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?
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.
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.
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.
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.
Ignoring all the ways that tech and finance crisscross one another these days and focusing specifically on HN: Y Combinator is a venture capital firm, and startups are businesses. HN is inextricably tied to finance.
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.
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).
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.
Credit Suisse investors lost that money, so it came out of the pensions and investments of ordinary people who invested in that bank. There were real losers here.
No more than how the London Whale lost $Billions for JP Morgan (and therefore damaged JP Morgan's shareholders). When you invest into a bank, its understood that the bank will play with your money in ways that could lose it.
There's no guarantee that any of this crap makes money. Investors make the decision that they're willing to risk money for the opportunity to make more money later. That's fundamental to the stock market (and bond market).
That’s fine but I think it’s disingenuous to pretend there are no losers here.
When schemes like archegos blow up, it often costs a lot of people who don’t even know they have invested in stocks (e.g their pension fund does) some of their life savings.
Archegos isn't a "scheme". Its a private hedge fund for Bill Hwang's family.
I mean, it really sucks for him and his family to lose $20,000,000,000 in a couple of days. But... this dude was playing with fire.
And yeah, sucks for Credit Susie who was left "holding the bag" on Archegos's margin calls (all other banks liquidated ahead of time and got out safely. Credit Susie was slow on the uptake and was left with a $5 Billion bill).
But guess what? Lending $Billions to reckless billionaires sometimes causes your bank to lose money. That's well within the risk-reward calculus. And a "big wall street bank" losing single-digit $Billions on a bet happens at least a few times each year: its not even that rare of an incident. This is literally the business they're in. (Indeed: banks like Credit Susie lend money somewhat recklessly because they know they can afford the loss if the bet goes sideways. I doubt anyone at Credit Susie is going to even get fired over this incident, its really not that big a deal.)
Honestly, this implosion is great entertainment because everything happened correctly. The damage is almost entirely isolated to Bill Hwang and his closest associates (family members, and some unfortunate church-members who got roped in). But it seems like Bill Hwang was a relatively honest fellow: so he didn't really screw anyone else over aside from himself.
Pretty much everyone in this story got "what they deserved". They played with fire, and then they got burned. This isn't a 2007 or 2008 situation where the fire spread and hurt someone else: this disaster is almost entirely "contained" to only the circle of reckless players.
Credit Suisse shareholders did not get what they deserved IMO, nor did shareholders of the legitimate companies in the pump and dump scheme - many Chinese equities fell dramatically when the news came out.
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).
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.
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.
ARK funds are actively managed funds that invest in sector-specific "innovative" companies. For example, ARKQ is their autonomous + robotics ETF. ARK funds have been doing extraordinarily well in the past few years, despite the fact that highly targeted sector-specific funds tend to underperform because of the difficulty of evaluating early stage companies launching risky technology products. Cathie Wood, the founder, has been heralded as something of an investment genius for her ability to grow her funds so rapidly.
Personal opinion:
I'm scared of investing in the ARK funds because there appears to be a cult of personality around Cathie. She hit it big with Tesla, but most of her popularity seems to be built around her youtube channel fandom. There's an entire ecosystem of youtubers pumping ARK funds the same way there's an entire ecosystem of internet users pumping dogecoin. If her first four funds were heavily bankrolled by Bill Hwang, it would make me even more hesitant to ever invest in an ARK fund.
It means ARK was mostly funded by someone previously convicted of fraud (and responsible for the recent collapse of over-extended Archegos), which is a bit concerning.
a conspiracy theory going around is that Bill was pumping up stocks that he and Cathie (ARKK) were buying through the use of “gamma squeeze”, ie buying far out of the money call options.
An example of how this works is let’s say Tesla is trading at $500. You purchase call options to buy TSLA at $1,000 that expire in two days. These options are super cheap because the idea that TSLA will double in two days is ludicrous. But the market makers who sold you the call option have to buy TSLA shares to hedge their risk, driving TSLA’s price up, and costing you much less to do it than just buying TSLA shares directly.
This theory is mostly advanced by short sellers who were betting against some of Cathie and Bills key positions. It started with GSX, where widely circulated short research demonstrated compelling evidence it was a fraud. Yet it kept going up for months after, and didn’t collapse until Bills fund did (Cathie did not own it AFAIK).
So they have pointed to a weird set of far OOM calls being bought right before expiration on other Cathie positions like Tesla during their big runs. And that since Bill Hwangs collapse they are all down sharply.
It sounds intriguing but could easily be coincidence. ARKK is down over 30% in last few months, but that was likely inevitable. If there was a magic gamma squeeze technique for keeping high fliers airborne she clearly isn’t using it. She’s stuck with concentrated bets in some illiquid positions of dubious value, and as her investors sell she will be forced to sell her positions in enough volume to crush their prices worse, driving ARKK down furth forcing more redemptions in an un-virtuous circle that ends very badly.
FWIW I never heard the term "Gamma Squeeze" until it was thrown around in context of GME. I used to work in Options Market Making. I am not saying the concept didn't exist, but this seems largely an idea that has never proven itself in reality. I am not saying I am the end authority on this, but personally I would look VERY closely at anyone throwing these terms around. Google trends shows virtually zero mentions of the term until recently: https://trends.google.com/trends/explore?date=all&geo=US&q=G...
