In 2021, a major event destined to be recorded in history occurred in the US stock market. The family fund Archegos of Bill Hwang, a fierce figure in hedge funds, was forced to be liquidated by brokers due to the simultaneous plunge of several heavily held stocks. It is estimated that the principal of 15 billion US dollars was all lost. On March 26 alone, Bill Hwang’s loss on that day may have reached a record-breaking 10 billion US dollars, creating the largest single-day loss for an individual investor in history.
1. American Dream
In 1964, Bill Hwang was born into a devout Christian family in South Korea. His father was a priest and his mother a missionary. He grew up in South Korea and didn’t immigrate to the United States with his parents and settle down in Las Vegas until he was 18.
After coming to the United States, Bill Hwang encountered the biggest setback in his life: his father unfortunately passed away, and the family lost its source of income. He had to work at McDonald’s to earn money while improving his English proficiency. Fortunately, being highly intelligent, Bill Hwang obtained an economics degree and an MBA from UCLA and Carnegie Mellon University respectively through his own efforts.
After graduating from prestigious schools, Bill Hwang entered Wall Street. As a Korean American, Bill Hwang’s first job was at Hyundai Securities, a subsidiary of South Korea’s Hyundai Group, mainly promoting securities of South Korean companies to Americans.
Around 1994, a stock recommendation he gave to a client brought a large amount of gains to the other party and left a deep impression on the client. The client, Julian Robertson, the founder of Tiger Fund who is as famous as George Soros, awarded him the “Best External Sales Award”. Bill Hwang then joined the legendary hedge fund Tiger Management founded by the latter.
Robertson highly appreciates Bill Hwang. Perhaps it is because the two have the same adventurous gene. In 2000, Robertson gave Bill Hwang $25 million in start-up capital. In the following year, Bill Hwang established Tiger Asia Management in New York and started his own business.
Bill Hwang’s investment strategy is very aggressive, and his asset management performance is also quite astonishing. At the peak of assets, the assets of Tiger Asia Management once reached 5 billion US dollars, and the annualized rate of return was as high as 16%. This poor Korean immigrant finally became a billionaire.
2.Devout Believer , Extreme Greed
Bill Hwang’s hedge fund career is full of controversies. Influenced by his parents, he is a devout Christian and even uses religious beliefs to guide his investment strategies. Bill Hwang’s most successful investment was LinkedIn. He believed that it was God who guided him to invest in this professional social networking site to help people find jobs.
Bill Hwang also leaves people with an impression of being amiable. He always wears a smile, is charitable, and is enthusiastic about religious and charitable causes. After getting rich, Bill Hwang often participates in various public welfare activities and has donated tens of millions of dollars to many Christian and charitable organizations.
Even on the day of the Manhattan trial, Bill Hwang still carried religious books to read. Perhaps it was for show or perhaps he hoped to find comfort from them. During the trial, the Christian groups that received his donations also helped him plead with the jury and the judge.
But on the other hand, Bill Hwang is as greedy and fierce as a shark in investment. Even after experiencing failures many times, he still does not change his adventurous nature. High leverage is his hallmark strategy. For stocks he values, he goes all in until finally facing a disastrous margin call.
Bill Hwang is not without experiencing failures. After the 2008 US financial crisis, his Tiger Asia Fund was once severely hit. After several major investment mistakes, his assets shrank by more than two-thirds. Bill Hwang himself once regarded this setback as a “warning from God to him.” But this “warning” seems to have only made Bill Hwang more actively participate in charitable causes, but it did not affect his subsequent even more greedy and adventurous investments at all.
Moreover, as a devout Christian, he did not hesitate to break the law and engage in illegal transactions. In 2012, Bill Hwang reached a criminal and civil settlement with the US government, paying a fine of more than 60 million US dollars and admitting to illegally trading stocks of two banks using insider information in 2008 and 2009. The Tiger Asia Management Fund he operated was also forced to close, and 16 million US dollars of illegal gains were confiscated. In 2014, Bill Hwang was banned from trading by Hong Kong regulators for four years.
3.Crazy Derivatives Leverage Trading
After Tiger Asia Management was forced to close due to insider trading, Bill Hwang founded a new family fund, Archegos Capital Management, in 2013. Bill Hwang, a devout Christian, chose the name Archegos, a term in Greek used to refer to Jesus Christ.
Although he was punished and forced to close Tiger Asia Fund, Bill Hwang did not change his nature of greed and adventure. At Archegos, he adopted an even more opaque and crazy investment strategy, which can increase the leverage ratio while evading supervision.
Archegos is different from traditional hedge funds and does not accept investor funds. But similar to the previous Tiger Fund, Bill Hwang mainly invests in many technology companies in the United States and China, including enterprises such as Viacom, Discovery, Tencent, Baidu, and GSX Techedu. Moreover, he is accustomed to holding a large number of companies in the same industry and seemingly doesn’t care about diversifying risks at all.
However, Archegos does not actually directly hold these stocks. Instead, it conducts hedging transactions with many investment banks through various complex financial derivatives such as total return swaps and contracts for difference. In this way, Archegos can bet on these stocks with extremely high leverage and a very small principal. In terms of contractual responsibilities, it is these investment banks that hold stock positions in the aforementioned companies and trade with Archegos.
The U.S. Securities and Exchange Commission (SEC) stipulates that an investor needs to disclose shareholding information if they hold more than 5% of the stocks of a U.S. listed company. But since Archegos does not directly hold shares, it does not need to report its risk exposure to financial regulatory agencies. This has turned Bill Hwang into an invisible hedge fund giant, and it was only when it finally collapsed that it entered the spotlight of the media.
