Goldman’s block sales: billions of secret derivatives lie at the nub of Archegos’ leverage blowout, leading to stocks being dumped by investment banks and loss warnings at Credit Suisse, Nomura
- Much of the leverage used by Hwang was provided by banks through swaps or so-called contracts-for-difference (CFDs)
- The products allow managers like Hwang to amass stakes in publicly traded companies without having to declare their holdings
The forced liquidation of more than US$20 billion in holdings linked to Bill Hwang’s investment firm is drawing attention to the covert financial instruments he used to build large stakes in companies.
Much of the leverage used by Hwang’s Archegos Capital Management was provided by banks including Nomura Holdings and Credit Suisse Group through swaps or so-called contracts-for-difference, according to people with direct knowledge of the deals. It means Archegos may never actually have owned most of the underlying securities – if any at all.
While investors who build a stake of more than 5 per cent in a US-listed company usually have to disclose their position and future transactions, that is not the case with stakes built through the type of derivatives apparently used by Archegos. The products, which are made off exchanges, allow managers like Hwang to amass stakes in publicly traded companies without having to declare their holdings.
One reason for the widening fallout is the borrowed funds that investors use to magnify their bets: a margin call occurs when the market goes against a large, leveraged position, forcing the hedge fund to deposit more cash or securities with its broker to cover any losses. Archegos was probably required to deposit only a small percentage of the total value of trades.
