The dramatic implosion of Bill Hwang's Archegos reveals big risks still lurk in swaps markets and could trigger a fresh round of regulatory crackdowns

  • Billionaire Bill Hwang’s Archegos imploded thanks to unsustainable leverage.
  • His family office used swaps, shielding his true exposure from the public and his prime brokers.
  • Experts believe this could lead to more transparency in derivatives and more family office scrutiny.
  • See more stories on Insider’s business page.

The most striking thing about the implosion of Archegos Capital Management, the family office of Tiger Cub Bill Hwang, was not the suddenness of the crash but how innocuous its origins were. 

There wasn’t a country defaulting on its debt or a commodity trading in the negatives or a global health crisis shutting down markets worldwide — just a company hoping to capitalize on its current stock price.

ViacomCBS announced last Monday it would offer $3 billion worth of stock after it closed at a record high price. Analysts from banks such as Wells Fargo downgraded the stock for fundamental reasons, as the company faces extreme pressure in the streaming market thanks to competitors like Netflix, Amazon, and HBO, pushing its stock price down. This started a domino effect, as margin calls came in from Hwang’s lenders that he couldn’t meet.

Archegos cofounder Bill Hwang had to pay millions for an insider trading scandal earlier in his career.Fuller Studio/YouTube

Then the stock, and others Hwang had invested in such as Discovery and Chinese companies Baidu, Tencent, and GSX, really fell as banks like Goldman Sachs and Morgan Stanley offered huge blocks of stocks for sale to reduce their exposure. Hwang’s lenders, some of which gave to him at a 20-to-1 ratio, sold these massive blocks of stocks at the end of last week and weekend to protect themselves. Nomura and Credit Suisse, two of his prime brokers, have estimated their losses will be in the billions.

And somehow, Hwang’s activities — despite being large enough to cause marketwide panic — were not listed in any disclosure thanks to the structure of his investments. Despite having tens of billions of exposure to the equities market, nearly all of Hwang’s portfolio was in total return swaps, a form of derivative that means Hwang’s family office does not actually own the underlying security his firm was betting on. 

“How could this firm take such huge economic exposures into Viacom and other companies without having to make any disclosures? Because of swaps,” said Paul Cellupica, the former general counsel for the Securities and Exchange Commission’s investment management division, in an interview with Insider.

“It will raise questions,” Cellupica, who stepped down in January, said.

Because Hwang operates as a family office, which he started in 2012 with $200 million and grew to $10 billion, he does not need to register as an investment advisor because he is not managing money other than his family’s wealth. This eliminates possible filings like ADVs, which show gross exposure to the markets, the number of investment professionals working at each firm, and foreign investment into the firm, among other datapoints.

13-F filings are required of investors each quarter that have at least $100 million of US equities, but Hwang’s usage of swaps shielded him from these filings.

The question now becomes what the SEC — which said Monday it is monitoring the fallout from the implosion — will do about it, if anything. Gary Gensler, the former head of the Commodity Futures Trading Commission who is President Joe Biden’s nominee to lead the agency, “wrote the book on swaps disclosure” when he led the CFTC and may make it a priority to continue that work when he starts at the SEC, said Jim Toes, the president of trade group Security Traders Association.

Toes expects the agency will be interested in how such a benign event like a company raising money could cause so much chaos.

“How many other family offices are like that, with that many assets and that much leverage?” he said.

13-Fs back in the news

Last year, the SEC floated a proposal to raise the threshold for reporting equity holdings from $100 million to $3.5 billion that was met with immediate pushback from smaller investors and companies. In the process of sifting through comments on that proposal, the agency learned just how valuable these filings are to the public, according to Cellupica.

For example, a lot of companies rely on filings to know who their shareholders are. Companies that Hwang, who pleaded guilty of insider trading in 2012 when he was running his former hedge fund Tiger Asia, was exposed to would have no idea he was so tied unless he alerted them.

Professors wrote into the SEC about the impact it would have on their market structure research, while hedge funds would lose the ability to protect against crowded trades.

But the same filing led to the discovery by retail traders of Melvin Capital’s short position in GameStop because Gabe Plotkin’s firm was using put options to bet against the video-game retailer. The company’s stock was pushed up by these Reddit-linked investors, causing billions in losses for Melvin and other funds. 

Options are required to be disclosed in 13-F filings while swaps and true short positions are not, though Cellupica expects that discussion to continue under the new chair.

“I could see it as an area [Gensler] would want to immediately focus on,” Cellupica said, though the discussion around what large investors have to disclose has been going on for years.

“This will be another input into that discussion.”

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