archegos_capital_management [CapiPedia]

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====== Archegos Capital Management ======
Archegos Capital Management was the private [[family office]] of former hedge fund manager [[Bill Hwang]]. In March 2021, it became the epicenter of one of the most spectacular and rapid financial implosions in modern history. Using enormous amounts of borrowed money, or [[leverage]], Archegos made highly concentrated bets on a handful of stocks. Its primary tool was the [[total return swap]], a type of [[derivative]] that allowed it to gain the economic benefits of owning a stock without actually holding legal title. This structure enabled Archegos to amass huge, hidden positions while flying under the radar of regulators. When the prices of its favored stocks, like [[ViacomCBS]] and [[Discovery]], began to wobble, its lenders—some of the world's largest [[investment banks]]—issued [[margin call]]s. Unable to provide the required collateral, Archegos defaulted, triggering a frantic $20 billion fire sale of its assets by its brokers. The collapse vaporized Hwang's estimated $20 billion fortune in just two days and inflicted over $10 billion in losses on banks like [[Credit Suisse]] and [[Nomura]], serving as a stark warning about the hidden risks in the financial system.
===== The Rise and Fall of a Titan =====
==== Who Was Bill Hwang? ====
Bill Hwang was a former "Tiger Cub," a protégé of legendary [[hedge fund]] manager Julian Robertson. After his first fund, Tiger Asia Management, pleaded guilty to [[insider trading]] in 2012 and was barred from managing public money by the [[SEC]], Hwang converted his operation into a family office. This structure is subject to far less regulatory oversight and public disclosure than a typical hedge fund. Freed from these constraints, Hwang built Archegos into a powerhouse, with his personal wealth swelling from around $1.5 billion in 2017 to an estimated $20 billion at its peak. He was known for his aggressive, high-conviction betting style, but few outside his circle of lenders knew just how large and leveraged his positions had become.
==== The Weapon of Choice: Total Return Swaps ====
The secret to Archegos's immense and invisible scale was the total return swap (TRS). Here’s a simple way to think about it:
  * Instead of buying 1 million shares of a company, Archegos would pay a bank (a [[prime broker]]) a fee.
  * In return, the bank would buy the shares and promise to pay Archegos the "total return"—any dividends and capital gains from those shares.
  * If the stock price fell, Archegos had to pay the bank for the losses.
This arrangement had two fateful advantages for Hwang. First, since the bank was the official owner of the stock, Archegos didn't have to publicly disclose its position, even when it exceeded the usual 5% ownership threshold. Second, banks were willing to provide immense leverage, sometimes lending $5 for every $1 of Archegos's own capital, because they held the underlying stock as collateral.
===== The Meltdown: A Cascade of Margin Calls =====
The entire house of cards came crashing down when ViacomCBS, one of Archegos's largest positions, announced a secondary stock offering. The news caused the stock price to dip, which was enough to breach the terms of Archegos's swaps. This triggered a margin call—a demand from a prime broker for more cash to cover the mounting losses.
Because Hwang couldn't meet the initial margin call, his brokers took action. Some, like [[Goldman Sachs]] and [[Morgan Stanley]], sensed the danger and moved ruthlessly to liquidate the shares they held as collateral in large "block trades." This swift action flooded the market with sell orders, causing the stock prices of Archegos's core holdings to plummet further. This, in turn, triggered margin calls from all of Archegos's other brokers in a deadly domino effect. Banks that were slower to sell, like Credit Suisse and Nomura, were left holding assets whose value was evaporating by the minute, leading to their catastrophic losses.
===== Lessons for the Value Investor =====
The Archegos saga, while dramatic, offers timeless lessons for the everyday investor.
==== The Dangers of Leverage ====
Leverage is a double-edged sword: it amplifies gains but also magnifies losses. Archegos used leverage to build a fortune, but that same leverage ensured its total and rapid destruction. A core tenet of [[value investing]] is the preservation of capital. Relying on borrowed money creates a fragility that is fundamentally at odds with building resilient, long-term wealth. Never invest with money you can't afford to lose, especially if it's borrowed.
==== Concentration vs. Diversification ====
Archegos was the definition of a concentrated portfolio. While focusing on a few great ideas can be powerful, extreme concentration without a deep [[margin of safety]] is a recipe for disaster. When your entire fortune is tied to the fate of a handful of securities, a single piece of bad news can be fatal. For most investors, sensible [[diversification]] across different, uncorrelated assets is a much safer path to financial security.
==== Know What You Own (and Who You're Dealing With) ====
The banks lending to Archegos were victims of [[counterparty risk]]. None of them had a complete picture of Hwang's total exposure because it was hidden across multiple firms using opaque derivatives. The lesson for individual investors is even simpler: stick to your circle of competence. If you don't understand an investment—whether it's a complex derivative or a business with a confusing financial model—stay away. As Warren Buffett says, "Risk comes from not knowing what you're doing."