13 ms·

Bill Hwang of Archegos Capital lost $20B in two days

256 points by haltingproblem 5y ago

Ericson2314 5y ago
If someone lost $20B in 2 days, what did they have to begin with? Probably not a "real" $20B. We really need to stop mixing up our stock and flows, and putting dollar amounts derived from the latter to the former in ways that make no sense.
- mizzack 5y ago
  A lot less than $20B. That's why creditors are eating losses.
- deleted 5y ago
  [deleted]
- headmelted 5y ago
  The article implies he was worth $20bn and lost all of it, which could easily be the case if he was leveraged 5:1 and had $100bn AUM in the fund. The circumstances are quite surprising given that this was his family office. From previous stories it sounded like Archegos was a hedge fund that blew up and lost investor money - but reading this it seems he was gambling with swaps on his own money plus whatever investment banks would lend him. It kind of sounds like he screwed up in losing his fortune, but rather than any kind of fraud the banks in question just screwed up worse by not doing proper diligence on their borrower (although obviously we don’t have insight into what was disclosed to the lenders, so who knows?). “If you owe the bank a thousand bucks you have a problem, if you owe the bank a million bucks they have a problem” comes to mind.
  - hogFeast 5y ago
    The swaps are the lending instrument. He used CFDs which are a type of OTC derivative. Instead of buying the stock, you put up some margin and (usually) promise to swap cash daily based on the movement in an underlying stock (or basket of stocks) i.e. instead of buying F, you promise to pay/receive the loss/gain in F stock every day. The leverage comes, of course, when investment banks say you can pay/receive the cash flows on a position worth X shares but only need to put margin that is significantly less than the actual purchase price for X shares i.e. for a $100 notional exposure, you only need to put up $5 in margin. Something to bear in mind if this sounds confusing. The risk doesn't go anywhere. If an investment bank agrees to pay the gain in the share price of AMZN, they hedge their risk by buying shares. There are a few unique things about the case, it seems implausible that Archegos weren't aware they were cornering the market for certain stocks through investment banks hedging their exposure, but the macro point is that the risk hasn't disappeared. Amazingly, this happened in 2007 too (everyone thought that the MBS market was deep and liquid...no, it was pretty much all owned by some particularly dense bankers in Germany/Japan/etc.). People forget that risk doesn't go anywhere and there is a point where risk-taking is just too high relative to the actual productivity of the underlying assets. Also, I don't the detail is out there. But the $20bn, I believe, refers to the gross leveraged position. It is very likely that he was leveraging every bit of equity he had on the way up (it doesn't matter anyway, all of his equity is going to be wiped out).
- snarf21 5y ago
  Yeah, this isn't investing. This is gambling.
  - MR4D 5y ago
    Worse - it's gambling with other people's money and then charging 2-and-20 on it. Actually, now that I think of it, it's even worse that that! - its taking other people's money, then leveraging it, and then charging 2-and-20. Who needs to be a criminal when you can just do this instead?
    - pradn 5y ago
      It was his family office, not a public-ish hedge fund.
    - alborzb 5y ago
      It's a family office, not a public investment fund, so I don't think the "other's people's money" phrase is valid here. It's kind of fuzzy just how much of it was leveraged, but there's more clarity into the situation of the family office in this article -- https://www.ft.com/content/c319839d-d185-4e8a-bbc7-659bebe58031 https://www.ft.com/content/c319839d-d185-4e8a-bbc7-659bebe58...
    - dragontamer 5y ago
      Archegos Capital was largely Bill Hwang (and his family's) money. No one really weeps for this guy. This is absolutely a situation where you can be Nelson (from the Simpsons) and just laugh at this idiot's mistake, without feeling bad about it. Overleveraging billions of your own money, and losing it all in a couple of days takes a certain level of recklessness. There were a few banks that got caught up in this issue (Credit Suisse lost $5 billion on this). But once again, we can just sit back and laugh at Credit Suisse for failing to account for the risk in granting Bill Hwang leverage. Not like an "Evil Laugh" or anything, but... sometimes investors make a mistake (be it a fund like Archegos Capital, or a bank like Credit Suisse). When they make mistakes, they loose $Billions. That's part of the risks they take when they do their business. Fair game when they lose on their bets.
markus_zhang 5y ago
I'm just curious how does HN prioritize posts. TBH I don't think this is very relevant to HN overall, plus it doesn't have a lot of up-votes and 0 discussion (till now). How does it show up in the front page at all?
- gruez 5y ago
  AFAIK it's a combination score + recency, with penalties if it's flagged and/or getting a lot of comments.
- endisneigh 5y ago
  I'm curious why you don't think it's relevant to HN, or do you think finance in general is irrelevant?
  - markus_zhang 5y ago
