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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 f

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 6y 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 6y ago
That was the home mortgage crisis.
selectodude 6y 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 6y 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).
  - samstave 6y ago
    We talk about corporate welfare, but we never look at political welfare. All these politicians profiting off of every transaction, insidertrading, zero accountability or transparency and zero fucking term limits. The elephant in the data center is politicians and their grift.
    - dnautics 6y ago
      Political welfare in the non-personal-profit sense is at least equally insidious. Possibly worse, because at least when a politician hides $70,000 in their freezer you can put a number on it and it's obviously shameful. A lot of political welfare is taking away from one group of people and giving to another group of people who were lucky enough to be under the auspices of someone more charismatic.
  - selectodude 6y ago
    That's fine, but you'd have to argue with somebody else. I don't work for the SEC.
    - endisneigh 6y ago
      > That's fine, but you'd have to argue with somebody else. I don't work for the SEC. I never claimed you did, we're having a discussion, no? lol.
      - selectodude 6y ago
        I wasn’t making a value judgement on the rationale behind why hedgies can lever tf up, just why the regulations are different depending on how much money you have to lever.
  - xkjkls 6y ago
    When have hedge funders been bailed out?
    - 6y ago
- humanistbot 6y ago
  Except when they are "too big to fail" and get massive government corporate welfare....
  - LatteLazy 6y ago
    Too big to fail applies to banks not hedge funds. If the hedge fund goes bust no one bails them out.
neatze 6y ago
Theoretical maximum for hedge fund after 2008 was/is 12 to 1 leverage (at least in my case), any brokerage account with 100K+ (if not mistaken) can get portfolio margin that is 6 to 1.
- warent 6y ago
  I'm not sure I understand this fully. Are you saying that if you have an account with 1 million dollars in it, you could actually have 6 million invested with 5% returns, making something like 300k annually minus some margin fees?
  - whoknowswhat11 6y ago
    Yes, but if the market goes south 20% the way it did just recently in 2020, they call you up and ask you to put in $5M more or they will liquidate everything that day. So it's not risk free.
  - the_local_host 6y ago
    Yeah it's possible, but it makes more sense to think about negative outcomes before positive outcomes. With enough leverage, you lose half of your money if the market goes down 10%. With more leverage, you lose all your money if the market goes down a few percentage points, as your account gets liquidated on the spot.
  - yellowstuff 6y ago
    I work in levered hedge fund strategies, so I have some insight here, although I don't negotiate financing myself. Banks tailor leverage to your strategy, so if your strategy is just to go long good stocks you won't get anything like 6X leverage. 6X leverage is realistic for a strategy that is long and short equal dollar amounts, and also carefully controls other risks besides dollar exposures. Also, you have to be fairly big to get that kind of leverage. $100 million is probably too small but $1B might be enough. So you put up $1B of your own money, and a bank would let you go long $3B and short $3B. The idea is that your longs hedge your shorts well so you can't lose too much. Obviously, in the case of Archegos the shorts didn't hedge the longs well.
paxys 6y ago
People should be allowed to take risks. There is nothing inherently wrong with being extremely leveraged, as long as you are prepared for the outcome. This is why the common joe does not have access to such investments, but accredited investors do.
- endisneigh 6y ago
  > People should be allowed to take risks Agreed. > There is nothing inherently wrong with being extremely leveraged, as long as you are prepared for the outcome. This is why the common joe does not have access to such investments, but accredited investors do. The downside of an overleveraged investment will affect the "common joe" - given that, what justification is there to allow hedge funds to do it? They receive all the upside, but not all of the downside.
  - paxys 6y ago
    The justification is that going from $50B to $5B isn't as bad as going from $50K to $5K. If people don't have money to eat or pay rent then it's a larger societal problem. Beyond that, you are on your own.
    - deleted 6y ago
      [deleted]
    - ALittleLight 6y ago
      I don't get it. You can go bankrupt without any leverage and definitely with 2:1. I could just put 100% of money in options and lose it all.
      - dragonwriter 6y ago
        > You can go bankrupt without any leverage You have to borrow something to have a debt that cannot be repaid.
zozbot234 6y ago
> It's incredible that he managed to be that leveraged to begin with Is it really that incredible, in the age of WallStreetBets self-defined 'autists' and 'apes'? There are many ways aside from properly-defined 'margin' investment to do very risky bets.
- samsonradu 6y ago
  I’m guessing parent is not familiar with the leverage on crypto platforms. https://www.binance.com/en/support/articles/360033162192 https://www.binance.com/en/support/articles/360033162192
grey-area 6y ago
This was not a hedge fund, it was a family office, a vehicle he chose after his last hedge fund blew up in 2013 and he was fined for fraud. He chose a family office probably because the disclosure requirements are not as arduous as hedge funds, then he lied to lots of banks about his exposure to ramp his own stocks multiple times by buying on margin with multiple partners, till it seems the banks found out and the last banks out were left holding the bag. Classic doubling down on failed leverage and classic signs of the massive bubble in financial assets about to implode.
- paulpauper 6y ago
  People have been predicting bubble and crisis and collapse for a decade to no avail. large companies, especially in tech,are generating record profits and earnings. Hedge fund and trader blow-ups happen in good times and bad. This guy had no idea what he was doing. This is not an indictment on the US economy or financial system.
  - deleted 6y ago
    [deleted]
  - enkid 6y ago
