The saga raises a number of questions, such as what happens when hedge funds morph into family offices; and when banks' risk exposures hunting for returns at a time of thin yields?

The saga of US-based Archegos Capital Management, a hedge fund structured as a family office – hence flying under regulatory scrutiny – raises questions of what other exposures investment banks might have to such funds. It could also prompt regulators to tighten controls.

As reported yesterday, Nomura and Credit Suisse both warned markets that they could face significant bills caused by losses at Archegos, which has failed margin calls. The entity operates as a family office for former New York hedge fund executive Bill Hwang. Shares in the Swiss and Japanese banks fell sharply yesterday. 

Goldman Sachs and Morgan Stanley rapidly moved large blocks of assets before other large banks that traded with Archegos, as the scale of the hedge fund’s losses became apparent, the Wall Street Journal said yesterday. A story in the Financial Times (of London) said that other banks affected by the Archegos saga are Citigroup, BNP Paribas, Deutsche Bank and UBS. This news service contacted the firms. As of the time of going to press, UBS declined to comment, as did Citigroup and BNP Paribas. A spokesperson for Deutsche Bank said: “We have significantly de-risked our exposure without incurring any losses. We are managing down the immaterial remaining client positions, on which we do not expect to incur any loss.”
 
Reports said Morgan Stanley and Goldman Sachs had declined to comment. (Normally, if a loss is likely to materially affect a share price, a bank will comment.)

The story also sheds light on whether, in a world of ultra-low interest rates and a hunger for yields, some banks’ risk controls may have been insufficient. 

“It does beg the question, what other skeletons are lurking in the closets of big investment banks? Archegos was largely unheard of just a week ago, and the default is potentially leading to a loss equivalent to more than a full year’s earnings for Credit Suisse. What else could be out there?” Will Howlett, equity research analyst at Quilter Cheviot, a UK-based wealth manager, wrote in a note. 

“Archegos had large exposures to Viacom CBS and several Chinese technology stocks which began to fall sharply in the middle of last week. Credit Suisse acts as one of the prime brokers to Archegos, and the fund defaulted on margin calls made last week by Credit Suisse and certain other banks. After failing to meet margin calls, Credit Suisse and other parties are in the process of exiting these positions,” he said. 

“The final bill will be considerable. The bank has advised that while it is premature to quantify the size of the loss from these exits, 'it could be highly significant and material' to Q1 results. Reports in the press suggest that expected losses could be above the statutory net income reporting for FY20,” Howlett continued. “The episode also highlights the importance of robust governance and risk controls, as well as the danger of leverage. It does seem that in this case, the bank’s risk controls have fallen short. Bill Hwang has a chequered history including being banned from trading in Hong Kong and fined millions of dollars in the US to settle illegal trading charges. Was it wise for the bank to offer him significant levels of leverage?”

Hwang’s track record
Hwang has a turbulent business history. Hwang previously ran Tiger Asia Management LLC in 2001, a business based in New York, becoming one of the biggest Asia-focused hedge funds, running more than $5 billion at one point. In the summer of 2012, Tiger Asia said it planned to wind down and return outside capital to investors. Later that year, the firm pleaded guilty to a criminal fraud charge and agreed to pay $44 million to settle civil allegations by US securities regulators that it engaged in insider trading of Chinese bank stocks. (Wall Street Journal, March 29.) “Tiger Asia regrets the actions for which it accepts responsibility today and is grateful that this matter is now resolved and behind it in the United States,” Hwang said in a statement at the time. The Tiger Asia business was rebranded as Archegos. 

Family office or hedge fund?
Since the Dodd-Frank legislation came into force more than a decade ago after the financial crash, hedge funds that wanted to be exempt from oversight from the Securities and Exchange Commission restructured themselves as single family offices, no longer taking in non-family money. George Soros is arguably the best-known of the hedge fund tycoons to have taken this course. 

This publication is talking to lawyers and other industry figures about whether the Archegos affair may change regulators’ oversight and controls on hedge funds and family offices operating in the space. We welcome readers’ views. To comment, email tom.burroughes@wealthbriefing.com