Frankly, the amount of misinformation being thrown around in forums like WSB these days is shocking to me. Its like the same people that realized they could easily distort views on the political system realized that was small game compared to getting rich off pump and dumps.
Yea, this theory isn't a WSB theory though they may have coined the "Gamma Squeeze" term. The shorts are mostly FinTwit types on Twitter.
What about the tactic though? As someone who understands this better than most, does it make sense that buying way out of the money calls on a stock like Tesla are a cheap way to goose it's share price higher?
I don't understand all the nuts and bolts of market making, but it seems weird to me that a MM would buy even 1 share in Tesla because someone spent $10 to buy a $1000 strike price contract the day before it expires.
Not the person you were replying to, but broadly, Market makers delta hedge in the future. What this means is you take your option, you figure out how much the price depends on the future, and that's your delta.
An at the money option will have a delta close to 1 - ie, if the future moves $1, the option price will basically move $1 too. So I can hedge my exposure to the option I just bought or sold by just buying or selling the same amount of the future in the opposite direction.
A far out of the money option will have a delta close to 0, it's price isn't going to move much when the future moves since it's still incredibly unlikely to come into the money and actually be worth exercising. So in order to hedge an option, the market maker only has to buy a tiny tiny amont of future to hedge the delta (or may not even hedge because they're willing to take some exposure to delta for some period of time, or their net delta position due to other options they've bought or sold cancels it out).
So the plan of "I'll buy these super out of the money options to force market makers to hedge" doesn't make a lot of sense - since for each option you buy the market maker only has to buy a tiny tiny amount of futures, and you could be buying 100 call options and find that all your purchases have been cancelled out by the market maker buying a single call at the money - not even touching the future. Now if the out of the money call options are cheap enough it could be more effective against the price that just buying the future, but that's incredibly unlikely, market makers aren't stupid and for these extremely out of the money options they're probably already charging a premium since they're difficult to accurately price.
Meanwhile, is the price of the underlying the only thing that causes the price to change? No. Gamma (or the value of the time between when you bought and the time to expiry) is a compenent, that's going to collapse coming into the last days of the option so you're paying for that. Volatility also effects the price, and you're probably paying a premium for protection against volatility that you're actually hoping against.
There is no question that negative gamma can accelerate nasty moves (at least in commodities where I’m involved). Maybe what you mean is negative gamma that is given to people as a “trap” and then the exploiter pushes the market towards the calls intentionally. That might be harder to do (would take tremendous might in any large market, like oil). Where negative gamma occurs more often is, for example, Oil producers buy tons of puts from banks, the market weakens and oil goes down, and the banks are forced to delta hedge their position aggressively. This isn’t a trap set by producers, it’s just the market positioning. Our adage is “the market goes to whatever level fucks the most people”.
Yeah I mean the effects of gamma aren't controversial, but the whole concept of being able to move the market with social media posts to force it to skyrocket, that is more dubious to me. The GME stuff was essentially as far as that concept has ever been taken, and that particular scenario didn't play out- so while theoretical, I don't think this is a real thing with any significant effects. The whole thing about manipulating financial markets for "lols" is just kind of strange to me- and it all feels very dishonest. I have been on WSB for years and occasionally look at stocktwits, and while it used to be mostly harmless, a lot of loss/gain porn, a lot of bad insight, but the occasional nugget of some solid research... it just feels sinister these days. Are these guys really in it for the lols... or secretly hoping to get rich and keeping an eye on their internet friends to ensure they get out before their friends do?
In general though, its not really clear to me who on these financial forums are the manipulators, the manipulated, or just truly clueless. But it's all just kind of upsetting, as it becomes clearer that the internet is spiraling towards ever increasing manipulation.
I have no idea about that, but it does concern me they'd accept money from someone convicted of fraud, who has now been implicated in two massive fund collapses caused by excessive leverage.
Past that I have no idea what caused the massive pump of ARK held stocks and the subsequent inevitable reversal (still going on), but I don't really need more than that to distrust them.
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.
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).
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.
I'm not sure of the actual point of this whole thread, but regular people make bad investments and get bailed out all the time: it's called bankruptcy.
Bankruptcy hurts more because no limited liability. And when the other bailouts are more like "refinancing" as the other reply points out, the institutional bailouts hurt even less.
There are refinances but there is also good ol' foreclosure. How many rich financiers have actually "lost everything"?
Coperate limited liability + allowed to leverage more + your friendly competitors bail you out is a suspicious combo, even if each of those in isolation is totally fine.
> “This bailout is for the honest, hard-working hedge fund people who should be assured of making money,” said Biden today.
> “We spent trillions of taxpayer’s money to bail out giant financial institutions who finally had their irresponsible business practices come back to bite them, and it’s only fair we do the same in this latest crisis.”
> “So, it’s only fair that these hedge funds, who once again were more irresponsible with money be helped out by the taxpayer without repercussion.”
> Biden revealed that the trillion-dollar package is set to be rolled out in the coming weeks with no demands for greater regulation or change to business practices.
It wasn’t really bailed out. Equity investors lost all their money. Banks bought the assets at depressed valuations and made enormous profits. Kind of the opposite of a bailout in many ways.
the investors lost everything. it is like a margin account that goes from +$30k to -$30k. the bailout gets it to zero. investors still losse everything.
