How one fund’s bad bets are roiling global markets

Credit Suisse and Nomura Holdings warned this morning that they faced huge losses from a multibillion-dollar fire sale of stocks held by just one investment firm, Archegos Capital Management. It’s the latest sign of the fragility of the global markets, and could spur more attention from regulators on the murky world of swaps and hedge fund borrowing.

What we’ve learned so far: Archegos manages the personal fortune of the former hedge fund mogul Bill Hwang, who won Wall Street’s business despite having pleaded guilty to insider trading years ago. It amassed huge positions in media giants like ViacomCBS and in several Chinese tech companies — largely with borrowed money.

The Archegos strategy included using swaps, contracts that gave Mr. Hwang financial exposure to companies’ shares while hiding both his identity and how big his positions really were. (It is also becoming increasingly apparent that several Wall Street banks lent Archegos money without knowing that others were doing the same thing for the same trades.)

Trouble for Mr. Hwang, and his banks, arose when the prices of those stocks started to fall. That prompted some of his lenders to demand cash to cover his bets. When they began to question his ability to do so, some of them, including Goldman Sachs and Morgan Stanley, seized some of his holdings and kicked off the sale $20 billion worth in huge block trades.
That forced selling led to even bigger drops in the prices of those stocks, starting a vicious circle.

Credit Suisse and Nomura acknowledged being hit especially hard. Credit Suisse told investors that a “U.S.-based hedge fund” had defaulted on its margin calls, which could lead to losses that were “highly significant and material to our first-quarter results.” Nomura said that one of its U.S. arms could suffer “a significant loss” because of the forced sales. Shares in Credit Suisse were down 14 percent this morning; those in Nomura were down 16 percent.
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Goldman, on the other hand, has told investors that its potential losses are “immaterial,” having covered its exposure.

Worries about a reckoning for the markets. Some bankers told The Financial Times that Archegos’s downfall highlighted the risk of one firm taking on so much leverage from multiple banks. (It also raises fresh questions about whether the mania for meme stocks, largely attributed to day traders, was actually fueled by hedge funds jumping into the trading.)

One person who is surely paying attention is Gary Gensler: President Biden’s pick to lead the S.E.C. has been an advocate for market transparency, having argued that unregulated dark pools could cause a broader risk to the U.S. economy.
The New York Times