    The problem is if finance is very relevant then pretty much we should be able to see a whole range of financial topics here. I still consider HN to be more tech related, but again this is just my POV. And if the community thinks finance is at least equally relevant then I'm fine. I mean I don't "hate" this post, I'm just curious how relevant it is to HN community. And I could be on the wrong end.
    - b0afc375b5 5y ago
      Agreed. I would say fin tech is somewhat relevant, since it has the tech component. But finance in general does not interest me at all. And that's coming from a former accountant.
    - brokencode 5y ago
      Stories are relevant if people find them interesting, and that’s about all the rhyme or reason there is to it. Somebody losing $20 billion in a matter of days is very eye-catching.
    - plank_time 5y ago
      You are definitely on the wrong end. HN is for any articles that are interesting, with a bias towards tech but not exclusively about it. This is a fascinating article and I’m glad that it was posted.
grey-area 5y ago
It came out recently that Bill Hwang also funded the first 4 ETFs from ARKK.
- jedberg 5y ago
  I'm not super familiar with ARKK. What does this imply and why was it revelatory that he was involved?
  - endisneigh 5y ago
    It basically just means that he pumped ARKK with debt and/or gains from leveraged investments. You could say that the implication is that ARKK's main investments, e.g. TSLA were also pumped. Given that most of ARKKs investments started to tank around the same time this fiasco happened, it could also imply some level of interconnectedness that investors were not explicitly made aware of (and they probably should've).
  - speeder 5y ago
    ARKK has been declining heavily lately, and according to some analysts it has been the culprit of a bunch of Nasdaq crashes the past 3 months. Seemly ARKK is focused on tech stocks, and as they keep losing share price they keep selling FAANG stocks to buy their own shares or smaller companies shares in an attempt to stall their losses. There was lots of speculation they were going to crash hard like Archegos did, and that was BEFORE the Archegos involvement was known.
    - hogFeast 5y ago
      When ARKK blows up it will precipitate a change in how some ETFs operate. ARKK is basically Archegos-lite (with retail investors bag-holding, not investment banks), they have invested heavily in a few stocks, have cornered the price, and when the fire alarm goes off they are the fat guy that gets jammed in the fire door. The fundamental principle of an ETF is liquidity, ARKK has wilfully debauched the concept for their own gain. You are seeing this with a few other ETFs, particularly INRG...amazingly given that they blew up in 2008 for the same reason, but a lot of these are attempting to manage the concentration risk (INRG recently rebalanced). ARKK is just pure greed: marketing fiction, aggressively corner the market, fuck the customers, fuck the consequences.
endisneigh 5y ago
It's incredible that he managed to be that leveraged to begin with. So much of the modern economy is built up on debt and leverage. Sometimes I can't help but feel it will all unravel, very quickly. What will it take? An asteroid impact? Another strange thing is the following: > U.S. rules prevent individual investors from buying securities with more than 50% of the money borrowed on margin. No such limits apply to hedge funds and family offices. People familiar with Archegos say the firm steadily ramped up its leverage. Initially that meant about “2x,” or $1 million borrowed for every $1 million of capital. By late March the leverage was 5x or more. Why are the rules not also applied to hedge funds? I wish I could say this is the only one, but from my knowledge there are a lot of rules that pretty much only apply to retail.
- grecy 5y ago
  > Sometimes I can't help but feel it will all unravel, very quickly. What will it take? A global pandemic got close, but they've just been printing money as fast as possible to stave it off. Time will tell if that's a good long term strategy.
- nielsbot 5y ago
  That was the home mortgage crisis.
- selectodude 5y ago
  >Why are the rules not also applied to hedge funds? Because the idea is that people who have enough money to invest in a hedge fund have enough money to lose it all and not end up on welfare.
  - endisneigh 5y ago
    I've heard this before, but you could argue that corporate welfare in the form of stimulus is a thing. Personally, I'd argue that if what you're saying is the actual position governments take, then there should be way more scrutiny towards organizations, given that they'll come screaming for help in the form of tax cuts or stimulus if they fail (either the failing organizations directly or those affected by the failing organization).
fallingfrog 5y ago
In the words of Steve Eisman, “They mistook leverage for genius.” Any big, overleveraged bet is going to go bad eventually, no matter how well researched.
- _wldu 5y ago
  Leverage is often framed as being sophisticated and savvy when in reality it's just reckless gambling. The house normally wins. Unsophisticated people realize this.
  - fennecfoxen 5y ago
    Leverage still makes lots of sense if you can put your liabilities in a separate limited-liability container. If you win, you win big; if you lose, you lose a finite amount in the form of the down payment, get a percentage of the value back as something you can deduct from your taxes, while whoever lent you money is stuck with your asset. (This does become problematic at scale when you borrow from the government or taxpayer-backed entities, like when Fannie Mae originates your commercial real-estate venture's mortgage.)
