Last week’s news of the collapse of Archegos Capital Management sure brought back memories of the 2008 financial crisis. Suddenly we were back to talk of margin calls, complex over-the-counter derivatives and opaque corporate structures designed to prevent trades from being disclosed.
Fortunately, this time the damage didn’t spread beyond Archegos, the banks such as Credit Suisse that provided financing and the stocks that were sold due to the margin call. However, this doesn’t mean that there are not some important lessons in this fiasco especially for the average investor.
In the world of money management, cachet is important. Bill Hwang, the architect of Archegos, was the protégé of hedge-fund legend Julian Robertson, who from 1980 to 1998 delivered an annualized return of 31.7 per cent compared to the S&P 500’s 12.7 per cent. At Archegos, according to the Financial Times, Hwang was able to grow about US$200 million in assets — which belonged to him and family members — to almost US$10 billion over nine years, using borrowed money from banks to leverage his returns.
This advertisement has not loaded yet, but your article continues below.
There were at least three warning signs, however, that the fee-hungry pros missed in their pursuit of short-term profit. Even Goldman Sachs, which had initially refused to finance Hwang, capitulated and started providing him funding.
Lack of transparency
While Hwang was known for his hedge fund pedigree, in 2012 he also pleaded guilty on behalf of his Tiger Asia fund to one count of wire fraud. Tiger Asia Management and Tiger Asia Partners ended up closing after settling an SEC civil lawsuit accusing them of insider trading and manipulating Chinese bank stocks. The $44 million settlement also led to Hwang agreeing to be barred from the investment advisory industry.
To get around this, he set up a family office, a kind of entity that usually manages one family’s money and which doesn’t face the same kind of scrutiny as a fund company, as they are generally exempt from registering as investment advisers with the SEC. This exemption allows such funds to keep their internal workings secret and means they do not have to make quarterly 13F filings, which require investment managers holding more than US$100 million in…