Archegos Capital and the Implosion of a Hedge Fund

By: Andrew McShane

Archegos Capital, a little-known, lightly regulated, but whale-size hedge fund caused chaos on Wall Street last week when it had more than $30 billion worth of positions liquidated by its brokers as the result of unmet margin calls.

Apparently Archegos had been concentrating their money in a few overvalued Media and Chinese stocks – ViacomCBS, Discovery, Baidu, and Tencent to name a few. To make matters much worse, they had been pushing these stocks with borrowed money.

Archegos Capital was so over-leveraged that it was estimated to have up to $9 in leverage for every $1 dollar in actual capital. Archegos had nearly 500% more money in the market than it had in assets – a 5x leverage. This type of situation is inherently dangerous and when different winds begin to converge, you can have a Nor’easter of a market disaster.

One of the first winds to blow was traders moving from over-valued momentum stocks in favor of Value Stocks. It’s why you have seen major pull back in tech stocks and gains in value stocks in recent weeks.

The other wind was that one of Archegos’ major holdings, ViacomCBS, announced it would issue $3 billion in new shares. This immediately caused the stock to drop in price. The sudden reduction in Archegos value put it over its borrowing limit and caused its lenders to issue a “margin call” which forced Archegos to sell its shares to cover the debt. Now, the down-side pressure on the stock was really building, but we weren’t done yet.

The brokers who handle the funds accounts executed “block trades.” This is the buying or selling of large blocks of stock to further limit any additional downside that would leave the broker with major losses. On Friday, Goldman Sachs, JP Morgan, Credit Suisse issued these block trades and wiped out nearly $35 billion worth of market cap, concentrated in the media and Chinese stocks.

When all was said and done, Archegos Capital lose nearly $33 billion in 3-4 days, and ViacomCBS lost half of its value during the same time.

So what happens next?

Well, the Senate Banking and Finance Committees have already taken notice and the meltdown “All the makings of a dangerous situation.” Whether or not action is actually taken to regulate this type of behavior is to be determined. Calls for greater disclosure from hedge funds have already taken place.

Also, the owner of Archegos Capital, Bill Hwang, pled guilty to insider trading of Chinese Bank Stocks in 2012. But sure, I’m sure this guy is good for it.

As for ViacomCBS – It’s a shame this stock got caught up in this. ViacomCBS has all the fundamentals of a great stock. It’s definitely not a Gamestop. It’s been a profitable company with stable cash flows and has increased its divided more than 400% in the last ten years.

Now, that it has fallen down to $48, it may be on the ground floor again and present a decent buying opportunity. Take a look below at the technical chart. It appears to have stabilized right where it left off before its drastic run up to $100. It’s right back on its trendline.


viacomcbs techncial

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