    - fallingfrog 5y ago
      How is that possible/legal? Is that some kind of structure that wealthy people have access to but regular people don’t? It sounds like you’re describing a way to externalize your losses to the bank or to the public, which is indeed the best way to make money fast, but is parasitic on society as a whole.
      - fighterpilot 5y ago
        It is both possible and legal for anyone in an agency relationship, be it an executive at a company or a hedge fund manager. Executive - take a massive unjustified risk (in terms of company direction), if it works out, get a huge bonus, if it doesn't work, get fired (by the board) Hedge fund manager - take a massive unjustified risk (in terms of a trade), if it works out, get a huge bonus, if it doesn't work, get fired (by your clients) These are both long call options with the premium equal to the opportunity cost of missed salary and the reputational impact. Individuals can't do it because they're not an agent for another group or another individual.
BiteCode_dev 5y ago
Someone is going to quote fooled by randomness in 3, 2, 1...
CyanLite2 5y ago
Lemme guess.... levered up 100:1 to invest in dogecoin?
istjohn 5y ago
Paywall: https://archive.is/h4hWp https://archive.is/h4hWp
- kpennell 5y ago
  https://github.com/iamadamdev/bypass-paywalls-chrome https://github.com/iamadamdev/bypass-paywalls-chrome
pkulak 5y ago
Ctrl-F for "The first in a cascade of events" and start reading there.
nabla9 5y ago
> “I try to invest according to the word of God and the power of the Holy Spirit”* >When the smoke finally cleared, Goldman, Deutsche Bank AG, Morgan Stanley, and Wells Fargo had escaped the Archegos fire sale unscathed. Bible lesson: For to everyone who has will more be given, and he will have an abundance. But from the one who has not, even what he has will be taken away. Matthew 25:29
- FredPret 5y ago
  Never knew Jesus talked about compound interest on investments and debt!
lordnacho 5y ago
Seems pretty straightforward to me, as a former fund manager. He had swaps so he could get leverage, and then had some concentrated positions in some shares. They went the wrong way, it ate up all of his capital, and it ate up some of the lenders' capital as well. The thing to remember is it didn't blow up the entire financial system, the banks still have capital left, it's just one guy who took a risk and some banks who took a risk on him. At the other end of the market, retail spreadbetting, this happens all the time. Perhaps not the spreadbetting co blowing up like on the CHF trade, but punters lose their stash when they are leveraged every day. It's basically the business model for some of these shops. The only minor insight this affair gives is that a lot of fund managers are just taking bigger risks, not being better selectors of investments. Eg you could just Martingale bet for a long time and probably look ok, until you look stupid. There's plenty of ways to make it skewed as well, so it's not 50/50 each day whether you make money, you can trade the skewness for the blowup risk.
- deleted 5y ago
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- deleted 5y ago
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- anonymouse008 5y ago
  I'm not a fund manager - and only took a few classes, so I'm probably way off in this line of questioning... Do you think he and potential compatriots gained additional exposure through the options chain? I'm still struggling to understand how there were $Xm+ weeklies significantly OTM on TSLA and other names the Monday of expiry. Could it be seen as a good investment strategy if you had exposure in other vehicles that just needed to cover the premium (assuming the greeks were right)?
  - lordnacho 5y ago
    I haven't looked at the data but he could certainly have bought some kind of structured product to enhance his bet further, which would turn up in the options. Normally the bank would look at your total position and work out from there what they thought your daily risk was, and thus how much margin to ask for. What isn't so easy is to spot the massive whale who's taken the same position with all the banks, so big that he moves the market the wrong way when it goes badly. Then your risk model is pretty useless.
ddalex 5y ago
Loss of a hundred dollars is a tragedy... the loss of billion is a statistic
ChrisArchitect 5y ago
news from a month ago posted in many articles on here more related discussion here: Credit Suisse Loses 4.7B https://news.ycombinator.com/item?id=26710344 https://news.ycombinator.com/item?id=26710344
- dang 5y ago
  Ah good catch. I invited the OP to repost the OP because I hadn't seen the story discussed on HN yet. Oops.
keeptrying 5y ago
His investors I do feel sorry for but honestly as long as he has $10M left (which I'm guessing he does), he'll be fine.
- Traster 5y ago
  The entire point of this is that he had a family shop - he didn't have investors. He was investing with his own money along with a load of leverage. The real losers here are people like Credit Suisse who booked billions in losses to cover a client that was paying them maybe millions in fees.
paulpauper 5y ago
>richer men and women, of course, but their money is mostly tied up in businesses, real estate, complex investments, sports teams, and artwork. Hwang’s $20 billion net worth was almost as liquid as a government stimulus check. And then, in two short days, it was gone. This is false. Stocks and real estate (in metro areas especially) is as liquid as cash. Tesla, google, msft,amazon , brk.a, are very liquid and trade hundreds of billions of dollars a day. The richest people in the world have almost all of their net worth in highly liquid stocks.