    The last crisis happened a little less than a decade ago, and crisises happen way more often than you seem to realize. 2008, 2001, 1987, 1973 all saw crashes due to some sort of crisis. It seems to happen about once a decade now. There was a period between 1929 and 1973 when they were less common, but before that, they seemed to happen at about that frequency as well.
    - majormajor 6y ago
      If you subscribe to a time-period thing, I guess a lot depends on how you look at the 2020 market fall and recovery... was it too fast to count??
      - enkid 6y ago
DesiLurker 6y ago
>Why are the rules not also applied to hedge funds? I think thats the wrong approach, correct approach would be to have rules to protect the rest of economy from that hedge-fund's possible bad decisions. So yes you should have freedom to lose all your money so long as the risks are highlighted clearly (as in enforceable, good faith, non-fine-print legalese).
thesausageking 6y ago
If a billionaire wants to blow their money on a risky bet, why should the SEC stop it? The $20B he "lost" went into the market and everyone, including retail investors, benefitted. The losers are Hwang and the banks Credit Suisse and Nomura, each of which will do a better job of assessing this kind of risk in the future. Hwang didn't have any outside capital so no one's 401k or personal holdings were affected.
- kovacs 6y ago
  The idea that he only hurt himself is simply not true. Behavior like this distorts markets and price discovery. Speaking of discovery (DISCK/DISKA), that's one of the stocks he bought and ran up from low $20s to $60s. Everyone who bought along the way thinking that the company had turned the corner because of their new streaming platform and that it was now in favor on Wall St. has been crushed. Yes, the market is volatile, but it's even more volatile when we allow some participants to come into the market loaded with cheap money and create havoc. If we're going to allow this unbridled behavior it undermines confidence in the "market". I know I've lost complete confidence in it since the GFC and now with the antics of the Fed over the past year. Knowing that there's no true price signal on anything makes you not want to buy anything, or else accept that the activity is nothing more than a turn at the craps table. And yes, in theory you should be fine long term, but the problem is it depends on your time window. The market can go nowhere for decades because of all the future profits that get pulled forward. We're staring that exact scenario in the face right now is my guess. All this is to say but one thing... end the Fed. Their recklessness is enabling this kind of crap.
  - teachingassist 6y ago
    > Everyone who bought along the way... has been crushed. Everyone who was crushed was under-diversified. Individual stocks fall by 50% all the time.
  - nradov 6y ago
    So what? In general retail investors who take concentrated positions in individual stocks are fools playing with fire. They're going to eventually take a huge loss regardless of the specific cause.
kccqzy 6y ago
Retail investors have been circumventing their requirement inventively. Look up all the Robinhood people using deep ITM calls, or box spreads, or (not at Robinhood but at Schwab, IB, etc) Portfolio Margin to increase the leverage beyond 2x.
singhrac 6y ago
Many are ignoring the fact that his leverage increased partially because the positions went up (a lot). If you buy $200mm of Viacom on $100mm of capital, that's 2x leverage. But if VIAC grows 2.5x (as it did between January and end of March) that's a $500mm position, so 5x leverage. Yes, you're entitled to the gains, but at the end of the day the prime brokers hold $500mm in VIAC stock and $100mm in cash. The prime brokers should not have been lied to, should not have been allowed to get these positions on swaps, and finally should have had an internal risk alert that says "this client is way past their leverage budget!".
- Grustaf 6y ago
  No, you put in 100 and then made 300, so your equity is 400 hence your leverage is down to 1.25x. Another way to see it is that the size of your loan is always 100, it doesn’t grow just because you made a lucky bet.
- bhk 6y ago
  I think you have it backwards. Leverage is the ratio of your notional stake to your net equity. If you buy $200mm of Viacom with $100mm then you have $100mm of debt. When it goes up 2.5X, you now hold $500mm stock and still have debt of $100mm -- net equity $400mm -- so your leverage becomes relatively small. In the Archegos case, a lot of their positions were swaps, so instead of outright ownership they held contracts with banks, but similar logic applies. The problems happen when the assets go down, not up.
semilattice 6y ago
>What will it take? An asteroid impact? I think dislodging US dollar from being 'reserve currency', and subsequently removing US (and UK) financial and judicial systems from being the 'international financial litigation and contract management' realms -- will do it. If it USD is replaced by a gold-backed crypto currency network that uses something other than 'Proof-of-Work' to ensure resiliency against attack. This will be 50% of the steps to get to the above. Replacement of US and UK judicial systems as 'arbitrators' of the contract terms -- will be harder to replace, however. Overall US dollar seems, now supporting what some would call, 'perception based' economy. Where majority of the leverage are afforded to non-material based businesses (Ad networks, financial services, legal services, etc). This kind of focus, perhaps affects the direction of the world progress. Not sure if this 'skewing' is good or bad for the world and future generations. For long time, there was no alternative to Western world ideals and approaches in many respects. But the trust in these has been quickly eroding, and it started decades ago. We might be at the 'apex' of the trust erosion process, but yet to see where it will go. Right now, whether it is a 48K USD for an influencer's ticktock post, or 60K USD + for a bitcoin, or 20 Bln USD losses by a small hedge fund. This all hardly makes any sense ... to many. Unless you look at it as faint indicators of the USD super-volcano-sized inflation, erupting.
scott00 6y ago
Avoidance of margin regulation was not really a factor in what happened here. For exchange traded stocks in the US there are two margining schemes: Reg T and portfolio margin. Reg T is available to anybody and gets you 2x. PM is harder to get, but not that hard: IB will give PM to accounts with at least 100k. PM gets you 6.66x. I think swaps can be used to do better than PM, but Huang didn't need swaps to get 5x.

