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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 circumsta

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).

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).