- deleted 5y ago
  [deleted]
- Traster 5y ago
  No I think this is actually a fair point, take Musk for example, he owns about 20% of TSLA which is worth ~120B and his total worth is ~150B. If Musk chose to liquidate that then we'd have to speculate quite broadly about what the new fair value for TSLA would be at. It has taken Gates literally decades to completely sell of his stake in MS.
paulpauper 5y ago
if you have $200 million why take such risk. instead diversify in FAANG+MSFT+TESLA with no leverage and make 40%/year easy as pie https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=2018&firstMonth=1&endYear=2021&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=0&absoluteDeviation=5.0&relativeDeviation=25.0&reinvestDividends=true&showYield=false&showFactors=false&factorModel=3&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=PYPL&allocation1_1=11&symbol2=AMZN&allocation2_1=12&symbol3=GOOG&allocation3_1=11&symbol4=V&allocation4_1=11&symbol5=MA&allocation5_1=11&symbol6=TQQQ&allocation6_1=11&symbol7=TSLA&allocation7_1=11&symbol8=MSFT&allocation8_1=11&symbol9=FB&allocation9_1=11&symbol10=ARKK&allocation10_1=0&allocation10_2=100&symbol11=SPY&allocation11_1=0&allocation11_2=0&allocation11_3=100 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
- xxpor 5y ago
  Not that I agree with this comment, but it just made me realize FAANG doesn't include MS, even though every time it's used it probably implies it.
  - TMWNN 5y ago
    When the term was coined Microsoft was still seen as old and stodgy, a half step above Oracle and IBM. Its image didn't change until after Satya Nadella became CEO in 2014 and Azure became the Avis to AWS's Hertz.
- suyash 5y ago
  this looks like a good site, can you do future projections with this tool ?
- cheschire 5y ago
  Greed, probably. 40% isn't enough for some people, they'd rather make multiple hundreds of percent profit in options trading.
- 5y ago
IMTDb 5y ago
> [After being convicted for wire fraud] When he informed [his mother] that the fines and disgorgements totaled more than $60 million, she replied, “Oh, dear. You did well, Sung Kook. Our America is going through a difficult time. Consider the amount you are paying as a tax.” No. You "did not well". It's not a tax, it's a fine for being a cheater, you should not be allowed to own or trade any financial product. The fact that he was not prevented from doing any more business is the real issue here.
wilsonfiifi 5y ago
To put that amount into perspective That's like 1/2 to 1/3 of the GDP of quite a few sub-Saharan countries! Yikes!
- avrionov 5y ago
  Great point. His loss is bigger than the GDP of the bottom 80 countries in the world. 113 Laos 20,440 114 Afghanistan 19,938 115 Mali 19,912 116 Lebanon (2020) 19,126 117 Zambia 18,955 118 Burkina Faso 18,853 119 Botswana 18,726 120 Gabon 18,362 121 Benin 17,327 122 Albania 17,138 123 Palestine[n 7] 16,481 124 Malta 16,476 125 Guinea 16,339 126 Georgia 16,163 127 Niger 15,899 128 Brunei 15,278 129 Madagascar 14,746 130 Jamaica 14,600 131 Mongolia 14,233 132 Mozambique 13,957 133 North Macedonia 13,821 134 Chad 12,531 135 Nicaragua 12,283 136 Armenia 12,251 137 Mauritius 12,212 138 Republic of the Congo 12,022 139 Moldova[n 8] 11,998 140 Equatorial Guinea 11,726 141 Bahamas 11,706 142 Namibia 11,381 143 Rwanda 10,633 144 Malawi 9,268 145 Mauritania 9,239 146 Kosovo 8,810 147 Togo 8,627 148 Tajikistan 7,825 149 Kyrgyzstan 7,470 150 Guyana 7,255 . . . 192 Tuvalu 57
ur-whale 5y ago
https://archive.is/h4hWp https://archive.is/h4hWp
tacon 5y ago
I had a deja vu moment in the article, when the banks realized that the first one to sell would have an advantage. Then overnight they dumped their positions, done by the time the market opened the next day. That is pretty much the plot of the excellent movie "Margin Call" (2011): https://en.wikipedia.org/wiki/Margin_Call https://en.wikipedia.org/wiki/Margin_Call
eqvinox 5y ago
So, uh... when is it "betting on stocks" (as in that article) and when is it "investing in stocks"? This has a slight taste of Newspeak...
- jmccaf 5y ago
  There is a joke about the irregular English conjugation of the verb "invest": - I invest - you trade - they speculate
  - TMWNN 5y ago
    >A recession is when your neighbor loses his job. A depression is when you lose yours. And recovery is when Jimmy Carter loses his. —Ronald Reagan, 1980 http://www.slate.com/id/2201249/ http://www.slate.com/id/2201249/
rvba 5y ago
> That Thursday his prime brokers held a series of emergency meetings. > The dilemma for Hwang’s lenders was obvious. If the stocks in his swap accounts rebounded, everyone would be fine. But if even one bank flinched and started selling, they’d all be exposed to plummeting prices. Credit Suisse wanted to wait. Isnt this market manipulation? Assuming that they didnt sell? I mean, even if they sell, it still sounds like insider trading / collusion?
spinny 5y ago
just pat him on the back and throw some taxpayer money as a bonus to the man
banbanbang 5y ago
If you think this is bad wait till you find out how much of current equity market is leveraged on top of crypto. The contagion will be massive and nothing like we ever experienced. That makes it even more dangerous because the Fed and CBs will not be able to do anything about it in coming weeks and months.

