Market history · Alternatives ·
Archegos: the hidden leverage that cost banks billions
Archegos Capital Management, the family office of Bill Hwang, had built very large positions in a small number of US and Chinese shares using total return swaps, which gave it the economic exposure without showing as a shareholder. When one of the shares fell in late March 2021, banks that had lent against the positions made margin calls the fund could not meet, and on Friday 26 March they sold large blocks of shares to cut their risk.
Credit Suisse and Nomura were hit hardest. CNN and Bloomberg reported on 29 March that the two banks warned of significant losses, and their shares fell. Credit Suisse eventually reported losses of about $5.5 billion on the matter.
The episode showed that leverage can be hidden from regulators and counterparties: each bank could see only its own exposure, not that others had lent against the same names.
The takeaway
Leverage that cannot be seen is risk that cannot be priced. A counterparty's concentration is your concentration too.
Sources
This is a retrospective about a past event, provided for general information. It is not investment advice, does not describe RockLake's positioning at the time, and past performance is not a guide to future performance. Read the risk warning.