Whilst the markets have been concerned about inflationary risks and therefore interest rate increases stalling the rally, we have been reminded this week of other ways low interest rates can create systemic risks – excessive leverage. This piece in Bloomberg talks about Archegos Capital Management, a US based hedge fund/family office which defaulted on margin calls when certain stocks in its leveraged and concentrated portfolio fell. The article spotlights the banks who lent against such a portfolio as well as the fund manager who they lent to who might end up losing as much as $10bn of his personal wealth as a result of this unwind.
“Hwang and his private investment firm, Archegos Capital Management, are now at the center of one of the biggest margin calls of all time–a multibillion-dollar fiasco involving secretive market bets that were dangerously leveraged and unwound in a blink.
Hwang’s most recent ascent can be pieced together from stocks dumped by banks in recent days–ViacomCBS Inc., Discovery Inc. GSX Techedu Inc., Baidu Inc.–all of which had soared this year, sometimes confounding traders who couldn’t fathom why.
One part of Hwang’s portfolio, which has been traded in blocks since Friday by Goldman Sachs Group Inc., Morgan Stanley and Wells Fargo & Co., was worth almost $40 billion last week. Bankers reckon that Archegos’s net capital–essentially Hwang’s wealth–had reached north of $10 billion. And as disposals keep emerging, estimates of his firm’s total positions keep climbing: tens of billions, $50 billion, even more than $100 billion.
It evaporated in mere days.
“I’ve never seen anything like this — how quiet it was, how concentrated, and how fast it disappeared,” said Mike Novogratz, a career macro investor and former partner at Goldman Sachs who’s been trading since 1994. “This has to be one of the single greatest losses of personal wealth in history.”
…The cascade of trading losses has reverberated from New York to Zurich to Tokyo and beyond, and leaves myriad unanswered questions, including the big one: How could someone take such big risks, facilitated by so many banks, under the noses of regulators the world over?
One part of the answer is that Hwang set up as a family office with limited oversight and then employed financial derivatives to amass big stakes in companies without ever having to disclose them. Another part is that global banks embraced him as a lucrative customer, despite a record of insider trading and attempted market manipulation that drove him out of the hedge fund business a decade ago.”


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