If someone lost $20B in 2 days, what did they have to begin with? Probably not a "real" $20B. We really need to stop mixing up our stock and flows, and putting dollar amounts derived from the latter to the former in ways that make no sense.

mizzack 5y ago
A lot less than $20B. That's why creditors are eating losses.
deleted 5y ago
[deleted]
headmelted 5y ago
The article implies he was worth $20bn and lost all of it, which could easily be the case if he was leveraged 5:1 and had $100bn AUM in the fund. The circumstances are quite surprising given that this was his family office. From previous stories it sounded like Archegos was a hedge fund that blew up and lost investor money - but reading this it seems he was gambling with swaps on his own money plus whatever investment banks would lend him. It kind of sounds like he screwed up in losing his fortune, but rather than any kind of fraud the banks in question just screwed up worse by not doing proper diligence on their borrower (although obviously we don’t have insight into what was disclosed to the lenders, so who knows?). “If you owe the bank a thousand bucks you have a problem, if you owe the bank a million bucks they have a problem” comes to mind.
- hogFeast 5y ago
  The swaps are the lending instrument. He used CFDs which are a type of OTC derivative. Instead of buying the stock, you put up some margin and (usually) promise to swap cash daily based on the movement in an underlying stock (or basket of stocks) i.e. instead of buying F, you promise to pay/receive the loss/gain in F stock every day. The leverage comes, of course, when investment banks say you can pay/receive the cash flows on a position worth X shares but only need to put margin that is significantly less than the actual purchase price for X shares i.e. for a $100 notional exposure, you only need to put up $5 in margin. Something to bear in mind if this sounds confusing. The risk doesn't go anywhere. If an investment bank agrees to pay the gain in the share price of AMZN, they hedge their risk by buying shares. There are a few unique things about the case, it seems implausible that Archegos weren't aware they were cornering the market for certain stocks through investment banks hedging their exposure, but the macro point is that the risk hasn't disappeared. Amazingly, this happened in 2007 too (everyone thought that the MBS market was deep and liquid...no, it was pretty much all owned by some particularly dense bankers in Germany/Japan/etc.). People forget that risk doesn't go anywhere and there is a point where risk-taking is just too high relative to the actual productivity of the underlying assets. Also, I don't the detail is out there. But the $20bn, I believe, refers to the gross leveraged position. It is very likely that he was leveraging every bit of equity he had on the way up (it doesn't matter anyway, all of his equity is going to be wiped out).
snarf21 5y ago
Yeah, this isn't investing. This is gambling.
- MR4D 5y ago
  Worse - it's gambling with other people's money and then charging 2-and-20 on it. Actually, now that I think of it, it's even worse that that! - its taking other people's money, then leveraging it, and then charging 2-and-20. Who needs to be a criminal when you can just do this instead?
  - pradn 5y ago
    It was his family office, not a public-ish hedge fund.
  - alborzb 5y ago
    It's a family office, not a public investment fund, so I don't think the "other's people's money" phrase is valid here. It's kind of fuzzy just how much of it was leveraged, but there's more clarity into the situation of the family office in this article -- https://www.ft.com/content/c319839d-d185-4e8a-bbc7-659bebe58031 https://www.ft.com/content/c319839d-d185-4e8a-bbc7-659bebe58...
  - dragontamer 5y ago
    Archegos Capital was largely Bill Hwang (and his family's) money. No one really weeps for this guy. This is absolutely a situation where you can be Nelson (from the Simpsons) and just laugh at this idiot's mistake, without feeling bad about it. Overleveraging billions of your own money, and losing it all in a couple of days takes a certain level of recklessness. There were a few banks that got caught up in this issue (Credit Suisse lost $5 billion on this). But once again, we can just sit back and laugh at Credit Suisse for failing to account for the risk in granting Bill Hwang leverage. Not like an "Evil Laugh" or anything, but... sometimes investors make a mistake (be it a fund like Archegos Capital, or a bank like Credit Suisse). When they make mistakes, they loose $Billions. That's part of the risks they take when they do their business. Fair game when they lose on their bets.

markus_zhang 5y ago

I'm just curious how does HN prioritize posts. TBH I don't think this is very relevant to HN overall, plus it doesn't have a lot of up-votes and 0 discussion (till now). How does it show up in the front page at all?