grecy 6y 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 6y ago

That was the home mortgage crisis.

selectodude 6y 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 6y 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).
- samstave 6y ago
  We talk about corporate welfare, but we never look at political welfare. All these politicians profiting off of every transaction, insidertrading, zero accountability or transparency and zero fucking term limits. The elephant in the data center is politicians and their grift.
  - dnautics 6y ago
    Political welfare in the non-personal-profit sense is at least equally insidious. Possibly worse, because at least when a politician hides $70,000 in their freezer you can put a number on it and it's obviously shameful. A lot of political welfare is taking away from one group of people and giving to another group of people who were lucky enough to be under the auspices of someone more charismatic.
- selectodude 6y ago
  That's fine, but you'd have to argue with somebody else. I don't work for the SEC.
  - endisneigh 6y ago
    > That's fine, but you'd have to argue with somebody else. I don't work for the SEC. I never claimed you did, we're having a discussion, no? lol.
    - selectodude 6y ago
      I wasn’t making a value judgement on the rationale behind why hedgies can lever tf up, just why the regulations are different depending on how much money you have to lever.
- xkjkls 6y ago
  When have hedge funders been bailed out?
  - 6y ago
humanistbot 6y ago
Except when they are "too big to fail" and get massive government corporate welfare....
- LatteLazy 6y ago
  Too big to fail applies to banks not hedge funds. If the hedge fund goes bust no one bails them out.

neatze 6y ago

Theoretical maximum for hedge fund after 2008 was/is 12 to 1 leverage (at least in my case), any brokerage account with 100K+ (if not mistaken) can get portfolio margin that is 6 to 1.

