When Did Archegos Collapse and Why Did It Happen?

The collapse of Archegos Capital Management sent ripples through global financial markets. This event highlighted how a privately managed investment firm could trigger substantial disruptions. Its rapid unraveling underscored the interconnectedness of large financial institutions and the potential for concentrated positions to create far-reaching consequences.

Archegos Capital Management Explained

Archegos Capital Management operated as a family office, a private investment firm managing the personal wealth of its founder, Bill Hwang. These entities serve ultra-high-net-worth individuals and families, often having less stringent regulatory disclosure requirements compared to traditional hedge funds. This structure allowed Archegos to operate with a degree of opacity regarding its investment strategies and holdings.

A central component of Archegos’s operational model involved the extensive use of total return swaps (TRS). A total return swap is a financial contract where one party, the “receiver” (Archegos), gains exposure to an underlying asset’s total return without owning it. The “payer” (a bank or prime broker) owns the asset and pays the receiver any capital appreciation and income, such as dividends. In return, the receiver pays the payer a floating interest rate and compensates for any capital depreciation of the asset.

This arrangement provided Archegos with economic exposure to significant stock positions by putting down only a fraction of the value of the underlying shares as collateral. Since the prime brokers held the actual shares on their balance sheets, Archegos avoided direct ownership. This bypassed certain public disclosure requirements that would have revealed the true scale of its holdings, allowing Archegos to build leveraged positions in specific stocks, largely hidden from broader market view and even from the individual banks it traded with.

The Accumulation of Risk

Archegos Capital Management pursued a strategy of building concentrated positions in a select few stocks, particularly in the media and technology sectors. This approach meant that a significant portion of its portfolio value was tied to the performance of a limited number of companies, amplifying both potential gains and losses. The firm leveraged its capital extensively to magnify these concentrated bets, with leverage ratios sometimes reaching five times or more, and even higher for individual positions.

To facilitate these positions, Archegos engaged with numerous prime brokers, including major financial institutions. These prime brokers extended credit and executed trades, allowing Archegos to gain exposure to large blocks of shares. The total return swaps used by Archegos were instrumental in this process, as they enabled the firm to control substantial synthetic positions without direct ownership of the underlying stock.

A significant vulnerability arose from Archegos’s use of multiple prime brokers. Each prime broker had visibility only into its own transactions with Archegos, lacking a comprehensive view of the family office’s total exposure across all its trading relationships. This fragmented view, combined with the opacity of total return swaps, meant that no single institution, nor the broader market, fully understood the scale and interconnectedness of Archegos’s positions. Regulatory disclosure requirements for family offices were also less stringent than for other investment vehicles, further contributing to this lack of transparency and allowing Archegos to amass undisclosed holdings.

The Unraveling Event

The unraveling of Archegos Capital Management began in late March 2021, triggered by a decline in the share price of ViacomCBS. On March 22, ViacomCBS announced a new equity offering, which led to a sharp drop in its stock price. This decline immediately pressured Archegos’s highly leveraged and concentrated positions in ViacomCBS and other related media stocks, such as Discovery Inc.

As the value of its holdings plummeted, Archegos began receiving margin calls from its prime brokers. These demands for additional collateral were necessary to cover the mounting losses on the total return swaps. Archegos found itself unable to meet these escalating demands, signaling its precarious financial state.

On Friday, March 26, 2021, several prime brokers initiated the forced liquidation of Archegos’s positions. Banks, including Goldman Sachs and Morgan Stanley, sold billions of dollars worth of shares in large block trades. These sales encompassed a range of stocks, including:
ViacomCBS
Discovery
Baidu
GSX Techedu
Tencent Music Entertainment
Vipshop Holdings

The volume of these sales further depressed the market prices of the underlying stocks, creating a cascading effect that exacerbated Archegos’s losses and triggered even more margin calls across its various counterparties. This uncoordinated unwinding of positions marked the collapse of Archegos Capital Management.

Immediate Financial Repercussions

The forced liquidation of Archegos Capital Management’s positions resulted in substantial financial repercussions for several major banks that served as its prime brokers. Credit Suisse reported losses totaling approximately $5.5 billion. Nomura Holdings also faced considerable losses, initially estimated at $2 billion, later increasing to about $2.85 billion.

Morgan Stanley incurred losses of around $911 million. UBS Group AG reported losses in the range of $774 million to $861 million, while Mitsubishi UFJ Financial Group (MUFG) declared losses of approximately $300 million. Goldman Sachs and Deutsche Bank managed to exit their exposures with minimal or no losses, attributed to their swift actions in liquidating positions.

The market reacted to the forced sales. The share prices of the specific stocks that were liquidated experienced declines, with ViacomCBS and Discovery, for instance, plunging by over 27% in a single trading day. Concurrently, the stock prices of the prime brokers exposed to Archegos, particularly Credit Suisse and Nomura, saw drops in value as investors reacted to the scale of the losses. The total financial impact on the broader financial industry from the Archegos collapse surpassed $10 billion.