gruez 5y ago
AFAIK it's a combination score + recency, with penalties if it's flagged and/or getting a lot of comments.
endisneigh 5y ago
I'm curious why you don't think it's relevant to HN, or do you think finance in general is irrelevant?
- markus_zhang 5y ago
  The problem is if finance is very relevant then pretty much we should be able to see a whole range of financial topics here. I still consider HN to be more tech related, but again this is just my POV. And if the community thinks finance is at least equally relevant then I'm fine. I mean I don't "hate" this post, I'm just curious how relevant it is to HN community. And I could be on the wrong end.
  - b0afc375b5 5y ago
    Agreed. I would say fin tech is somewhat relevant, since it has the tech component. But finance in general does not interest me at all. And that's coming from a former accountant.
  - brokencode 5y ago
    Stories are relevant if people find them interesting, and that’s about all the rhyme or reason there is to it. Somebody losing $20 billion in a matter of days is very eye-catching.
  - plank_time 5y ago
    You are definitely on the wrong end. HN is for any articles that are interesting, with a bias towards tech but not exclusively about it. This is a fascinating article and I’m glad that it was posted.

grey-area 5y ago

It came out recently that Bill Hwang also funded the first 4 ETFs from ARKK.

jedberg 5y ago
I'm not super familiar with ARKK. What does this imply and why was it revelatory that he was involved?
- endisneigh 5y ago
  It basically just means that he pumped ARKK with debt and/or gains from leveraged investments. You could say that the implication is that ARKK's main investments, e.g. TSLA were also pumped. Given that most of ARKKs investments started to tank around the same time this fiasco happened, it could also imply some level of interconnectedness that investors were not explicitly made aware of (and they probably should've).
- speeder 5y ago
  ARKK has been declining heavily lately, and according to some analysts it has been the culprit of a bunch of Nasdaq crashes the past 3 months. Seemly ARKK is focused on tech stocks, and as they keep losing share price they keep selling FAANG stocks to buy their own shares or smaller companies shares in an attempt to stall their losses. There was lots of speculation they were going to crash hard like Archegos did, and that was BEFORE the Archegos involvement was known.
  - hogFeast 5y ago
    When ARKK blows up it will precipitate a change in how some ETFs operate. ARKK is basically Archegos-lite (with retail investors bag-holding, not investment banks), they have invested heavily in a few stocks, have cornered the price, and when the fire alarm goes off they are the fat guy that gets jammed in the fire door. The fundamental principle of an ETF is liquidity, ARKK has wilfully debauched the concept for their own gain. You are seeing this with a few other ETFs, particularly INRG...amazingly given that they blew up in 2008 for the same reason, but a lot of these are attempting to manage the concentration risk (INRG recently rebalanced). ARKK is just pure greed: marketing fiction, aggressively corner the market, fuck the customers, fuck the consequences.

endisneigh 5y ago

It's incredible that he managed to be that leveraged to begin with. So much of the modern economy is built up on debt and leverage. Sometimes I can't help but feel it will all unravel, very quickly. What will it take? An asteroid impact? Another strange thing is the following: > U.S. rules prevent individual investors from buying securities with more than 50% of the money borrowed on margin. No such limits apply to hedge funds and family offices. People familiar with Archegos say the firm steadily ramped up its leverage. Initially that meant about “2x,” or $1 million borrowed for every $1 million of capital. By late March the leverage was 5x or more. Why are the rules not also applied to hedge funds? I wish I could say this is the only one, but from my knowledge there are a lot of rules that pretty much only apply to retail.

grecy 5y ago
> Sometimes I can't help but feel it will all unravel, very quickly. What will it take? A global pandemic got close, but they've just been printing money as fast as possible to stave it off. Time will tell if that's a good long term strategy.
nielsbot 5y ago
That was the home mortgage crisis.
selectodude 5y ago
>Why are the rules not also applied to hedge funds? Because the idea is that people who have enough money to invest in a hedge fund have enough money to lose it all and not end up on welfare.
- endisneigh 5y ago
  I've heard this before, but you could argue that corporate welfare in the form of stimulus is a thing. Personally, I'd argue that if what you're saying is the actual position governments take, then there should be way more scrutiny towards organizations, given that they'll come screaming for help in the form of tax cuts or stimulus if they fail (either the failing organizations directly or those affected by the failing organization).

fallingfrog 5y ago

In the words of Steve Eisman, “They mistook leverage for genius.” Any big, overleveraged bet is going to go bad eventually, no matter how well researched.

_wldu 5y ago
Leverage is often framed as being sophisticated and savvy when in reality it's just reckless gambling. The house normally wins. Unsophisticated people realize this.
- fennecfoxen 5y ago
  Leverage still makes lots of sense if you can put your liabilities in a separate limited-liability container. If you win, you win big; if you lose, you lose a finite amount in the form of the down payment, get a percentage of the value back as something you can deduct from your taxes, while whoever lent you money is stuck with your asset. (This does become problematic at scale when you borrow from the government or taxpayer-backed entities, like when Fannie Mae originates your commercial real-estate venture's mortgage.)
  - fallingfrog 5y ago
    How is that possible/legal? Is that some kind of structure that wealthy people have access to but regular people don’t? It sounds like you’re describing a way to externalize your losses to the bank or to the public, which is indeed the best way to make money fast, but is parasitic on society as a whole.
    - fighterpilot 5y ago
      It is both possible and legal for anyone in an agency relationship, be it an executive at a company or a hedge fund manager. Executive - take a massive unjustified risk (in terms of company direction), if it works out, get a huge bonus, if it doesn't work, get fired (by the board) Hedge fund manager - take a massive unjustified risk (in terms of a trade), if it works out, get a huge bonus, if it doesn't work, get fired (by your clients) These are both long call options with the premium equal to the opportunity cost of missed salary and the reputational impact. Individuals can't do it because they're not an agent for another group or another individual.