LTCM wasn't bailed out, all the investors in it got screwed. Banks took 90% control of all of their assets, and the 10% that was left to the original capital managers was still far less than many of the debts accrued.
I suppose this really calls into question, what bail out means to you. If we label every private company transaction for a struggling company as a bail out, rather than the traditional one where only ones where the government steps in, then it's almost impossible for anything to not get bailed out.
Specific or not (yes many different types of institutions can access these markets), hedge funds are known for taking highly leveraged bets with this overnight cash. There is a huge market for sponsored repo trades.
Hedge funds were most certainly a part of this problem, and were bailed out.
Hedge funds are bailed out by banks frequently. Said banks have and continue to receive bailouts funded by the taxpayer. I argue it's basically the same thing, just a step removed.
I haven't heard of any hedge fund being given a bailout from the government directly, though.
The most recent example I can think of is Melvin Capital (a few months ago). They were bailed out by Citadel. Citadel was bailed out by US tax payers in 2009 via AIG.
Unfortunately things are very opaque because of the said interconnectedness this article discusses.
If you buy a car at a dealership and they take that money and donate it to ISIS, did you just support terrorism? No, the dealer did. You only bought a car.
We'll have to agree to disagree on this one. Personally, if I give you a dollar and you give that dollar to someone else, I'd say that I had indirectly given the final person a dollar.
It happened, it's over. Citadel still exists as a company thanks to the AG bailout. That does not mean everything citadel ever buys is now a government bailout.
> The most recent example I can think of is Melvin Capital (a few months ago). They were bailed out by Citadel.
Citadel buying a controlling interest in a fund that was historically very profitable and hit a huge a landmine, allowing them to buy at a huge discount, isn't really a "bailout" in the same way you're suggesting. Citadel didn't slide them a couple billion dollars under the table and say "don't worry about it, you get me next time".
> Citadel was bailed out by US tax payers in 2009 via AIG
This was, quite literally 12 years ago. These events are in no way related. Almost every bank was subsidized in 2008/2009. This isn't some unscrupulous "tax payer to hedge fund" hidden money pipeline.
> Citadel buying a controlling interest in a fund that was historically very profitable and hit a huge a landmine, allowing them to buy at a huge discount, isn't really a "bailout" in the same way you're suggesting. Citadel didn't slide them a couple billion dollars under the table and say "don't worry about it, you get me next time".
Sure, but the context is that they were doing very poorly and needed liquidity to survive. They received it. That is being bailed out, no? The entire point I’m making is that they receive incredible assistance when very poor decisions are made.
> This was, quite literally 12 years ago. These events are in no way related. Almost every bank was subsidized in 2008/2009. This isn't some unscrupulous "tax payer to hedge fund" hidden money pipeline.
Yes, that is my point exactly. Many of these banks wouldn’t exist if it weren’t for the tax payer.
I see, we're using different definitions. I'm using the Oxford definition of bailout:
- an act of giving financial assistance to a failing business or economy to save it from collapse.
I personally wouldn't consider a zero-interest loan to be a bailout. If I buy a car and receive a no interest loan I wouldn't consider myself to be "bailed out", per your definition; nor would I consider receiving a dollar from a friend for a pack of gum to be a "bailout".
Under that definition, bail outs are a fundamentally great part of capitalism. "Bail outs" in general parlance almost always correspond with government propping up businesses that would otherwise go bankrupt.
indeed - however the different between bailing out your local barber and a bank is that when you bailout a bank the upside is contained, but the downside is spread, whereas with the barber, since barbers don't fundamentally engage in activities that allow for exponential gain the bailout is more directly given to citizens in the form of services, not captured by rich people.
The most recent example I can think of is Melvin Capital (a few months ago). They were bailed out by Citadel. Citadel was bailed out by US tax payers in 2009 via AIG.
Wait a second. Citadel is a fund manager. AIG is an insurance company. Neither are banks.
The bail outs being described are the invisible hand though. Government actions aren't being described, private companies engaging in private investments are. "Bail out" seems to be a catch all term for "struggling company I dislike received financing".
Taxpayers didn't pay for any of the 2009 bailouts, which were actually loans, the repayment of which actually benefitted taxpayers. The bailouts, if paid by taxpayers, would have required paying about triple taxes that year, which didn't happen. The Fed, not taxpayers, made loans. By law, the profits the Fed made on those loans, went to Treasury, which actually does cover taxpayer expenses.
Read up on this before making claims that are completely opposite of the facts.
Off the top, Bear Stearns bailed out its main hedge fund after it had to liquidate in what ended up being a precursor to the financial crisis. It happens fairly often.
The implicit hand under the market in fact better than a bailout, there's no embarrassment. Hedge funds get to borrow money, which they use to get long the market that is implicitly supported, which accrues more capital to the funds, which they can use to borrow more money.
Your average saver cannot just do this, being limited to 2x as per other comments.
Banks take equity positions in struggling hedge funds as they do for everything they loan money too. Is a homeowner who instead of defaulting on their mortgage refinanced with less equity being bailed out?
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.
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.
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?
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.
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.
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.
You can get up to 12 to 1 leverage with 5+ million dollars account with most brokerage firms, but it will be substantially depended on your reputation as manager, fees you willing to pay and most importantly your market exposure. Assuming regulations did not change since 2014 or so.
