CASE: Archegos Flashcards
Mains events in this case:
- Archegos was a Family office founded by Bill Hwang, had a prior conviction for insider trading with his hedge fund, Tiger Asia, which closed due to related penalties (he is now in jail)
- Used total return swaps to gain exposure without owning underlying stocks on tech/media.
- Goldman Sachs and Credit Suisse banks (among others) provided Archegos with leveraging their large positions through swaps and loans allowing massive trades.
- March 2021: Defaults on margin calls (demand for more cash to cover potential losses) triggered massive stock sell-offs.
- Banks collectively lost over $10 billion due to exposure to Archegos’ positions.
Were there any issues of transparency?
Does a concentrated position impact evaluation of any listed company?
Transparency Issues:
Total return swaps enabled hidden, highly leveraged bets.
Lack of regulatory requirements for family offices to disclose large positions.
Impact of Concentrated Positions:
Allowed Archegos to control large percentages of stocks without transparency.
High risk due to leverage: When stocks dropped, it led to forced sell-offs, impacting market stability.
What is a total return swap?
What is a HDS search search on Bloomberg?
What is a 13F filing? What is whale watching?
- Definition: A derivative contract where one party receives the total return of a stock or asset (price + dividends) without owning it and allowed Hwang to take significant positions without revealing ownership.
- Used for tracking historical positions of traders or companies, showing trading history and stock ownership changes.
- Definition: Quarterly report required by the SEC for institutional investment managers with over $100 million in assets.
Purpose: Discloses holdings, useful for “whale watching.” - Monitoring large, influential investors (like Archegos) whose trades can impact market trends.
What were the risks involved in this case?
Number of risks:
Leverage Risk - Archegos used excessive leverage, particularly through total return swaps, without sufficient collateral to cover potential losses.
Concentration Risk - Archegos held highly concentrated positions in a few stocks, amplifying losses when those stocks declined.
Transparency Risk - Lack of disclosure requirements for family offices allowed Archegos to accumulate large, risky positions unnoticed, lack of KYC from banks.
Reputation Risk - Banks risked reputational damage by associating with Hwang, who had a prior conviction for insider trading.
Counterparty Risk - If Archegos failed to meet its obligations, banks were exposed to potentially significant financial losses.
Liquidity Risk - Large, leveraged positions could not be quickly liquidated, creating massive losses when Archegos defaulted.
What types of risks were Credit Suisse exposed to and did they manage their risks effectively?
Leverage and Concentration Risks: Overexposed to Archegos with large, concentrated bets on single stocks, lacking strong margin requirements.
Counterparty Risk: Poor credit assessment and inadequate margin policies led to catastrophic exposure to Archegos’ failure.
Transparency and Oversight: Failed to conduct sufficient due diligence on Archegos’ total exposure across other prime brokers.
Risk Management:
Credit Suisse did not manage risks effectively and incurred over $5 billion in losses due to delayed action in liquidating Archegos positions.
The bank’s lax risk controls and insufficient oversight of concentration and leverage contributed to significant financial and reputational damage.
Credit Suisse: Demonstrated inadequate risk management, with poor controls and delayed action, leading to heavy losses and significant scrutiny.
What types of risks were Goldman Sachs exposed to and did they manage their risks effectively?
Reputation Risk: Concerns arose from partnering with Hwang, given his past insider trading conviction.
Liquidity Risk: Exposure to Archegos meant potential loss if positions could not be liquidated quickly in a sell-off.
Risk Management:
Goldman Sachs managed risk more effectively than others by rapidly liquidating positions as soon as Archegos showed signs of defaulting.
Despite initial concerns about Hwang’s history, Goldman’s quick response allowed them to avoid significant financial losses.
Goldman Sachs: Exhibited better risk management due to their swift action upon signs of default, limiting exposure and financial impact.
SoF, SoW, KYC - this could have been done better in this case.. what are some client profiling questions you would have asked Archegos/Bill before taking them on as a client?
Where did Hwang claim his money was from and what should the banks have done to ensure the legitimacy of his funds?
Bill Hwang claimed that the funds managed by Archegos came from his personal wealth, accumulated through previous investments, notably from his former hedge fund, Tiger Asia, which was dissolved after regulatory penalties. However, because Archegos was structured as a family office, it was not required to disclose its holdings publicly, creating opacity around the sources and uses of funds.
- Request Detailed Financial Statements and Audits: detailed financial statements and independent audit reports.
- Independent Verification of Wealth Sources: Banks could have engaged third-party financial auditors to verify Hwang’s wealth origin - cross checking for high risk activities.
- Enhanced Due Diligence on Prior Convictions: apply enhanced scrutiny given Hwang’s insider trading background.
- Confirm Liquidity and Investment Strategy
- Request Legal Documentation on Family Office status and exemption from certain regulatory filings.
- Establish Regular Monitoring and Reporting: Even after onboarding, banks could have imposed regular reporting requirements and agreed-upon risk management protocols to monitor Archegos’ positions and exposures.
This would help ensure ongoing compliance with Source of Funds (SoF) integrity and could have flagged the escalating leverage sooner.
