New York, NY – The collapse of Archegos Capital Management, a family office run by former hedge fund manager Bill Hwang, has rocked the financial world and sent shockwaves through Wall Street. Here’s how it happened.
Archegos was a highly-leveraged family office that made large bets on stocks using derivatives, which are financial instruments that allow investors to bet on the future direction of a stock without actually owning it. Archegos reportedly had more than $10 billion in assets under management and was one of the largest holders of certain stocks, including ViacomCBS and Discovery.
In late March, Archegos’s highly-leveraged positions began to unwind rapidly, leading to a series of margin calls from its banks, including Credit Suisse and Nomura. Margin calls occur when banks demand that investors put up more collateral to cover losses on their positions. In this case, Archegos was unable to meet these demands, leading to a rapid sell-off of its holdings.
Over the course of just 48 hours, Archegos’s positions were liquidated, leading to billions of dollars in losses for its banks and other counterparties. Credit Suisse and Nomura were hit particularly hard, with both banks warning of significant losses as a result of their exposure to Archegos.
The collapse of Archegos is the second-biggest bank collapse in US history, after the collapse of Lehman Brothers in 2008. The fallout from the collapse is likely to be significant, with many in the financial industry warning of potential contagion and systemic risk.
In response to the collapse, regulators and lawmakers are calling for greater oversight and transparency in the family office and hedge fund industries. Family offices, in particular, are largely unregulated and operate outside the purview of many financial regulators.
The collapse of Archegos also highlights the risks associated with highly-leveraged positions and the use of derivatives in the financial markets. While these financial instruments can be useful for investors seeking to hedge their positions or take on leverage, they also carry significant risks, particularly in the event of market turbulence or unexpected events.
In the wake of the Archegos collapse, there have been calls for greater transparency in the financial industry, particularly in the areas of risk management and regulatory oversight. Some experts have called for increased scrutiny of family offices and other non-bank financial institutions, which operate outside the scope of many financial regulators.
The collapse has also raised questions about the role of investment banks in facilitating highly-leveraged bets by hedge funds and family offices. Some have argued that banks should be required to conduct more thorough due diligence on their clients and their trading strategies to prevent similar collapses from occurring in the future.
In response to the collapse, Credit Suisse and Nomura have both announced significant losses and changes to their risk management practices. Credit Suisse has said that it will be reducing its exposure to prime brokerage and overhauling its risk management processes, while Nomura has announced plans to cut back on its US business and review its risk management practices.
The Archegos collapse is likely to have long-lasting repercussions for the financial industry, and many are calling for increased regulation and oversight to prevent similar collapses from occurring in the future. The incident highlights the need for greater transparency, risk management, and regulatory oversight in the financial industry, particularly in the areas of derivatives trading and leverage.
While the full impact of the Archegos collapse is yet to be seen, it is clear that the incident has shaken the financial world and underscored the importance of responsible risk management and regulatory oversight in the modern economy.
Overall, the collapse of Archegos is a stark reminder of the risks and potential consequences of high leverage and the use of complex financial instruments in the financial markets. The fallout from the collapse is likely to be significant and long-lasting, with many in the financial industry calling for greater regulation and oversight to prevent similar collapses in the future.
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