BiteCode_dev 5y ago

Someone is going to quote fooled by randomness in 3, 2, 1...

CyanLite2 5y ago

Lemme guess.... levered up 100:1 to invest in dogecoin?

istjohn 5y ago

Paywall: https://archive.is/h4hWp https://archive.is/h4hWp

kpennell 5y ago
https://github.com/iamadamdev/bypass-paywalls-chrome https://github.com/iamadamdev/bypass-paywalls-chrome

pkulak 5y ago

Ctrl-F for "The first in a cascade of events" and start reading there.

nabla9 5y ago

> “I try to invest according to the word of God and the power of the Holy Spirit”* >When the smoke finally cleared, Goldman, Deutsche Bank AG, Morgan Stanley, and Wells Fargo had escaped the Archegos fire sale unscathed. Bible lesson: For to everyone who has will more be given, and he will have an abundance. But from the one who has not, even what he has will be taken away. Matthew 25:29

FredPret 5y ago
Never knew Jesus talked about compound interest on investments and debt!

lordnacho 5y ago

Seems pretty straightforward to me, as a former fund manager. He had swaps so he could get leverage, and then had some concentrated positions in some shares. They went the wrong way, it ate up all of his capital, and it ate up some of the lenders' capital as well. The thing to remember is it didn't blow up the entire financial system, the banks still have capital left, it's just one guy who took a risk and some banks who took a risk on him. At the other end of the market, retail spreadbetting, this happens all the time. Perhaps not the spreadbetting co blowing up like on the CHF trade, but punters lose their stash when they are leveraged every day. It's basically the business model for some of these shops. The only minor insight this affair gives is that a lot of fund managers are just taking bigger risks, not being better selectors of investments. Eg you could just Martingale bet for a long time and probably look ok, until you look stupid. There's plenty of ways to make it skewed as well, so it's not 50/50 each day whether you make money, you can trade the skewness for the blowup risk.

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anonymouse008 5y ago
I'm not a fund manager - and only took a few classes, so I'm probably way off in this line of questioning... Do you think he and potential compatriots gained additional exposure through the options chain? I'm still struggling to understand how there were $Xm+ weeklies significantly OTM on TSLA and other names the Monday of expiry. Could it be seen as a good investment strategy if you had exposure in other vehicles that just needed to cover the premium (assuming the greeks were right)?
- lordnacho 5y ago
  I haven't looked at the data but he could certainly have bought some kind of structured product to enhance his bet further, which would turn up in the options. Normally the bank would look at your total position and work out from there what they thought your daily risk was, and thus how much margin to ask for. What isn't so easy is to spot the massive whale who's taken the same position with all the banks, so big that he moves the market the wrong way when it goes badly. Then your risk model is pretty useless.

ddalex 5y ago

Loss of a hundred dollars is a tragedy... the loss of billion is a statistic

ChrisArchitect 5y ago

news from a month ago posted in many articles on here more related discussion here: Credit Suisse Loses 4.7B https://news.ycombinator.com/item?id=26710344 https://news.ycombinator.com/item?id=26710344

dang 5y ago
Ah good catch. I invited the OP to repost the OP because I hadn't seen the story discussed on HN yet. Oops.

keeptrying 5y ago

His investors I do feel sorry for but honestly as long as he has $10M left (which I'm guessing he does), he'll be fine.

Traster 5y ago
The entire point of this is that he had a family shop - he didn't have investors. He was investing with his own money along with a load of leverage. The real losers here are people like Credit Suisse who booked billions in losses to cover a client that was paying them maybe millions in fees.

paulpauper 5y ago

>richer men and women, of course, but their money is mostly tied up in businesses, real estate, complex investments, sports teams, and artwork. Hwang’s $20 billion net worth was almost as liquid as a government stimulus check. And then, in two short days, it was gone. This is false. Stocks and real estate (in metro areas especially) is as liquid as cash. Tesla, google, msft,amazon , brk.a, are very liquid and trade hundreds of billions of dollars a day. The richest people in the world have almost all of their net worth in highly liquid stocks.

