Fund Collapse: 2021 - Archegos Capital Management - A review of its sudden collapse and the resulting impact

On 26 March, 2021 a relatively unknown hedge fund defaulted on its margin call. That resulted in huge losses in for a number of stocks in the market, as well as lasting damage to some banks that were acting as the hedge fund’s prima brokerage. This relatively unknown hedge fund went by the name “Archegos Capital Management”.

In this post let’s examine how this collapse materialized.

As usual we’ll look into the key events leading up to and days after the collapse.

Timeline

2013

Bill Hwang creates the Archegos family office
Archegos started with roughly $500 million in NAV

2014

Hwang "was banned from trading in Hong Kong for four years."

2016

Archegos NAV reaches $3.9 billion
Credit Suisse's risk management internal credit rating of Archegos improved several rungs between 2012 and 2016 due to the fund's increasing net asset value (NAV)

2018

When the Hong Kong trading ban was lifted in 2018, prime services sought permission to restart trading with Archegos in Asia, which resulted in a second reputational risk review that largely mirrored the first.
Archegos started trading in Hong Kong restarted.

2019

January 2019: Credit Suisse has an initial margin rate of 15-25%.
May 2019: Credit Suisse agreed to a new standard swap margin rate of 7.5%.
- Archegos to "significantly increase its swap exposure with Credit Suisse".
November 2019: An annual credit review of Archegos recommended maintaining its BB- rating and more than doubling the fund's risk limit, despite a 40% decline in its NAV.

2020

Archegos’s NAV reaches $20 billion.
Over the course of 2020, Archegos's risk profile increased "significantly".
By April 2020, Archegos's "potential exposure" was more than 10 times its $20 million limit.
By July 16, 2020, Archegos had over $600 million in "net scenario exposure" — more than 240% of its limit.
By July 22, 2020, Archegos's net exposure had jumped to $828 million.
By September 1, 2020, Archegos's overall holdings at Credit Suisse had risen to $9.5 billion, more than 75% of which was long.

2021

January, 2021

Archegos's internal credit rating at Credit Suisse (CS) was downgraded from BB- to B+, due to an increase in how long it was estimated it would take to liquidate its positions.

February, 2021

The Credit Suisse (CS) asked Archegos for $750 million in additional margin in February 2021. Archegos posted $500 million.

March 23, 2021 (Tue)

SUMMARY: ViacomCBS decides to do a stock sale, perhaps to take advantage of higher prices.
Pre-open: Archegos has over $600 million of excess margin at Credit Suisse.
Daytime trading: ViacomCBS stock drops by 9%.
Post-close: Archegos’s excess margin was wiped out by market movements and Archegos owed Credit Suisse more than $175 million by the next day, which Archegos paid.

March 24, 2021 (Wed)

SUMMARY: ViacomCBS stock continues its slide.
Daytime trading:
- ViacomCBS drops another 30%, clearly indicating that the market is not happy about the dilution of shareholder equity.
- Another of Archegos's significant positions, Tencent Music Entertainment Group, fell 20%.
Post-close:
- Credit Suisse determined it would be making a $2.7 billion call for variation margin the next day.
- The matter was escalated to the co-heads of PrimeServices and the head of equities, who scheduled a call with Archegos for that evening to inform it of the upcoming margin call. Archegos told Credit Suisse it could not meet either Credit Suisse's or any of its other prime brokers' margin calls on the following day.
Evening: Credit Suisse's investment bank chief executive and group chief risk officer were informed; it was the first time either recalled hearing about Archegos.

March 25, 2021 (Thu)

SUMMARY: Archegos fails to meet margin call.
Credit Suisse issued two margin calls that totalled more than $2.8 billion.
Archegos reiterated that its cash reserves had been exhausted by margin calls from other prime brokers earlier in the week.