But does that apply to family offices? It sounds a lot like he was personally liable for these trades, which would explain why he appeared to be leveraged more than 10 to 1.
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.
> 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.
> 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.
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.
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.
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.
I don't think it's related to a time period, more just random external factors. Obviously, there has to be some periodicity because a there's no such thing as a back to back crash, it would just bigger crash, but I don't think there's evidence that the market will have a done year every 8-12 years.
This distinction between hedge fund and family office is of no use here. His fund was only a family office in that it didn't take money from investors. It operated just like a hedge fund and was not free of any rules that would have prevented this loss from happening had it been officially recognized as a hedge fund.
There is less oversight for family offices isn't there? The SEC is thinking of introducing more regulation as a result of this on both HFs and FOs. Perhaps you are saying swaps or other instruments he used are not regulated anyway even for HFs, but perhaps they should be?
I find it suspicious that he went from fraud in a hedge fund Tiger Asia involving manipulated prices and insider trading (for which he was convicted) to a less regulated family office using things like swaps which avoid oversight, and which he then proceeded to blow up with excessive leverage (and possibly other illegal shenanigans to manipulate prices), using instruments which avoid oversight on stock positions, most likely using leverage he obtained by lying to banks about his exposure - I sincerely doubt the multiple brokers were aware of just how much exposure he had and how concentrated it was, and they all raced to call it in when they found out.
I'd be very surprised if there were no illegal activity there which would not have been caught by increased oversight, though of course it is now in nobody's interest to look into that too closely.
>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).
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.
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.
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.
That's what you took away from my response? So what? It's not a problem that this kind of behavior is enabled and hurting the integrity of what the majority of people rely on for a shot at being able to retire someday? This is one fund that blew up during good times. How many others are out there acting this way and what's the risk that everyone is taking without even knowing by being invested in the market at all? Are you up for another GFC or bust that takes 10+ years to get back to even? Because these things are the seeds for that. Booms and busts aren't a good thing.
I guess I just see things differently. This isn't about being properly diversified, this is about the integrity of our markets and trust. I mean if the idea is that it's a free for all then why have securities laws at all? The US markets have been viewed as a haven of trust and stability. Garbage like this only serves to undermine that trust.
> If a billionaire wants to blow their money on a risky bet, why should the SEC stop it?
It's not "their money" to blow. 80% of that money was borrowed from others and he now cannot afford to pay them back. Yes, the SEC should definitely care
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.
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!".
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.
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.
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.
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.
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.
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.)
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.
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.
Limited liability entities (e.g. corporations, LLCs, etc) are one of the legal cornerstones our economy. Anyone can form one, but it takes expert (thus expensive) advice from a lawyer to make sure you are in compliance and thus really protected - either as a shareholder or an agent of the company. This makes sense when a lot of money is at stake.
To be clear: the entity is liable for the debts it incurs but not necessarily its shareholders or agents. If it cannot pay its debts it goes into bankruptcy and is either reorganized with its creditors as its new owners or liquidated and sold.
This is something anyone has access to. The price of registering and maintaining some sort of corporation (LLC, etc) is in the $100-$400/yr range depending on state. Most people obviously don't find it's worth the hassle, obviously, and it comes with additional troubles like paperwork and taxes, but the barrier is not all that steep.
The limited-liability corporation structure moreover has some majorly useful properties for society. For instance, you probably own some shares of a major pharmaceutical company in your portfolio (through a retirement fund). If the company loses a lawsuit related to, say, the opioid epidemic, and owes billions, and goes totally bankrupt, then you can 100% lose your stake in the company as it is turned over to creditors — but those creditors cannot go after you personally as an owner of the corporation for every dollar that you own; your liability is limited. This has democratized investing a lot, and individual investors benefit quite a bit, as they have lesser risk tolerance than the billionaires.
However, the limitation of liability is a reason prudent lenders ought consider the risks inherent in lending to you. For instance, if you bring an adequate down payment, and you are using the proceeds to purchase an asset that has some reasonable value — the worst case is they're stuck with a building still worth something, plus the down payment. The problem, again, is when taxpayers end up becoming imprudent lenders because of policy or bailouts.
Yeah, the "holding corp with a business plan to buy a building with a down payment and a mortgage — renovating it, collecting rent and deprecation, and later selling, hopefully for a profit" is a pretty normal thing, and describing a huge portion of commercial real estate (n.b. this means real estate owned for profit, not in the SimCity zoning sense). A failure leaves the lender owning the building. This is expected.
A single owner running insanely levered stock trades, though, could easily be found grossly undercapitalized, and that's another matter entirely.
I thought there was some kind of separation between ownership and management in an llc? Like, the company is its own entity, it makes its own decisions, and it can borrow money by itself. And then the individual shareholders are not liable for the company’s debts.
But you’re saying that the sole shareholder can also be the management?
I guess in that case it’s really up to the bank or brokerage to have enough sense to not lend your llc money if the business plan is to fly to Vegas and put it all on red..
It's not that simple. Banks have tighter lending standards for LLCs. It's not like any random person can form an LLC, borrow money from a bank or brokerage, YOLO it in the stock market, and walk away if the bet goes bad. In reality the lender will usually demand significant collateral and/or require the LLC owner to accept personal liability. LLCs have their uses but they aren't financial magic.
