Archegos Icarus

A formerly unknown operator, Bill Hwang runs Archegos Capital; a fund now recognised globally. Over the last eight years, Hwang increased his fund from US$200m to US$20b in assets. As impressive as that number is on the surface, understanding how 100x was possible is startling.

Hwang made use of leverage; a lot of leverage. For every $100 of investing, $85 came from their broker (85% leverage). If the $100 investment doubled, $115 would belong to Archegos and only $85 would be repaid (before fees). If the $100 investment fell just 15%, the stocks would need to be liquidated to repay the bank; the infamous margin call.

Now, Archegos began their investment journey by leveraging into momentum stocks in the tech space. As the price rose, the fund would increase its leverage.

This began a self-fulfilling, albeit dangerous, cycle. Archegos would invest, the stock price would increase, Archegos would increase their leverage and invest more into the stock, prices would skyrocket, etc. Names like Viacom ran from $20 to peak at $100 last month.

And then the inevitable happened. Stocks started to fall. Hwang was expected to contribute US$300m to Viacom’s stock issuance. After a bad night in Asian markets, Archegos was unable to foot the bill. The stock issuance was inadvertently completed without Hwang’s contribution. As the market caught wind, Viacom plummeted 50% in the last week of March. As the largest shareholder in the company, Archegos was forced to liquidate as the margin calls came in.

Archegos called together a meeting with all brokers to strategise an effective unwinding. Not all parties were willing to leave a decision to negotiate and compromise. Goldman Sachs dumped billions in stocks in indiscriminate block trades. US$35b was wiped off the market as names like Shopify and Tencent Music were sold off. Other banks were caught with losses as overleveraged positions were not sold in time. Hwang’s portfolio sits at a fraction of what it was before.

More information will arise in the coming months as the dust settles. A story rivalling Billion Dollar Whale and not far from the Big Short will no doubt receive the attention it deserves.

One of our favourite finance writers, Bloomberg’s Matt Levine, breaks it down perfectly in his blog here including how such a situation was possible in the first place.