fees from a Billionaire.

What went wrong?

You know, "Dena Vala Jab bhi Deta Deta Chappad Faad Ke" but in Bill's case, it was numerous difficulties that God sent back to back. In the First of the moves that led to the fall, Viacom Media CBS decided to raise more capital of $3 Billion by issuing new shares at discount. Now that is not a problem for those who are not already invested but for those who are existing shareholders, it is bad news because it would decrease their proportionate ownership in the company and when you own a big chunk of a company as large as 50%, imagine the impact. This news led to a decrease in the price of Viacom by 10%.

The next blow was a regulation change proposal by the Government of China regarding Vaping Products which would negatively impact RLX Technology an e-cigarette manufacturing company. The result - A Decline of 40% in a week.

The next big holding asset was GSX Techedu which is a stock that is being heavily targetted by Short Sellers because of various reports suggesting that the company uses Fake Users to post Active User Numbers.

If those not enough for the fate to bring upon Bill, SEC brought upon a rule that would require foreign companies listed in U.S to disclose their involvement with their countries' government. While this looks like a rule for all, experts suggest that this rule was particularly brought upon to target China and the Chinese Government's involvement in the companies. This, as a result, bought upon a heavy decline in related stocks like Tencent Music and Baidu Inc. which again unfortunately Bill's Archegos Capital was invested in.

Who would have imagined that all these declines and that too in the near span of days? These declines resulted in huge Mark-to-Market losses in the portfolio due to which the brokers who have lent money, had to make margin calls. Margin calls are basically a call to deposit more money to cover the decrease in the value of the collateral. Here the collateral is the shares purchased on leverage. And when the brokers called for margin settlements, Bill couldn't simply deposit such a large amount of money due to lack of liquidity which made a chill run down the spines of these brokers as they realized that they wrote the script of a disaster.

Reports suggest that his position would have easily been $100 Billion and even more who knows. This declines bought down the Portfolio of Archegos by 27% within one day. Imagine losing 27% in one day! Bloodbath isn't it? And for those who have invested such a huge amount on leverage, it could mean that the whole wealth of Archegos could have been wiped out within one day.

And when these brokers were left with nothing, they had to sell these stocks in the market in huge block deals. (in bulk) Because there is only one option other than selling stocks which is to hold them and wait for them to rise again. But it was not a feasible option which was later proved when Credit Sussie announced that the company could face losses up to the extent of $2 Billion due to the decline of these shares before they could even sell them. Goldman Sachs and Morgan Stanley were able to exit them before much damage was done and Credit Suisse and Nomura were the ones who suffered the most.

Long story short, this incident would be a classic case study of what bad could happen due to Greed. Leverage-Investing is often utilized by Investors to magnify their profits but leverage often comes with a downside which we now probably know of.

Here the Greed is not just from the side of the Family Office, Archegos but even from the brokers who turned greedy to earn that extra fee from a Multi-Billionaire and ended up posting losses. It even teaches us that no matter even if you are a Hedge Fund Manager, you still can be worse with your own money because there's no limit to the emotion that is attached to one's own money.

This incident has nothing to do with Indian Financial Markets, it won't affect us in any way but it has everything that an individual investor needs to learn about Money, Investing & Personal Finance.

As someone once said, "Things that can't happen happens all the time."

So that is it for this week's FinMail. We hope you're taking some positive lessons from this incident. Keep learning & we will see you next week.


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