Bill Hwang, who is accustomed to licking blood on the tip of a knife, finally fell due to his crazy investment strategy. Although their downfall was the result of the superposition of many accidental events, the collapse of Archegos was an inevitable result under high-leverage derivative trading. High leverage made Bill Hwang gain a lot with a small principal, but it also eventually brought him a disastrous defeat.
In mid-March 2021, several stocks such as Viacom, RLX Technology, and GSX Techedu, which Archegos held heavy positions in derivative contracts, experienced a significant drop in stock prices due to various reasons, and their market value evaporated by more than half within a week. Archegos, which holds derivative contracts, also received margin calls from multiple investment banks.
4.The Epic Hundred-Billion-Dollar Blowup
Due to Bill Hwang’s previous crazy leveraged operations, Archegos was facing a margin call exposure of more than 60 billion US dollars, and up to 100 billion US dollars at most. This was far beyond their tolerance. On March 25, Bill Hwang, who was desperate, contacted multiple investment banks such as Goldman Sachs, Morgan Stanley, Nomura Securities, UBS, and Credit Suisse, hoping to get their grace to avoid a margin call, but no agreement was reached.
On March 26, the moment of Archegos’ margin call finally arrived. Many investment banks that had derivative transactions with them were also forced to close their positions by force and sold off a large number of stocks involved in the transactions such as Discovery, Baidu, Vipshop, and RLX Technology at a large discount. The total selling scale was as high as 19 billion US dollars.
This forced liquidation caused Archegos to lose 10 billion US dollars in one day, setting a record for the largest single-day loss of an individual investor in Wall Street history. The US and Chinese technology stocks involved were also innocently affected. After being sold off, the overall market value evaporated by more than 30 billion US dollars.
The Archegos margin call incident actually did not have a significant impact on the US stock market as a whole. It only involved many stocks in their investment portfolio because the US stock market was in a bull market stage brought about by the ultra-low interest rates of the Federal Reserve at that time. However, the relevant investment banks that had derivative transactions with Archegos suffered huge losses as a result.
According to JPMorgan Chase’s estimate, the total losses of various investment banks were as high as 10 billion US dollars. Goldman Sachs and Morgan Stanley were the first two investment banks to clear their positions. Therefore, their losses were the smallest among them, while other investment banks were not so lucky: Mitsubishi UFJ Financial Group lost 300 million US dollars, UBS lost 861 million US dollars, and Nomura Securities lost 2.9 billion US dollars.
Credit Suisse was the investment bank that was hurt the most by Bill Hwang. In the Archegos margin call incident, Credit Suisse lost 5.5 billion US dollars and was forced to close its securities financing business in November 2021. This margin call was one of the main reasons for Credit Suisse’s liquidity crisis and directly led to the continuous collapse of the stock price of Credit Suisse with a history of more than 160 years.
Under the arrangement of the Swiss financial regulatory authorities, at the beginning of 2023, UBS took over Credit Suisse at a floor price of only 3 billion Swiss francs. In addition, UBS also has to take responsibility for the supervision of Credit Suisse. After completing the acquisition last year, UBS agreed to pay a fine of 400 million US dollars to the US and British regulatory authorities to reach a settlement on Credit Suisse’s improper risk management in the Archegos margin call case.
5.Financial derivatives are the main cause
In April 2022, exactly one year after the Archegos blowup incident, the US government officially arrested Bill Hwang and Halligan and brought 11 charges against them including fraud, conspiracy, securities fraud, and market manipulation. Bill Hwang’s bail was set as high as 100 million US dollars. After mortgaging two properties and paying 5 million US dollars in cash, he was able to be released on bail pending trial.
Bill Hwang’s defense lawyer believes that his operations at Archegos are completely legal, and investment banks are paying for their own failures in derivative transactions.
But the Manhattan prosecutor accused Bill Hwang’s team of exaggerating the value of their derivative trading holdings to investment banks, fraudulently inflating a 1.5 billion US dollar investment portfolio to 36 billion US dollars. “This kind of market manipulation behavior must be held accountable.”
The century’s largest blowup of tens of billions of dollars shattered Bill Hwang’s American dream and he will spend the rest of his life in prison.
Damian Williams, the US federal prosecutor in Manhattan in charge of this case, said that Bill Hwang and his deputy exaggerated the position size of more than ten stocks invested by Archegos and misled investment banks to conduct derivative transactions with them.
Unlike the previous admission of insider trading, this time Bill Hwang refused to accept all charges. His legal team has been arguing in the previous defense process that the prosecution is only trying to convict high-risk and aggressive investment methods. Bill Hwang also did not cash out from his holdings and did not embezzle for personal gain. But obviously, the jury did not believe his defense.
A greedy and unrestrained fund manager actually caused a sky-high gap of tens of billions of dollars. The Archegos blowup incident triggered investigations by regulatory authorities in the United States, Europe, and Japan, and finally led to Bill Hwang being prosecuted and convicted. But similar to the 2008 financial crisis, behind this epic blowup of Archegos, there is also the chaos of uncontrolled financial derivatives.
The derivatives such as total return swaps and contracts for difference controlled by Bill Hwang are in the gray area of over-the-counter transactions. Various investment banks do not know exactly how many leveraged derivative contracts Bill Hwang has entered into. Therefore, Bill Hwang was able to conduct transactions with many investment banking giants at the same time and manipulate an investment portfolio of more than 30 billion US dollars.
And driven by interests, various investment banks also did not conduct effective risk management, but chose to conduct high-leverage transactions with Bill Hwang, exposing an exposure of more than 10 billion US dollars.
However, even if Bill Hwang is personally disgraced, if regulatory authorities cannot take effective measures to control various high-leverage margin transactions and supervise family funds like Archegos, then there will still be new Bill Hwangs on Wall Street in the future. Greed is human nature.
Reproduction Notes：InvestFancy » How To Lost $15 Billion in Two Days