warent 6y ago
I'm not sure I understand this fully. Are you saying that if you have an account with 1 million dollars in it, you could actually have 6 million invested with 5% returns, making something like 300k annually minus some margin fees?
- whoknowswhat11 6y ago
  Yes, but if the market goes south 20% the way it did just recently in 2020, they call you up and ask you to put in $5M more or they will liquidate everything that day. So it's not risk free.
- the_local_host 6y ago
  Yeah it's possible, but it makes more sense to think about negative outcomes before positive outcomes. With enough leverage, you lose half of your money if the market goes down 10%. With more leverage, you lose all your money if the market goes down a few percentage points, as your account gets liquidated on the spot.
- yellowstuff 6y ago
  I work in levered hedge fund strategies, so I have some insight here, although I don't negotiate financing myself. Banks tailor leverage to your strategy, so if your strategy is just to go long good stocks you won't get anything like 6X leverage. 6X leverage is realistic for a strategy that is long and short equal dollar amounts, and also carefully controls other risks besides dollar exposures. Also, you have to be fairly big to get that kind of leverage. $100 million is probably too small but $1B might be enough. So you put up $1B of your own money, and a bank would let you go long $3B and short $3B. The idea is that your longs hedge your shorts well so you can't lose too much. Obviously, in the case of Archegos the shorts didn't hedge the longs well.

paxys 6y ago

People should be allowed to take risks. There is nothing inherently wrong with being extremely leveraged, as long as you are prepared for the outcome. This is why the common joe does not have access to such investments, but accredited investors do.

endisneigh 6y ago
> People should be allowed to take risks Agreed. > There is nothing inherently wrong with being extremely leveraged, as long as you are prepared for the outcome. This is why the common joe does not have access to such investments, but accredited investors do. The downside of an overleveraged investment will affect the "common joe" - given that, what justification is there to allow hedge funds to do it? They receive all the upside, but not all of the downside.
- paxys 6y ago
  The justification is that going from $50B to $5B isn't as bad as going from $50K to $5K. If people don't have money to eat or pay rent then it's a larger societal problem. Beyond that, you are on your own.
  - deleted 6y ago
    [deleted]
  - ALittleLight 6y ago
    I don't get it. You can go bankrupt without any leverage and definitely with 2:1. I could just put 100% of money in options and lose it all.
    - dragonwriter 6y ago
      > You can go bankrupt without any leverage You have to borrow something to have a debt that cannot be repaid.

zozbot234 6y ago

> It's incredible that he managed to be that leveraged to begin with Is it really that incredible, in the age of WallStreetBets self-defined 'autists' and 'apes'? There are many ways aside from properly-defined 'margin' investment to do very risky bets.

samsonradu 6y ago
I’m guessing parent is not familiar with the leverage on crypto platforms. https://www.binance.com/en/support/articles/360033162192 https://www.binance.com/en/support/articles/360033162192

grey-area 6y ago

This was not a hedge fund, it was a family office, a vehicle he chose after his last hedge fund blew up in 2013 and he was fined for fraud. He chose a family office probably because the disclosure requirements are not as arduous as hedge funds, then he lied to lots of banks about his exposure to ramp his own stocks multiple times by buying on margin with multiple partners, till it seems the banks found out and the last banks out were left holding the bag. Classic doubling down on failed leverage and classic signs of the massive bubble in financial assets about to implode.

paulpauper 6y ago
People have been predicting bubble and crisis and collapse for a decade to no avail. large companies, especially in tech,are generating record profits and earnings. Hedge fund and trader blow-ups happen in good times and bad. This guy had no idea what he was doing. This is not an indictment on the US economy or financial system.
- deleted 6y ago
  [deleted]
- enkid 6y ago
  The last crisis happened a little less than a decade ago, and crisises happen way more often than you seem to realize. 2008, 2001, 1987, 1973 all saw crashes due to some sort of crisis. It seems to happen about once a decade now. There was a period between 1929 and 1973 when they were less common, but before that, they seemed to happen at about that frequency as well.
  - majormajor 6y ago
    If you subscribe to a time-period thing, I guess a lot depends on how you look at the 2020 market fall and recovery... was it too fast to count??
    - enkid 6y ago

DesiLurker 6y ago

>Why are the rules not also applied to hedge funds? I think thats the wrong approach, correct approach would be to have rules to protect the rest of economy from that hedge-fund's possible bad decisions. So yes you should have freedom to lose all your money so long as the risks are highlighted clearly (as in enforceable, good faith, non-fine-print legalese).

thesausageking 6y ago

If a billionaire wants to blow their money on a risky bet, why should the SEC stop it? The $20B he "lost" went into the market and everyone, including retail investors, benefitted. The losers are Hwang and the banks Credit Suisse and Nomura, each of which will do a better job of assessing this kind of risk in the future. Hwang didn't have any outside capital so no one's 401k or personal holdings were affected.

