Nomura and Credit Suisse are facing billions of dollars in losses after a U.S. hedge fund, named by sources as Archegos Capital, defaulted on margin calls, putting investors on edge about who else might have been caught out.
Losses at Archegos, run by former Tiger Asia manager Bill Hwang, had triggered a fire sale of stocks on Friday, a source familiar with the matter said.
The news has sparked fears that other lenders could be in the process of exiting these positions too. Shares in Bank of America Corp, Citigroup Inc, JPMorgan Chase & Co, Goldman Sachs, Wells Fargo & Co and Morgan Stanley were all hit U.S. premarket trading, as were shares of Deutsche Bank and UBS.
S&P 500 futures were off 0.57% pointing to a weaker open for the benchmark index.
COMMENTS:
RICK MECKLER, PARTNER, CHERRY LANE INVESTMENTS, A FAMILY INVESTMENT OFFICE IN NEW VERNON, NEW JERSEY
“It’s reflective of some of the excesses the market has seen over the last month with wild gyrations in some specific stocks without much explanation. This certainly explains the trading in VIAB and Discover and some of the Chinese issues. It’s a black eye for the industry because it suggests that the problems that they had over 10 years ago now, there still may not be a full handle on risk control when it comes to leveraged trading.”
“It’s effect on the broad market is probably pretty limited. It doesn’t change much about the economy or it doesn’t impact a vast majority of U.S. stocks. Initial reaction when I got the news this morning - the market was down but since it has recovered about half of that. My guess is that the financial sector will take a hit today but the impact on broader markets is going to be small.”
“This seems like a pretty specific case. Most funds are subject to margin rules which wouldn’t allow for this. I don’t think the whole story has come out yet and I’m saying this without knowing what the problem was. The swap market has been problematic to the industry for a while. There has always been some fears of whether the counter parties can stand behind some of these (trades). But this seems pretty specific - the fund had no clients and it seemed to be using offshore financing techniques that are not used by a lot of funds. That said, you just don’t know who’s on the other side of all these traders and what other impacts are. But it’s hard to see this as being a problem for the industry as a whole. It will raise the idea that risk control is an important components of asset management and it may put emphasis again on having clients demand some look at risk control systems in some of their investments.”
“A bigger concern would be regulator who would want to understand how you get to the point of taking losses on these types of transactions and whether or not they can be destabilizing to the overall market. It could lead to increased regulation. But it does seem, for now, as a one-off event.”
MARK PACITTI, MANAGING DIRECTOR AND FOUNDER OF WOOZLE RESEARCH, LONDON
”Our analysis suggests that the Archegos Capital Management (ACM) fire sale could result in additional forced selling from other HF’s that have exposure to the same portfolio companies. We have reason to believe that other HF’s will be implementing more stringent risk parameters, tighter VAR restrictions, and increased stop-loss discipline as well as profit taking to fund highly exposed positions. While it’s hard to decipher which HF’s are most exposed, we do believe that the ($)20bn fire sale from ACM is perhaps the tip of the iceberg and that the sharp selloff in Chinese and US tickers has the potential to drive 2-3x that amount of volume in additional forced selling or HF positioning amounting to a potential and incremental 40-60bn in additional holdings that we believe might be next in line to be liquidated due to either reducing VAR and/or forced selling on stringent P&L requirements. We are also seeing a higher than usual correlation between tickers in covid-winnning sectors such as Technology names and many HF portfolio ‘hotels’ tickers are at risk of seeing a further decline on nothing more than internal risk parameters and positioning rather than fundamentals.”
SIMON CARLTON, CHIEF EXECUTIVE OFFICER, CARLTON JAMES GROUP, LONDON
“The Archegos events tell a story about one of the fundamental issue with the stock market and the intrinsic connection throughout. The self-fulfilling prophecy of these margin calls are yet another indication that we may see a double dip recession on the horizon as the pandemic lifts its hold on the global economy. Prepare for very bumpy ride over the next few years.”
This article originally appeared on Reuters.
