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A forced hedge fund liquidation that started last week hit global investment banks Credit Suisse and Nomura on Monday after they warned of financial troubles as a result of the blowup.
Nomura shares fell a record 16 percent on Monday as Credit Suisse’s shares dropped 15, its biggest fall since the pandemic struck last March.
Credit Suisse’s plunge came after it warned of a “highly significant and material” hit to its first quarter results tied to trouble at a “US-based hedge fund” that the Wall Street Journal has identified as Archegos Capital management, led by Bill Hwang, a former protégé of hedge-fund titan Julian Robertson.
The unnamed hedge fund “defaulted on margin calls made last week by Credit Suisse and certain other banks,” the Zurich-based bank said Monday. “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.”
Japanese-based Nomura also warned a financial hit tied to $2 billion its owed by a US client, which reports have identified as Hwang’s Archegos.
The warnings come as the Journal reports on a forced liquidation of Hwang’s hedge fund, which has triggered stock selling on a mass scale valued at $30 billion since last week.
On Friday, the hedge fund implosion pulled down major US media companies ViacomCBS and Discovery, sending shares tumbling 27 percent, marking their biggest declines ever.
As Wall Street last week struggled to grasp what was happening, some analysts pointed to a wider market correction. But over the weekend, it emerged that the selling was the result of Goldman Sachs and Morgan Stanley unloading big block trades because Archegos had borrowed money for trades and wasn’t able to make good on its debts when the banks asked for more capital to cover losses, known as a margin call.
Morgan Stanley and Goldman Sachs did not comment, although Morgan Stanley has reported told investors it sold $15 billion worth of blocks in the last few days and has no more blocks to sell, according to CNBC.
Bloomberg reported that Goldman has also dramatically reduced its exposure to the blowup and has told clients that any resulting ding to its financials will be immaterial.
The Securities and Exchange Commission said Monday that it is monitoring the situation, and has been in communicating with market participants since last week.
As a Robertson protege, Hwang was a member of an elite group of hedge funders known as a “Tiger cub,” a reference to Robertson’s Tiger Management. He used that cred to open a multi-billion dollar Asia-focused hedge fund, Tiger Asia Management in New York before shutting it down in the wake of a 2012 insider trading plea tied to Chinese bank stocks.
Hwang then focused on running his own money out of Archegos, a family office. Investment shops without outside investors are usually allowed to take bigger risks as they are under less scrutiny by regulators.
In Archegos’ case, the firm used derivatives contracts with brokers, or swaps, to supercharge his trades, Bloomberg reported. But Hwang was forced by his bankers to sell more than $20 billion worth of shares after some trading positions moved against him, Bloomberg said.
As the bets imploded, Hwang’s prime brokers, in this case Goldman and Morgan Stanley, started demanding he provide more collateral. They then exercised their right to liquidate his positions to recover their money.
Once the banks began liquidating his positions, it triggered selling by other investors to avoid losses on stocks that would soon be plummeting in value. Nine stocks bore the brunt of this sell off, including ViacomCBS, Discovery, Shopify, Chinese firms Tencent Music, Baidu, GSX, iQiyi Inc., Vipshop Holdings, and UK online retailer Farfetch.
While much of the block trading appears to be over, there is still the potential for fallout, said Richard Hunter, the head of markets at Interactive Investor. “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.”
Bank stocks were generally down on Monday, with Morgan Stanley down 2.6 percent to $77.84 and Goldman Sachs down 1.2 percent to $323.37. Credit Suisse recently traded down 11 percent to $11.44 while Nomura is down 13.6 percent to $5.71 a share.
The Archegos fallout is the latest corporate crisis to put pressure on Credit Suisse. Earlier this month, the bank said it faces potential losses from the collapse of UK financial finance firm Greensill Capital, with which it ran $10 billion of investment funds.
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