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- The Archegos Capital’s collapse may lead to massive loss for global banks such as Goldman Sachs, Credit Suisse,Morgan Stanley, Deutsche Bank and
- The liquidation of the fund led to a distress sale of assets worth over $20 billion.
- The US Securities and Exchange Commission said it was closely monitoring the situation.
The collapse of Archegos Capital, the personal hedge fund of billionaire Bill Hwang, might lead to global banks, such as Goldman Sachs, Morgan Stanley, Deutsche Bank, Credit Suisse, and Nomura, losing a whopping $6 billion. The investors and regulators believe that the impact of the collapse could have a wider ripple effect in the sector.
The fall of the hedge fund is being closely monitored at a global level by financial regulators. The liquidation of the fund led to a distressed sale of assets worth over $20 billion with all big names in the investment banking space reported lost funds worth billions.
According to news reports, the hedge fund purchased total return swaps, a kind of derivatives that let investors to put money on stock price moves without requiring any underlying securities. The fund, instead of buying securities through cash, posts collaterals against them. Archegos’ positions were said to be highly leveraged, as its positions were worth over $50 billion despite having assets worth only around $10 billion.
On Monday, the US Securities and Exchange Commission said it was closely monitoring the situation and was in touch with market participants, as panic spread across the financial markets about the scale of the impact.
Switzerland’s Credit Suisse and Japan's Nomura said equity derivatives trade might face huge losses due to lending to the hedge fund, which led to a global banking stock sell-off. On Tuesday, Goldman Sachs Group shares fell 1.7 per cent, and Morgan Stanley’s shares were down 2.6 per cent. Nomura’s shares saw a record intraday drop of 16.3 per cent, and Credit Suisse recorded its biggest fall in a year of 14 per cent. UBS fell 3.8 per cent, and shares of Deutsche Bank were down 5 per cent.
Archegos’s collapse was reportedly triggered by last week’s fall in the share price of ViacomCBS, the US media behemoth. Archegos had exposure to Viacom through loans, and the fall in Viacom’s share prices forced the hedge fund to unwind its position, resulting in further price fall of Viacom. Besides, Archegos had to sell off stakes in several Chinese tech firms and other media companies.
The hedge fund failed to meet the banks’ more collateral direction for security against the equity swap trades the fund had partially financed. As the value of those positions dropped sharply, lenders had to resort to selling big chunks of securities to recover from debts.
Experts in the hedge funds market have expressed doubts over why Archegos had such a big exposure to Discovery and ViacomCBS as both the stocks are not considered to be high growth plays as compared to other media stocks, which have done very well through the pandemic.
The collapse of the hedge fund adds another blow to Credit Suisse in a series of corporate crisis that the bank has been dealing with. It had suffered after Greensill Capital, the supply chain finance company, went into administration earlier this month.