Kill Your Hedge Fund in Three Easy Steps - The Implosion of Archegos Capital
Picture this: you grow up modestly in South Korea with a father working as a pastor. After
turning 18 years old, you immigrate to the United States. Immediately after arriving, your father passes away, and you are forced to take a job working long hours at McDonald's to support your family. These are the origins of Bill Hwang, quite the opposite of the beginnings of your stereotypical Wall Street banker.
Solely due to his mother's tenacious insistence, Bill enrolled at UCLA to study business. He
quickly developed a knack for the subject and set his sights on Wall Street. But 1980s high
finance proved virtually inaccessible to a Korean immigrant like Bill. He couldn't find work at Goldman Sachs or Morgan Stanley but was adamant that he would pursue a career in New York City.
So, Bill Hwang ended up taking a job at Hyundai Securities and quickly established himself
as a proficient securities salesman. Not long after starting work at Hyundai, Bill Hwang's skill - and potential - was noticed by none other than Julian Robertson. Julian Robertson is the famous hedge fund manager who founded the powerhouse firm Tiger Management ($95 billion under management as of Oct 2021). Anyone who had worked with Julian Robertson had great success under him and would replicate that success within their own respective hedge fund or investing firm. The Robertson protégées were coined 'tiger cubs'.
Julian Robertson seeded Bill Hwang's 'Tiger Asia', with it soon proving to be a very successful firm, managing $10 billion at its height. However, Tiger Asia crossed the line between aggressive investing strategies and unlawful practices, with Hwang facing lawsuits from multiple security regulators. Ultimately, the fund was forcibly closed. But Hwang wasn't finished.
Soon after settling matters with regulators, he founded Archegos Capital. Archegos is known as a 'family office', managing an individual's money. So, instead of starting a new hedge fund, which would be unlikely considering his securities violation, he would take the money he already had (in the region of $200 million) and invest that instead. At least, in the beginning, Bill was incredibly successful, betting large on technology stocks and riding the decade-long boom on names such as Facebook, Netflix, Google and LinkedIn. To increase his returns, Bill increasingly used leverage to build up more significant positions, exacerbating his gains and reinvesting the profit into his original bet. Bill had taken a small fortune of $200 million and, in under seven years, had transformed it into a mammoth $20 billion.
Next came the unwinding. I would like to preface this by saying that Bill is not an intellectual mastermind, contrary to what one may think whilst drooling over the enormous returns above. The Wall Street Journal described him as
"A grown up version of someone you would see on Reddit's WallstreetBets or Robinhood... betting on a stock and sticking with it regardless." - Wall Street Journal
There was no complicated investing strategy, no complex algorithm, and no genius analysts. Bill would often justify his overleveraged, radically aggressive investments by claiming they were "driven by faith in order to enact God's will." Without sounding sacrilegious, I would discourage the use of faith as your primary tool in fundamental analysis. Anyway, Bill thought otherwise, and his blind belief in his strategy, without caution or re-evaluation, eventually led to the un-doing of Archegos Capital.
On the afternoon of March 22nd 2021, Viacom CBS (PARA), a media conglomerate, announced a stock and convertible bond sale. The company wanted to raise $3 billion to fuel future spending on streaming content. Viacom CBS was a stock Bill Hwang heavily invested in, with an outsized position that he had accumulated over years. The stock/bond sale hurt the share price, with Viacom CBS declining 9% the following day and dropping 23% the day thereafter.
With the stock plunging that far, that fast, it triggered a margin call. If you had borrowed so much money - like in Bill's case - and there is no equity left after a stock drops that quickly, the banks will demand more collateral. If Hwang has no money left or refuses to put up any more collateral, the dealing firm will take over his position. The Wall St dealers pleaded with Bill to liquidate some of his stock, take his losses and survive, perhaps cutting his fortune from $20 to $10 billion, but surviving nevertheless. But Bill Hwang refused.
Companies that Bill Hwang invested billions of dollars into suddenly started turning against him. The banks began to panic, demanding that he needed to post more collateral; otherwise, they would have to terminate the agreement and liquidate his entire portfolio. Bill - unsurprisingly - did not have enough spare capital, and the banks were forced to take over and liquidate his complete portfolio. In the end, Bill Hwang lost everything - all of what remained of his $20 billion fortune - and the banks that had lent him money also endured heavy losses. Credit Suisse reported losing $5.5 billion, and Japanese investment bank Nomura lost $2.5 billion due to the Archegos fallout. In summing Archegos' and the Bank's losses, $30 billion was wiped out in one week.
When evaluating this saga of comical errors, we must consider how much of Bill's success can be attributed to his brilliance and how much can we attribute to the fact that he bought into a ten-year exponential tech bull run. But who knows? Leverage works really well... until it doesn't, and then you're back working at McDonald's with Bill. This proves that the degeneracy runs deep no matter what level you're at. You could be a broke, brainless Robinhood trader or a billionaire hedge fund manager, but at the end of the day, we're all just people trying to unsuccessfully predict the future.
References/ Further Reading
Who is Bill Hwang – the Wall Street investor who lost US$20 billion in two days?
How Bill Hwang of Archegos Capital Lost $20 Billion in Two Days - Bloomberg
Archegos founder Bill Hwang arrested on US fraud charges | Financial Times
Total bank losses from Archegos implosion exceed $10bn | Financial Times