Financial regulators across the world are monitoring the collapse of the New York-based billionaire Bill Hwang’s personal hedge fund.
The sudden liquidation of Hwang’s Archegos Capital Management sparked a fire sale of more than $20bn assets that has left some of the world’s biggest investment banks nursing billions of dollars of losses.
The US Securities and Exchange Commission on Monday said it had been “monitoring the situation and communicating with market participants since last week” as panic spreads about the possible scale of the fallout from the forced liquidation of Hwang’s Archegos fund.
The investment banks Nomura and Credit Suisse on Monday warned investors that they are facing huge losses from their exposure to Archegos. Shares in Japan’s Nomura dropped 16% and Credit Suisse dropped 14% as analysts speculated on just how much money they could lose.
Nomura, which is Japan’s largest investment bank, warned it faced a possible $2bn loss. Credit Suisse said its losses would be “highly significant and material” but did not put a figure on it. The Financial Times said the Swiss bank could faces losses as high as $4bn. Credit Suisse declined to comment on any estimate.
In a statement, the Swiss bank said “a significant US-based hedge fund defaulted on margin calls made last week”, and that meant it and other banks were forced into “the process of exiting these positions”.
Japan’s chief cabinet secretary, Katsunobu Kato, said the Japanese government was carefully monitoring the situation at Nomura and that the Financial Services Agency would share information with the Bank of Japan.
The Swiss financial regulator, Finma, said it was also monitoring the situation, and warned that several banks and locations internationally were involved.
The sudden collapse of Archegos was said to have been triggered by a sharp drop in the share price of the US media giant ViacomCBS last week. The fund had a big exposure to Viacom – via loans – and it was forced to unwind its position, which caused the price to drop further. Archegos was also forced sell stakes in other media companies and a host of Chinese tech companies.
Banks such as Nomura and Credit Suisse offer broker services to clients such as Archegos, lending them money to buy shares and other assets, while also processing their trades.
However, if the value of assets held in the client’s account falls significantly, usually because of a slump in the price of shares or other publicly traded securities, the broker can make a margin call, demanding that their client adds more cash or collateral to their accounts.
If clients fail to meet that demand, the broker will take steps to minimise their potential exposure to losses – including selling shares and other assets owned by the client.
“Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions,” Credit Suisse said. “While at this time it is premature to quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first-quarter results.”
Investors are keeping a close eye on further fallout. Richard Hunter, the head of markets at Interactive Investor said: “The reported liquidation of some block trades and a potential hedge fund default will be closely monitored by investors for any ripple effects over the coming days, although for the moment the moves appear to be confined to a handful of specific stocks.”
The billionaire investor Mike Novogratz said he thought the collapse of Hwang’s Archegos fund could turn out to be “the most spectacular personal loss of wealth in history”.
Hwang’s Wall Street career began in the 90s when he was backed by the renowned hedge fund manager Julian Robertson’s Tiger Management. He went on to run Tiger Asia Management, which became one of the largest investors in Asian financial markets. However, in 2012 the SEC charged Hwang and Tiger Asia with insider trading and manipulation of Chinese stocks. Hwang pleaded guilty, agreed to criminal and civil settlements of more than $60m and later closed the fund.
In 2013, Hwang converted the firm into a family office – Archegos Capital Management.
The Archegos fallout is the latest corporate crisis to put pressure on Credit Suisse, which was also dealt a blow after the supply chain finance firm Greensill Capital fell into administration this month.