The house wins in lots of cases because of capital differences. You often end up in a forced sell LOW situation with leverage. Ie, market swings up and down 10%, then up and down 20%, at some point on a down swing if you are levered up a lot house calls you up for an extra $5B which you don't have, so they sell everything out from under you. So you can end up selling low not high in these models.
> Any big, overleveraged bet is going to go bad eventually
Gambler’s Ruin proves any open-ended bet (effectively, a series of bets over time) will, “big” and “overleveraged” don’t actually matter here, except in terms of what the consequences are when failure occurs.
Of course, “eventually” is a slippery thing, no one is actually doing it with an infinite time horizon, and over any finite horizon failure is not guaranteed (though increasingly likely the longer the horizon.)
> “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
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.
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)?
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.
> The only minor insight this affair gives is that a lot of fund managers are just taking bigger risks
Really? I think there are several take aways that will affect the markets for a while.
1) Prime brokers were blind to his exposure, using multiple prime brokers and also not having to report controlling interest in shares controlled by Swaps let one player control an amount of shares on single firms that no prime broker would ever let their clients control.
I'm fairly certain we'll see some overhaul on the swap side to shed more light on what positions they hold, similar to what hedge funds have to file quarterly.
2) Family offices have kind of slid under hte radar, hedge funds have to file quarterly docs on what they hold and report when they control more than 5 or 10%, depending on the jurisdiction. Family offices side step this requirement due to a quirk in securities law.
Again I expect this "loop hole" to be closed.
3) One firm essentially was responsible for most of the share price gain for a few individual stocks, specifically viacom where he bought almost all of viacoms share price appreciation. This bullying technique was common in the 80s bond markets due to the small number of players who could buy up bond positions to push them around. Those markets were reformed such that this doesn't really happen too often anymore. Bill, found a cunning way to do this in the securities markets.
The SEC is going to look at t his very closely, remember their mandate is to have orderly markets and this ordeal was anything but orderly.
But are those major? Major would be if someone could blow up so much that we take down Lehmans again, despite all the stuff that's been put in place since.
The PB thing is interesting to me, I never took a massive position across PBs but I had assumed if I did they would ask whether I was doing the same trade everywhere. At least when executing FX trades electronically, they all said it was a big no-no to split the trade across banks.
> I'm fairly certain we'll see some overhaul on the swap side to shed more light on what positions they hold, similar to what hedge funds have to file quarterly.
I bet someone with a bit of crypto knowledge could invent a way to report this without revealing exactly who has what. At least it sounds like one of those zero knowledge games.
The FO thing yeah, maybe they shouldn't have that loophole.
Single price mover, yeah, I don't think it's healthy. In general I like transparency.
Agree that large holdings should be reported but disagree they FO should need to publish their portfolios, that seems like a massive violation of privacy.
This is the craziest part to me. Writing the swaps meant the the bank had to replicate the position they sold by purchasing shares and options to hedge. The volume of hedging activity is what pushed the price of the stocks up, then VIAC decided to take advantage of the high share price by doing a share offering, VIAC gapped down 7-8%, and Bill Hwang lost $20B.
I wonder if the recent pullback in growth stocks is due to other family offices also gaining massive exposure via swaps, swaps that are being quietly unwound. Though, another round of panic selling by prime brokers would likely be obvious like Archegos blowing up was.
Family offices should definitely be reined in, make them equivalent to hedge funds and call it a day.
> VIAC decided to take advantage of the high share price by doing a share offering
this is actually what i'd expect a company to do, if their share price grew unexpectedly and "unreasonably". The fact that Archegos didn't anticipate this (which directly led to their demise) is a sign of incompetence imho.
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.
>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.
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.
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.
Why work to be CTO when being an engineering manager is plenty to lead a comfortable life? Why work to be a senior engineer when being a junior engineer is so much less stressful?
People have lots of reasons for continuing to push towards bigger things and for some of them that doesn't stop no matter how much they have.
if you fail as a CTO you probably still have your old job or can work somewhere else. you still keep your skills. if your investment blows up, you have to start from zero again.
> [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.
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):
> 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?
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.
219 comments
[ 4.6 ms ] story [ 254 ms ] threadI 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.
A whole community can't instantly evaluate the article. Give things a chance!
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.
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.
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).
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?
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-bbc7-659bebe58...
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.
There's no guarantee that any of this crap makes money. Investors make the decision that they're willing to risk money for the opportunity to make more money later. That's fundamental to the stock market (and bond market).
When schemes like archegos blow up, it often costs a lot of people who don’t even know they have invested in stocks (e.g their pension fund does) some of their life savings.
Archegos isn't a "scheme". Its a private hedge fund for Bill Hwang's family.
I mean, it really sucks for him and his family to lose $20,000,000,000 in a couple of days. But... this dude was playing with fire.
And yeah, sucks for Credit Susie who was left "holding the bag" on Archegos's margin calls (all other banks liquidated ahead of time and got out safely. Credit Susie was slow on the uptake and was left with a $5 Billion bill).