March 26, 2021 (FRI)

SUMMARY: Archegos fails to meet margin call.
Banks offering prime brokerage services start to liquidate positions.
This sale apparently resulted in a 27% plunge in share price of ViacomCBS and a similar fall in the price of Discovery, Inc.
Credit Suisse delivered an Event of Default notice to Archegos and began unwinding its
Archegos positions.

March 29, 2021 (Mon)

SUMMARY: The share price of Credit Suisse was down by 14%, while Nomura Holdings shares declined by 16%.
A Credit Suisse press release declared:

"the loss resulting from this exit ... could be highly significant and material to our first quarter results."

WSJ reports that Goldman Sachs (GS) and Morgan Stanley (MS) were able to limit their losses by acting more quickly than Credit Suisse (CS) and Nomura Holdings.
Deutsche Bank (DB) was also able to avoid losses.

March 30, 2021 (Tue)

SUMMARY: Expanding scope of impact - more stocks added, more bank losses declared, indices continue slide.
Baidu (BIDU) stock added to the list of affected stocks.
Mitsubishi UFJ Financial (MUFG) EMEA declares a loss of $300 million.
Shares of Nomura fell again on the 30th, and the Securities and Exchange Commission stated it was conducting an investigation.
Nikkei 225 Index went down by 0.77%
SEC announces investigation

April 5, 2021 (Mon)

SUMMARY: Regulators start to take interest.
The Chair of the US Senate banking committee, Sherrod Brown, wrote to Crystal Lalime general counsel at Credit Suisse, as well as Nomura, Goldman Sachs and Morgan Stanley to inquire about "the implosion of Archegos Capital" and gave the lenders 14 days to reply.
Credit Suisse was mentioned by the Financial Times as "allowing the family office (of Hwang) to make highly leveraged bets on US and Chinese stocks".
The Securities Exchange Commission and the Financial Conduct Authority also have requested information about the implosion from the lenders, as well as the NGO Self-regulatory organization Finra.

April 6, 2021 (Tue)

SUMMARY: Credit Suisse (CS) reveals true impact.
Credit Suisse (CS) first reports loss of $4.7 billion.
Credit Suisse (CS) reports the departure of the following executives:
- Chief Risk officer
- Chief Compliance Officer
- Head of the Investment Bank
Credit Suisse (CS) floats plan to raise $2 billion in fresh capital

April 16, 2021 (Fri)

SUMMARY: Morgan Stanley reports losses.
Morgan Stanley (MS) reported a loss of close to $1 billion.
Credit Suisse Group AG (CS)'s losses confirmed to be at $5.5 billion
Nomura Holding's losses confirmed to top $2.0 billion.

April 27, 2021 (Tue)

SUMMARY: UBS reports losses.
UBS reported losses amounting to $774 million
Nomura increases its losses to $2.85 billion.

July 29, 2021

The Credit Suisse group releases a report based on a review the bank’s relationship with Archegos as conducted by a Special Committee comprised of four directors as appointed by the CS Group AG Board of Directors. The report is titled - “Credit Suisse Group Special Committee of the Board of DirectorsReport on Archegos Capital Management”

2022

April 27, 2022

SUMMARY: Arrests made
Hwang and Patrick Halligan (former Archegos CFO), were arrested and charged with racketeering conspiracy, securities fraud, and wire fraud in connection the company's 2021 collapse.

Impacted parties

Stocks

ViacomCBS (CBS)
Discovery
Baidu (BIDU)
Tencent (TCEHY)
Vipshop (VIPS)
Fartech (FTCH)

Banks

Credit Suisse (CS) - Looses $5.5 billion
Nomura Holdings - Looses $2.85 billion
Morgan Stanley (MS) - Looses $0.911 billion
Deutsche Bank (DB) - Looses $0.774 billion
Goldman Sachs (GS) - Looses $0.300 billion

Bill Hwang

The WSJ reported that Hwang lost $8 billion in 10 days.
Bloomberg News reported that Hwang lost $20 billion in 2 days.