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Traster 5y ago
No I think this is actually a fair point, take Musk for example, he owns about 20% of TSLA which is worth ~120B and his total worth is ~150B. If Musk chose to liquidate that then we'd have to speculate quite broadly about what the new fair value for TSLA would be at. It has taken Gates literally decades to completely sell of his stake in MS.

paulpauper 5y ago

if you have $200 million why take such risk. instead diversify in FAANG+MSFT+TESLA with no leverage and make 40%/year easy as pie https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=2018&firstMonth=1&endYear=2021&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=0&absoluteDeviation=5.0&relativeDeviation=25.0&reinvestDividends=true&showYield=false&showFactors=false&factorModel=3&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=PYPL&allocation1_1=11&symbol2=AMZN&allocation2_1=12&symbol3=GOOG&allocation3_1=11&symbol4=V&allocation4_1=11&symbol5=MA&allocation5_1=11&symbol6=TQQQ&allocation6_1=11&symbol7=TSLA&allocation7_1=11&symbol8=MSFT&allocation8_1=11&symbol9=FB&allocation9_1=11&symbol10=ARKK&allocation10_1=0&allocation10_2=100&symbol11=SPY&allocation11_1=0&allocation11_2=0&allocation11_3=100 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...

xxpor 5y ago
Not that I agree with this comment, but it just made me realize FAANG doesn't include MS, even though every time it's used it probably implies it.
- TMWNN 5y ago
  When the term was coined Microsoft was still seen as old and stodgy, a half step above Oracle and IBM. Its image didn't change until after Satya Nadella became CEO in 2014 and Azure became the Avis to AWS's Hertz.
suyash 5y ago
this looks like a good site, can you do future projections with this tool ?
cheschire 5y ago
Greed, probably. 40% isn't enough for some people, they'd rather make multiple hundreds of percent profit in options trading.
5y ago

IMTDb 5y ago

> [After being convicted for wire fraud] When he informed [his mother] that the fines and disgorgements totaled more than $60 million, she replied, “Oh, dear. You did well, Sung Kook. Our America is going through a difficult time. Consider the amount you are paying as a tax.” No. You "did not well". It's not a tax, it's a fine for being a cheater, you should not be allowed to own or trade any financial product. The fact that he was not prevented from doing any more business is the real issue here.

wilsonfiifi 5y ago

To put that amount into perspective That's like 1/2 to 1/3 of the GDP of quite a few sub-Saharan countries! Yikes!

avrionov 5y ago
Great point. His loss is bigger than the GDP of the bottom 80 countries in the world. 113 Laos 20,440 114 Afghanistan 19,938 115 Mali 19,912 116 Lebanon (2020) 19,126 117 Zambia 18,955 118 Burkina Faso 18,853 119 Botswana 18,726 120 Gabon 18,362 121 Benin 17,327 122 Albania 17,138 123 Palestine[n 7] 16,481 124 Malta 16,476 125 Guinea 16,339 126 Georgia 16,163 127 Niger 15,899 128 Brunei 15,278 129 Madagascar 14,746 130 Jamaica 14,600 131 Mongolia 14,233 132 Mozambique 13,957 133 North Macedonia 13,821 134 Chad 12,531 135 Nicaragua 12,283 136 Armenia 12,251 137 Mauritius 12,212 138 Republic of the Congo 12,022 139 Moldova[n 8] 11,998 140 Equatorial Guinea 11,726 141 Bahamas 11,706 142 Namibia 11,381 143 Rwanda 10,633 144 Malawi 9,268 145 Mauritania 9,239 146 Kosovo 8,810 147 Togo 8,627 148 Tajikistan 7,825 149 Kyrgyzstan 7,470 150 Guyana 7,255 . . . 192 Tuvalu 57

ur-whale 5y ago

https://archive.is/h4hWp https://archive.is/h4hWp

tacon 5y ago

I had a deja vu moment in the article, when the banks realized that the first one to sell would have an advantage. Then overnight they dumped their positions, done by the time the market opened the next day. That is pretty much the plot of the excellent movie "Margin Call" (2011): https://en.wikipedia.org/wiki/Margin_Call https://en.wikipedia.org/wiki/Margin_Call

eqvinox 5y ago

So, uh... when is it "betting on stocks" (as in that article) and when is it "investing in stocks"? This has a slight taste of Newspeak...

jmccaf 5y ago
There is a joke about the irregular English conjugation of the verb "invest": - I invest - you trade - they speculate
- TMWNN 5y ago
  >A recession is when your neighbor loses his job. A depression is when you lose yours. And recovery is when Jimmy Carter loses his. —Ronald Reagan, 1980 http://www.slate.com/id/2201249/ http://www.slate.com/id/2201249/

rvba 5y ago

> That Thursday his prime brokers held a series of emergency meetings. > The dilemma for Hwang’s lenders was obvious. If the stocks in his swap accounts rebounded, everyone would be fine. But if even one bank flinched and started selling, they’d all be exposed to plummeting prices. Credit Suisse wanted to wait. Isnt this market manipulation? Assuming that they didnt sell? I mean, even if they sell, it still sounds like insider trading / collusion?

spinny 5y ago

just pat him on the back and throw some taxpayer money as a bonus to the man

banbanbang 5y ago

If you think this is bad wait till you find out how much of current equity market is leveraged on top of crypto. The contagion will be massive and nothing like we ever experienced. That makes it even more dangerous because the Fed and CBs will not be able to do anything about it in coming weeks and months.