The Rise and Fall of Archegos Capital Management: A Lesson in Risk Management

Who was Archegos Capital Management and what did they do to create the financial turmoil?

Archegos Capital Management was a family office that managed the personal wealth of Bill Hwang, a former hedge fund manager and protégé of legendary investor Julian Robertson. Instead of directly owning the stocks, Archegos used total return swaps to gain exposure to the price movements of a handful of stocks, such as ViacomCBS, Baidu, Vipshop, and Farfetch. The total return swaps also allowed Archegos to leverage its bets by borrowing money from several banks that acted as its prime brokers.

However, this strategy backfired in late March 2021, when ViacomCBS announced a $3 billion stock offering that triggered a sharp sell-off in its shares. This put pressure on Archegos’ margin requirements, and when it failed to meet these margin calls, its prime brokers began to liquidate its positions in a fire sale that sent shockwaves across the market.

Who were the biggest winners and losers out of this underlying deal?

The biggest losers in this deal were Archegos and its founder Bill Hwang, who reportedly lost $20 billion in just two days. Hwang was also indicted and arrested on federal charges of fraud and racketeering in April 2022. Among the banks that lent money to Archegos, Credit Suisse and Nomura Holdings suffered the most significant losses of $5.5 billion and $2.85 billion, respectively. Other banks that were exposed to Archegos, such as Morgan Stanley, UBS, and Mitsubishi UFJ Financial, also faced losses but managed to exit their positions more quickly.

The biggest winners in this situation were some of the hedge funds that took advantage of the opportunity created by Archegos’ forced liquidation. These hedge funds bought some of the stocks dumped by Archegos at discounted prices and made profits as they rebounded later.

What happened to Credit Suisse in this deal?

Credit Suisse was one of the main lenders to Archegos and suffered a staggering $5.5 billion loss when it had to unwind its positions after Archegos defaulted on its margin calls. This loss was one of the worst trading losses in Credit Suisse’s history and resulted in significant reputational damage for the Swiss bank. Credit Suisse faced criticism for its slow and ineffective handling of the situation compared to other banks that moved faster to limit their exposure. As a result of this debacle, Credit Suisse announced several changes in its senior management team, including replacing its chief risk officer, investment banking head, equities sales & trading Americas head, global head of prime services, and head of credit risk management.

Conclusion:

The collapse of Archegos Capital Management serves as a cautionary tale of the dangers of leveraging and poor risk management in the financial industry. The fallout from this event will have long-lasting consequences for banks and investors alike. As we move forward, it is essential to learn from this incident and take steps to ensure that proper risk management measures are in place to prevent such events from occurring again in the future.

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Keywords: Archegos Capital Management, financial turmoil, risk management, total return swaps, leverage, margin calls, Bill Hwang, Credit Suisse, Nomura, hedge funds

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