kovacs 6y ago
The idea that he only hurt himself is simply not true. Behavior like this distorts markets and price discovery. Speaking of discovery (DISCK/DISKA), that's one of the stocks he bought and ran up from low $20s to $60s. Everyone who bought along the way thinking that the company had turned the corner because of their new streaming platform and that it was now in favor on Wall St. has been crushed. Yes, the market is volatile, but it's even more volatile when we allow some participants to come into the market loaded with cheap money and create havoc. If we're going to allow this unbridled behavior it undermines confidence in the "market". I know I've lost complete confidence in it since the GFC and now with the antics of the Fed over the past year. Knowing that there's no true price signal on anything makes you not want to buy anything, or else accept that the activity is nothing more than a turn at the craps table. And yes, in theory you should be fine long term, but the problem is it depends on your time window. The market can go nowhere for decades because of all the future profits that get pulled forward. We're staring that exact scenario in the face right now is my guess. All this is to say but one thing... end the Fed. Their recklessness is enabling this kind of crap.
- teachingassist 6y ago
  > Everyone who bought along the way... has been crushed. Everyone who was crushed was under-diversified. Individual stocks fall by 50% all the time.
- nradov 6y ago
  So what? In general retail investors who take concentrated positions in individual stocks are fools playing with fire. They're going to eventually take a huge loss regardless of the specific cause.

kccqzy 6y ago

Retail investors have been circumventing their requirement inventively. Look up all the Robinhood people using deep ITM calls, or box spreads, or (not at Robinhood but at Schwab, IB, etc) Portfolio Margin to increase the leverage beyond 2x.

singhrac 6y ago

Many are ignoring the fact that his leverage increased partially because the positions went up (a lot). If you buy $200mm of Viacom on $100mm of capital, that's 2x leverage. But if VIAC grows 2.5x (as it did between January and end of March) that's a $500mm position, so 5x leverage. Yes, you're entitled to the gains, but at the end of the day the prime brokers hold $500mm in VIAC stock and $100mm in cash. The prime brokers should not have been lied to, should not have been allowed to get these positions on swaps, and finally should have had an internal risk alert that says "this client is way past their leverage budget!".

Grustaf 6y ago
No, you put in 100 and then made 300, so your equity is 400 hence your leverage is down to 1.25x. Another way to see it is that the size of your loan is always 100, it doesn’t grow just because you made a lucky bet.
bhk 6y ago
I think you have it backwards. Leverage is the ratio of your notional stake to your net equity. If you buy $200mm of Viacom with $100mm then you have $100mm of debt. When it goes up 2.5X, you now hold $500mm stock and still have debt of $100mm -- net equity $400mm -- so your leverage becomes relatively small. In the Archegos case, a lot of their positions were swaps, so instead of outright ownership they held contracts with banks, but similar logic applies. The problems happen when the assets go down, not up.

semilattice 6y ago

>What will it take? An asteroid impact? I think dislodging US dollar from being 'reserve currency', and subsequently removing US (and UK) financial and judicial systems from being the 'international financial litigation and contract management' realms -- will do it. If it USD is replaced by a gold-backed crypto currency network that uses something other than 'Proof-of-Work' to ensure resiliency against attack. This will be 50% of the steps to get to the above. Replacement of US and UK judicial systems as 'arbitrators' of the contract terms -- will be harder to replace, however. Overall US dollar seems, now supporting what some would call, 'perception based' economy. Where majority of the leverage are afforded to non-material based businesses (Ad networks, financial services, legal services, etc). This kind of focus, perhaps affects the direction of the world progress. Not sure if this 'skewing' is good or bad for the world and future generations. For long time, there was no alternative to Western world ideals and approaches in many respects. But the trust in these has been quickly eroding, and it started decades ago. We might be at the 'apex' of the trust erosion process, but yet to see where it will go. Right now, whether it is a 48K USD for an influencer's ticktock post, or 60K USD + for a bitcoin, or 20 Bln USD losses by a small hedge fund. This all hardly makes any sense ... to many. Unless you look at it as faint indicators of the USD super-volcano-sized inflation, erupting.

scott00 6y ago

Avoidance of margin regulation was not really a factor in what happened here. For exchange traded stocks in the US there are two margining schemes: Reg T and portfolio margin. Reg T is available to anybody and gets you 2x. PM is harder to get, but not that hard: IB will give PM to accounts with at least 100k. PM gets you 6.66x. I think swaps can be used to do better than PM, but Huang didn't need swaps to get 5x.