Market Thinking

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Arch – Egos?

We like to look for nominative determinism where we can find it, so to see that the over-leveraged US Hedge Fund that was forced to aggressively de-leverage on Friday was called ArchEgos was too good to miss. At least Morgan Stanley and Goldmans got to do the, doubtless lucrative, trading. Less so the ever hapless Nomura and the increasingly troubled Credit Suisse, both of whom have issued what amounts to profit warnings. To be honest we are surprised not to find SoftBank in there somewhere – they usually are. Perhaps they will turn up later. Meanwhile, maybe CS should have listened more closely to their own analyst on Viacom, one of the stocks most heavily hit by the basket deleveraging, who re-iterated his $46 price target last week as the stock hit $100 on March 22nd. Other analysts were also calling the stock lower and it may well have been this early selling that triggered the margin call rather than the other way around. At Friday’s close Viacom was back down $48, while Discovery was down a similar amount.

Except that’s not how investment banks work, the guys analysing the company are rarely exposed to the slick suits in Prime Brokerage who are basically in the business of lending money on margin – and grabbing it back when they see any risk to themselves. Unfortunately, they are as likely to move in packs as anyone else and whoever finally overturned Goldman’s compliance department to sign up Bill Hwang (they had resisted for years on account of an insider trading conviction) is doubtless feeling very anxious this morning. And they won’t be alone in the world of PB, for while it is not yet clear who first called margin on Bill Hwang – it won’t be pleasant for those following on – as John Tuld put it so bluntly in the movie Margin Call

Margin Call – got to be first.

A couple of interesting points are already emerging from this. First, it looks like Bill Hwang was trading on swap with the Prime Brokers, which means that not only was it likely the Brokers’ risk desk making the call on selling, but also the fact is that Archegos were not registered as shareholder, the banks were. Perhaps in the current climate someone might ask how this works for the regulator, especially in the light of Bill Hwang’s history? Secondly, Bill Hwang was known to be an aggressive trader of stocks with large short positions – much like the Reddit and Wall Street Bets crowd. Obviously the message boards over there are alight with this story, but is this perhaps the endgame for those types of traders?

Meanwhile as a different part of CS messes up this week, the asset management division must be grateful for the distraction and also somewhat grateful that David Cameron is distracting some of the media at least from CSAM’s long term involvement with the ‘billionaires’ Lex Greensill and Sanjeev Gupta, which goes back to the GAM scandal before this one.

We have noted that the triple witching in March (the third Friday) is often a significant event for asset allocators and it may well be that the moves on the fourth Friday were also associated with some calendar events, either for Hedge Funds or Prime Brokerage or indeed that we are hitting the anniversary of the market lows. The fact that even after this week’s fall, Viacom is still up 290% on the year is a small reminder of how crazy these markets have been. Some of the Chinese ADRs like Baidu were also in the basket being shifted by the Prime Brokers and were also weak and there is no doubt that the next few days will see markets nervous about what else might be forced onto the block thanks to margin calls. There may be some more forced deleveraging generally but equally there may be some good stocks thrown out with the froth.

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  • Nicely put I do agree it was the sell off in Viacom after it placed new shares that prompted one of Archegos prime brokers to make a margin call as they realised the value of what they held as security didn’t tally. One can only assume that the other PB’s only found out later. But it’s not a hedge fund but a family office which exempts it from some of the SEC scrutiny but it doesn’t exempt the banks from KYC. It also raises questions about regulation of family offices going forward. Many ex hedge fund managers have opted for this route to escape regulation. The regulator once again is behind the curve. Although it is easy with hindsight to say didn’t someone at the SEC wonder why so many hedge funds were closing and so many family offices opening?

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