Skip to main content

Archegos? More Like Arche-gone

In late March, a completely out of left field event occurred, Archegos, a large family-run hedge fund collapsed. To be more precise, Archegos began liquidating large positions in blue-chip companies that it had invested in like Viacom CBS, which Archegos owned $20bn worth of shares or an astonishing 30% of the company’s total value.

The founder of Archegos, Bill Hwang saw his nearly $20bn fortune go up in smoke, due to this. What started initially as a fund mainly centered around tech stocks, Bill Hwang started to move towards a more eclectic array of companies like media conglomerates ViacomCBS and Discovery, Inc which became huge parts of Archegos’ portfolio and Chinese stocks like GSX, Techedu, Baidu, Iqiyi, and Vipshop.

 It is required by US law to prevent individual investors from buying securities with more than 50% of the money borrowed on margin. No such rule applies for hedge funds and family offices. As a result of this, Hwang was allowed to exercise as much risk as he could stomach, which seemed to be too much. Archegos took large positions in a variety of companies like ViacomCBS using “total return swaps”, which are contracts brokered by Wall Street banks that allow a firm to take on profits and losses of a portfolio of stocks in exchange for a fee. Swaps also allowed Archegos to maintain their anonymity on certain positions that they owned as they were estimated to have had exposure to more than 10% of multiple companies’ shares, which traditionally would mean they would be subject to additional regulations around disclosures and profits. Some estimates for the company’s leverage ratio are as high as 8 to 1, meaning that even a minimal loss would result in some of the firm’s equity being consumed. To be succinct, a leverage ratio is the ratio of debt to equities that a firm uses to finance their operations. In the case of Archegos, it could be possible that they had 8 times as much debt as they did equities. This is the method Hwang had used to build up his company to it’s $30bn value. Unlike how you or I borrow money from the bank, Archegos borrowed specifically from prime brokers, banks who specifically cater to hedge funds. Prime brokers aid hedge funds in making trades and lend them capital in the form of margin lending.


Hwang was always teetering on the line with his over levered margin account. By mid-March, Hwang’s strategy began backfiring, as the stock price of companies in which Archegos had significant exposure in, like the Chinese internet-search company Baidu and the online luxury fashion retailer Farfetch, began to decrease rapidly. Baidu’s stock price had dropped by more than 20% from it’s high-point in February. This prompted margin calls. Margin calls occur when a margin account falls below the broker’s minimum requirement. In order to meet the margin call the investor, in this case Archegos, had to provide more of their own assets, either securities or cash, into the account. The situation worsened on March 22nd when ViacomCBS announced a sale of common stock, which put further pressure on Archegos, as the announcement sparked a slide in share price, thus adding to Archegos’ continuing losses. ViacomCBS’ stock fell through with this announcement possibly because already existing shares would be diluted, thus prompting a sell off. Regardless, Archegos had to further liquidate it’s assets that it actually owned or put forth even more cash. The fund decided to sell some of its position in ViacomCBS to try to offset losses, adding further downward pressure on the stock. As ViacomCBS' stock prices continued to tank, Archegos’ banks started selling bulk amounts of shares at a discount, a technique known as block trades.

Many of Archegos’ prime brokers took hits from its collapse. Credit Suisse had to report a loss of $4.7bn and two top executives left their role. Nomura had lost $2bn. Other banks like Deutsche, Goldman Sachs, and Morgan Stanley, in comparison were comparatively unscathed. Goldman and Morgan quickly sold of large blocks of assets via block trading by selling Archegos’ positions at a discount.

Morgan Stanley CEO, James Gorman, stated that through a series of block sales, Morgan Stanley had lost around $644m, which is also the amount Archegos owes them under the transactions they failed to pay them. Moreover, Morgan Stanley lost an additional $267m, as they decided to sell all the remaining long and short positions as quickly as possible, resulting in the subsequent loss.

 Now, it needs to be asked why no one did anything. Archegos’ meltdown seemed entirely preventable, but Hwang’s lenders didn’t seem to want to rollback on his leverage. If they had limited his leverage or insisted on more transparency of his dealings around Wall Street, Archegos would not have blown up like it did. However, lenders aren’t the only culprit. Regulators seem to be quiet lax on family offices like Hwang’s, which allowed for him to be such a risky investor in the first place. In Europe, there is legislation which requires the party bearing the risk of an investment to disclose its interest; however, in the US, whales like Hwang are allowed to stay hidden. What will happen know, will lenders be more wary of family offices and ask for more transparency, will regulators place more stringent legislation on family offices so that they can't so recklessly experiment with risk?



Popular posts from this blog

Apple Multiples Valuation

Unlike a traditional DCF model, doing a multiples analysis with comparable companies is a lot easier and quicker to do. The four companies I used to compare with Apple are: Microsoft, Amazon, Netflix, and Google. I used Microsoft because Apple and Microsoft are competitors in the field of hardware, mainly computers. Amazon and Apple are comparable because they're both tech giants in their respective fields and even have services in common such as Amazon Prime/Apple TV and Siri/Echo. Similarly, Netflix and Apple compete with each other in regards to their streaming services. Google and Apple both produce hardware like  home-pods, phones and computers, despite Apple being considerably larger.  The multiples that I used for the valuation are: EV/Sales, EV/EBITDA, EV/EBIT, and P/E. EV is the Enterprise Value of a company, which can be calculated by subtracting cash and cash equivalents and adding total debt to the Market cap. EV is the true value of a company while taking into account

DCF Valuation - Netflix

Time to put everything together with this blog post looking at DCF for Netflix. In the case of WACC, I got a percentage of 12%. I still have difficulties calculating it, so I know I need to improve on that front.  Conclusion: Netflix stock is overvalued at 12%. I think in order to make my analysis more effective I can include a What-If analysis that includes a variety of WACC and perpetual growth rate percentages. 

3-Statement Model - Netflix

To be honest, this was a lot more time consuming than I thought it would be. But, I'm glad I got it done. First thing to note with this 3S model is that it was designed specifically to integrate with a DCF Valuation, which will be shown in the next blog post.