BILLIONS OF DOLLARS OF SECRET DERIVATIVES BEHIND ARCHEGOS SELLOUT
The forced liquidation of more than $20 billion in holdings linked to Bill Hwang’s investment firm is drawing attention to the covert financial instruments he used to build large stakes in companies, Sofia Horta e Costa, Tracy Alloway, and Bei Hu reported for Bloomberg News.
Much of the leverage used by Hwang’s Archegos Capital Management was provided by banks including Nomura Holdings Inc. and Credit Suisse Group AG through swaps or so-called contracts-for-difference (CFDs), according to people with direct knowledge of the deals. It means Archegos may never actually have owned most of the underlying securities -- if any at all.
While investors who build a stake of more than 5% in a US-listed company usually have to disclose their position and subsequent transactions, that’s not the case with stakes built through the type of derivatives apparently used by Archegos.
The products, which are made off exchanges, allow managers like Hwang to amass stakes in publicly traded companies without having to declare their holdings.
The swift unwinding of Archegos has reverberated across the globe after banks such as Goldman Sachs Group Inc. and Morgan Stanley forced Hwang’s firm to sell billions of dollars in investments accumulated through highly leveraged bets.
The selloff roiled stocks from Baidu Inc. to ViacomCBS Inc. and prompted Nomura and Credit Suisse to disclose that they face potentially significant losses on their exposure.
One reason for the widening fallout is the borrowed funds that investors use to magnify their bets: a margin call occurs when the market goes against a large, leveraged position, forcing the hedge fund to deposit more cash or securities with its broker to cover any losses.
Archegos was probably required to deposit only a small percentage of the total value of trades. The chain of events set off by this massive unwinding is yet another reminder of the role that hedge funds play in the global capital markets.
A hedge fund short squeeze during a Reddit-fueled frenzy for Gamestop Corp. shares earlier this year spurred a $6 billion loss for Gabe Plotkin’s Melvin Capital and sparked scrutiny from US regulators and politicians.
The idea that one firm can quietly amass outsized positions through the use of derivatives could set off another wave of criticism directed against loosely regulated firms that have the power to destabilize markets.
WEEKLY FEATURE : BONNER DYTOC SHOWS THE WAY IN STOCK PLAY