But guess what? Lending $Billions to reckless billionaires sometimes causes your bank to lose money. That's well within the risk-reward calculus. And a "big wall street bank" losing single-digit $Billions on a bet happens at least a few times each year: its not even that rare of an incident. This is literally the business they're in. (Indeed: banks like Credit Susie lend money somewhat recklessly because they know they can afford the loss if the bet goes sideways. I doubt anyone at Credit Susie is going to even get fired over this incident, its really not that big a deal.)
Honestly, this implosion is great entertainment because everything happened correctly. The damage is almost entirely isolated to Bill Hwang and his closest associates (family members, and some unfortunate church-members who got roped in). But it seems like Bill Hwang was a relatively honest fellow: so he didn't really screw anyone else over aside from himself.
Pretty much everyone in this story got "what they deserved". They played with fire, and then they got burned. This isn't a 2007 or 2008 situation where the fire spread and hurt someone else: this disaster is almost entirely "contained" to only the circle of reckless players.
You make a good point. I completely forgot that part. Kindof important too.
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).
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.
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.
https://ark-funds.com/wp-content/fundsiteliterature/holdings...
A layperson's summary:
ARK funds are actively managed funds that invest in sector-specific "innovative" companies. For example, ARKQ is their autonomous + robotics ETF. ARK funds have been doing extraordinarily well in the past few years, despite the fact that highly targeted sector-specific funds tend to underperform because of the difficulty of evaluating early stage companies launching risky technology products. Cathie Wood, the founder, has been heralded as something of an investment genius for her ability to grow her funds so rapidly.
Personal opinion:
I'm scared of investing in the ARK funds because there appears to be a cult of personality around Cathie. She hit it big with Tesla, but most of her popularity seems to be built around her youtube channel fandom. There's an entire ecosystem of youtubers pumping ARK funds the same way there's an entire ecosystem of internet users pumping dogecoin. If her first four funds were heavily bankrolled by Bill Hwang, it would make me even more hesitant to ever invest in an ARK fund.
An example of how this works is let’s say Tesla is trading at $500. You purchase call options to buy TSLA at $1,000 that expire in two days. These options are super cheap because the idea that TSLA will double in two days is ludicrous. But the market makers who sold you the call option have to buy TSLA shares to hedge their risk, driving TSLA’s price up, and costing you much less to do it than just buying TSLA shares directly.
This theory is mostly advanced by short sellers who were betting against some of Cathie and Bills key positions. It started with GSX, where widely circulated short research demonstrated compelling evidence it was a fraud. Yet it kept going up for months after, and didn’t collapse until Bills fund did (Cathie did not own it AFAIK).
So they have pointed to a weird set of far OOM calls being bought right before expiration on other Cathie positions like Tesla during their big runs. And that since Bill Hwangs collapse they are all down sharply.
It sounds intriguing but could easily be coincidence. ARKK is down over 30% in last few months, but that was likely inevitable. If there was a magic gamma squeeze technique for keeping high fliers airborne she clearly isn’t using it. She’s stuck with concentrated bets in some illiquid positions of dubious value, and as her investors sell she will be forced to sell her positions in enough volume to crush their prices worse, driving ARKK down furth forcing more redemptions in an un-virtuous circle that ends very badly.
Frankly, the amount of misinformation being thrown around in forums like WSB these days is shocking to me. Its like the same people that realized they could easily distort views on the political system realized that was small game compared to getting rich off pump and dumps.
What about the tactic though? As someone who understands this better than most, does it make sense that buying way out of the money calls on a stock like Tesla are a cheap way to goose it's share price higher?
I don't understand all the nuts and bolts of market making, but it seems weird to me that a MM would buy even 1 share in Tesla because someone spent $10 to buy a $1000 strike price contract the day before it expires.
An at the money option will have a delta close to 1 - ie, if the future moves $1, the option price will basically move $1 too. So I can hedge my exposure to the option I just bought or sold by just buying or selling the same amount of the future in the opposite direction.
A far out of the money option will have a delta close to 0, it's price isn't going to move much when the future moves since it's still incredibly unlikely to come into the money and actually be worth exercising. So in order to hedge an option, the market maker only has to buy a tiny tiny amont of future to hedge the delta (or may not even hedge because they're willing to take some exposure to delta for some period of time, or their net delta position due to other options they've bought or sold cancels it out).
So the plan of "I'll buy these super out of the money options to force market makers to hedge" doesn't make a lot of sense - since for each option you buy the market maker only has to buy a tiny tiny amount of futures, and you could be buying 100 call options and find that all your purchases have been cancelled out by the market maker buying a single call at the money - not even touching the future. Now if the out of the money call options are cheap enough it could be more effective against the price that just buying the future, but that's incredibly unlikely, market makers aren't stupid and for these extremely out of the money options they're probably already charging a premium since they're difficult to accurately price.
Meanwhile, is the price of the underlying the only thing that causes the price to change? No. Gamma (or the value of the time between when you bought and the time to expiry) is a compenent, that's going to collapse coming into the last days of the option so you're paying for that. Volatility also effects the price, and you're probably paying a premium for protection against volatility that you're actually hoping against.
In general though, its not really clear to me who on these financial forums are the manipulators, the manipulated, or just truly clueless. But it's all just kind of upsetting, as it becomes clearer that the internet is spiraling towards ever increasing manipulation.
