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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

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.

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.