Archigos’ inspiration should wake up US regulators in danger

Motivation of Archigos Capital Management, a fund that has had to liquidate stocks worth more than $ 20 billion, should ask regulators if this is another preventable financial disaster.

Allowing investors to build large stakes in private companies using derivatives hidden from public view — and using borrowed funds to do so — some of the Wall Street prime brokers are handing over their own risk to the police. Maybe that’s not the ideal. Bill Hwang‘S investment firm, had to meet one of the largest margin calls on record, a disaster waiting to happen.

We still need to know more about how Archigos built his whale-like investments — and, most importantly, how exactly the various banks that provided the financing were exposed — until recently the Hwang firm was behind a series of transactions that boosted the wider market despite the decline of ViacomకాCBS Inc. and Discovery Inc. Unfortunately for Hwang, the market was eventually too big to bet against him. Some of the companies he has invested in, including Chinese internet search giant Baidu Inc. and Viacom’s CBS, have been sold, and Archigos’ strategy has turned sour. Along with Hwangzhou, the company’s financiers were also damaged.

His fund has approximately $ 10 billion in assets and its total positions may exceed $ 50 billion, made possible by financing from some of Wall Street’s most prestigious names, from Goldman Sachs Group Inc. to Morgan Stanley. The huge concentration of archigos in single companies exacerbated the pain of this particular blow.

While they were concerned about the ability of Archigos to cover its bet, Goldman and Morgan Stanley seized shares that were collateral with the fund and offloaded them into blocks. According to some holdings sold, they represent 10% or more shares held in companies The Wall Street Journal, And such a large-scale shutdown led to an unprecedented decline in those stocks. Those sudden drops cause other funds to reduce their positions, further inducing further declines and losses.

The result? At least two global security firms that have funded Archigos-Nomura Holdings Inc. and Credit Suisse Group AG are facing ‘significant’ losses, but Goldman does not now appear to have suffered material damage. Shares of Credit Suisse and Nomura fell on Monday. Nomura, which expects a loss of $ 2 billion, had to pull the bond sale.

Even more casualties could occur. Despite the loss to a pair of leading investment banks that wiped out profits this quarter, there are important lessons for financial stability. The need to shed more light on the equity exchanges that Hwang uses to make his massive hidden bet on single companies is clear.

Investors with a 5% or more stake in a US-listed company are usually required to disclose their position, which is not the case with holdings created using Archigos derivatives, according to my colleagues at Bloomberg News.

Who knows, Hwang’s major brokers are not 100% comfortable with the huge risk he is sitting on? By gathering information from rival market participants they need to assess how he is running his total investments. Unless they push him, Hwang will have to share the scope of his bets with all his banks. When this is over, the bet, which is heavily concentrated in volatile stocks, makes it harder for investment banks to defend themselves and see leverage.

The growing concentrated security industry means that the risk of hedge fund embedding is less and less left in the hands of Wall Street banks. The capital requirements introduced after the last financial crisis made the business of lending to hedge funds more expensive, leaving only the elite firms in the business. Crowded trades exacerbate the threat to market financial stability that is financially aided by a small group.

Hwang, a former hedge fund manager who had previously pleaded guilty to insider trading on behalf of a former employer, lured Wall Street with the promise of juicy commissions. Goldman Sachs, who resisted the temptation to do business with him, also eventually stepped inside. But his inspiration is not just a high-profile story. This is an example of high leverage combined with concentration, and the pocket of the market is somewhat left to control itself. © Bloomberg

Bloomberg Opinion Columnist Covering Elisa Martinuzzi Finance

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