Past that I have no idea what caused the massive pump of ARK held stocks and the subsequent inevitable reversal (still going on), but I don't really need more than that to distrust them.
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.
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.
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).
I never claimed you did, we're having a discussion, no? lol.
https://en.wikipedia.org/wiki/Long-Term_Capital_Management
Coperate limited liability + allowed to leverage more + your friendly competitors bail you out is a suspicious combo, even if each of those in isolation is totally fine.
https://en.wikipedia.org/wiki/Long-Term_Capital_Management
> “This bailout is for the honest, hard-working hedge fund people who should be assured of making money,” said Biden today.
> “We spent trillions of taxpayer’s money to bail out giant financial institutions who finally had their irresponsible business practices come back to bite them, and it’s only fair we do the same in this latest crisis.”
> “So, it’s only fair that these hedge funds, who once again were more irresponsible with money be helped out by the taxpayer without repercussion.”
> Biden revealed that the trillion-dollar package is set to be rolled out in the coming weeks with no demands for greater regulation or change to business practices.
https://www.betootaadvocate.com/world-news/democrats-announc...
What does this sentence mean?
e.g. https://www.nytimes.com/2020/07/23/business/economy/hedge-fu...
“ It remains unclear how big of a role hedge funds played in March’s meltdown — even how many and which funds were involved remains hazy. ”
Hedge funds were most certainly a part of this problem, and were bailed out.
I haven't heard of any hedge fund being given a bailout from the government directly, though.
Unfortunately things are very opaque because of the said interconnectedness this article discusses.
When somebody asks for an example of A, and you provide an example of B, they might assume you can't provide an example of A.
If you buy a car at a dealership and they take that money and donate it to ISIS, did you just support terrorism? No, the dealer did. You only bought a car.
The direct or indirectness of the money flow is unrelated to whether or not something is a bailout.
It happened, it's over. Citadel still exists as a company thanks to the AG bailout. That does not mean everything citadel ever buys is now a government bailout.
That's just silly.
> The most recent example I can think of is Melvin Capital (a few months ago). They were bailed out by Citadel.
Citadel buying a controlling interest in a fund that was historically very profitable and hit a huge a landmine, allowing them to buy at a huge discount, isn't really a "bailout" in the same way you're suggesting. Citadel didn't slide them a couple billion dollars under the table and say "don't worry about it, you get me next time".
> Citadel was bailed out by US tax payers in 2009 via AIG
This was, quite literally 12 years ago. These events are in no way related. Almost every bank was subsidized in 2008/2009. This isn't some unscrupulous "tax payer to hedge fund" hidden money pipeline.
Sure, but the context is that they were doing very poorly and needed liquidity to survive. They received it. That is being bailed out, no? The entire point I’m making is that they receive incredible assistance when very poor decisions are made.
> This was, quite literally 12 years ago. These events are in no way related. Almost every bank was subsidized in 2008/2009. This isn't some unscrupulous "tax payer to hedge fund" hidden money pipeline.
Yes, that is my point exactly. Many of these banks wouldn’t exist if it weren’t for the tax payer.
No, it is not. If they were given free money, or a loan with basically no interest, or some other sweetheart deal, that would be a bailout.
Someone taking advantage of your misfortunate in order to buy you at a discount as not a "bail out".
- an act of giving financial assistance to a failing business or economy to save it from collapse.
I personally wouldn't consider a zero-interest loan to be a bailout. If I buy a car and receive a no interest loan I wouldn't consider myself to be "bailed out", per your definition; nor would I consider receiving a dollar from a friend for a pack of gum to be a "bailout".
Wait a second. Citadel is a fund manager. AIG is an insurance company. Neither are banks.
Read up on this before making claims that are completely opposite of the facts.
Your average saver cannot just do this, being limited to 2x as per other comments.
Or, the Fed organized it.
They ended up leveraged 100 to 1 and had trillions in bonds.
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.
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.
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.
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.
You have to borrow something to have a debt that cannot be repaid.
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.
Classic doubling down on failed leverage and classic signs of the massive bubble in financial assets about to implode.
I find it suspicious that he went from fraud in a hedge fund Tiger Asia involving manipulated prices and insider trading (for which he was convicted) to a less regulated family office using things like swaps which avoid oversight, and which he then proceeded to blow up with excessive leverage (and possibly other illegal shenanigans to manipulate prices), using instruments which avoid oversight on stock positions, most likely using leverage he obtained by lying to banks about his exposure - I sincerely doubt the multiple brokers were aware of just how much exposure he had and how concentrated it was, and they all raced to call it in when they found out.
I'd be very surprised if there were no illegal activity there which would not have been caught by increased oversight, though of course it is now in nobody's interest to look into that too closely.
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).
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.
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.
Everyone who was crushed was under-diversified. Individual stocks fall by 50% all the time.
I guess I just see things differently. This isn't about being properly diversified, this is about the integrity of our markets and trust. I mean if the idea is that it's a free for all then why have securities laws at all? The US markets have been viewed as a haven of trust and stability. Garbage like this only serves to undermine that trust.
It's not "their money" to blow. 80% of that money was borrowed from others and he now cannot afford to pay them back. Yes, the SEC should definitely care
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!".
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.
Any big, overleveraged bet is going to go bad eventually, no matter how well researched.
(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.)
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.
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.
