Is this the start of the Bear Market? Bill Hwang used his extraordinary risk-taking abilities to turn a $200 million initial investment into nearly $20 billion in less than ten years, only to lose it all in a matter of days. The simplicity of Bill Hwang’s investment strategy, as well as the failure of Archegos Capital Management at the end of last month, was perhaps the most striking characteristic of his nonfictional rise, fall, rise and fall away.
Archegos was betting heavily on a handful of Chinese technology and media stocks, hoping to see their value rise. Absolute return swaps were Hwang’s key trading strategy. In terms of derivatives, these are fairly normal. They allow investors to profit from an underlying asset without actually owning it (which requires disclosure as the holders of publicly-listed shares). Another significant benefit is that swaps allow you to increase the flexibility of your bet.
The crux, according to sources, is the sheer extent of Hwang’s power – up to 20 times on some positions. This meant that if the stocks he was betting on increased by 5%, he would make a profit of 100%. In the other side, if they fell 5%, he will lose his entire investment. It fell and he lost it all.
The collapse of a relatively unknown Company poses no danger to the financial system. Archegos has ceased operations, a few banks have suffered substantial losses giving loans , and a few workers have lost their jobs. Despite this, Hwang’s troubles, while extreme, are far from special. Investment banks’ prime brokerage units, which provide financing for trading clients such as hedge funds, have exploded as a result of booming markets. Retail investors organizing on social media and buying options in order to make outsized bets on unloved stocks like GameStop have echoes in the Archegos saga.