To be clear: the entity is liable for the debts it incurs but not necessarily its shareholders or agents. If it cannot pay its debts it goes into bankruptcy and is either reorganized with its creditors as its new owners or liquidated and sold.
The limited-liability corporation structure moreover has some majorly useful properties for society. For instance, you probably own some shares of a major pharmaceutical company in your portfolio (through a retirement fund). If the company loses a lawsuit related to, say, the opioid epidemic, and owes billions, and goes totally bankrupt, then you can 100% lose your stake in the company as it is turned over to creditors — but those creditors cannot go after you personally as an owner of the corporation for every dollar that you own; your liability is limited. This has democratized investing a lot, and individual investors benefit quite a bit, as they have lesser risk tolerance than the billionaires.
However, the limitation of liability is a reason prudent lenders ought consider the risks inherent in lending to you. For instance, if you bring an adequate down payment, and you are using the proceeds to purchase an asset that has some reasonable value — the worst case is they're stuck with a building still worth something, plus the down payment. The problem, again, is when taxpayers end up becoming imprudent lenders because of policy or bailouts.
https://en.wikipedia.org/wiki/Piercing_the_corporate_veil#Un...
A single owner running insanely levered stock trades, though, could easily be found grossly undercapitalized, and that's another matter entirely.
But you’re saying that the sole shareholder can also be the management?
I guess in that case it’s really up to the bank or brokerage to have enough sense to not lend your llc money if the business plan is to fly to Vegas and put it all on red..
Yeah, there are plenty of single-owner LLCs. It's the go-to small-company structure.
Congrats on killing it....
I don't know who you think the house is...is it the investment banks? They are holding the bag for $5bn+.
There exist bets that carry little to no risk, and whose returns exceed the cost of leverage.
In Hwang's case, he seemed to be uninterested in risk management, in which case your generalization probably holds true.
Gambler’s Ruin proves any open-ended bet (effectively, a series of bets over time) will, “big” and “overleveraged” don’t actually matter here, except in terms of what the consequences are when failure occurs.
Of course, “eventually” is a slippery thing, no one is actually doing it with an infinite time horizon, and over any finite horizon failure is not guaranteed (though increasingly likely the longer the horizon.)
>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
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.
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)?
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.
Really? I think there are several take aways that will affect the markets for a while.
1) Prime brokers were blind to his exposure, using multiple prime brokers and also not having to report controlling interest in shares controlled by Swaps let one player control an amount of shares on single firms that no prime broker would ever let their clients control.
I'm fairly certain we'll see some overhaul on the swap side to shed more light on what positions they hold, similar to what hedge funds have to file quarterly.
2) Family offices have kind of slid under hte radar, hedge funds have to file quarterly docs on what they hold and report when they control more than 5 or 10%, depending on the jurisdiction. Family offices side step this requirement due to a quirk in securities law.
Again I expect this "loop hole" to be closed.
3) One firm essentially was responsible for most of the share price gain for a few individual stocks, specifically viacom where he bought almost all of viacoms share price appreciation. This bullying technique was common in the 80s bond markets due to the small number of players who could buy up bond positions to push them around. Those markets were reformed such that this doesn't really happen too often anymore. Bill, found a cunning way to do this in the securities markets.
The SEC is going to look at t his very closely, remember their mandate is to have orderly markets and this ordeal was anything but orderly.
The PB thing is interesting to me, I never took a massive position across PBs but I had assumed if I did they would ask whether I was doing the same trade everywhere. At least when executing FX trades electronically, they all said it was a big no-no to split the trade across banks.
> I'm fairly certain we'll see some overhaul on the swap side to shed more light on what positions they hold, similar to what hedge funds have to file quarterly.
I bet someone with a bit of crypto knowledge could invent a way to report this without revealing exactly who has what. At least it sounds like one of those zero knowledge games.
The FO thing yeah, maybe they shouldn't have that loophole.
Single price mover, yeah, I don't think it's healthy. In general I like transparency.
it not bad to split fx trade across multiple brokers
they tell you not to do it so they get more biz and beter spread markouts
This is the craziest part to me. Writing the swaps meant the the bank had to replicate the position they sold by purchasing shares and options to hedge. The volume of hedging activity is what pushed the price of the stocks up, then VIAC decided to take advantage of the high share price by doing a share offering, VIAC gapped down 7-8%, and Bill Hwang lost $20B.
I wonder if the recent pullback in growth stocks is due to other family offices also gaining massive exposure via swaps, swaps that are being quietly unwound. Though, another round of panic selling by prime brokers would likely be obvious like Archegos blowing up was.
Family offices should definitely be reined in, make them equivalent to hedge funds and call it a day.
this is actually what i'd expect a company to do, if their share price grew unexpectedly and "unreasonably". The fact that Archegos didn't anticipate this (which directly led to their demise) is a sign of incompetence imho.
more related discussion here:
Credit Suisse Loses 4.7B https://news.ycombinator.com/item?id=26710344
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.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
People have lots of reasons for continuing to push towards bigger things and for some of them that doesn't stop no matter how much they have.
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.
https://en.wikipedia.org/wiki/Margin_Call
This has a slight taste of Newspeak...
- I invest
- you trade
- they speculate
—Ronald Reagan, 1980 http://www.slate.com/id/2201249/
> 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?