Bubbles everywhere are a sign of dysfunction and stress, but a fund blowing up is not itself a systemic risk, more of questionable internal risk management.
A massive fire sale of some individual stocks last week had traders talking about who’d taken the hit as shares in ViacomCBS and Discovery plunged 27% on Friday alongside some big Chinese tech stocks. It looks certain the unwinding was caused by a massive margin call on Archegos Capital, the family fund run by Tiger ‘cub’ Bill Hwang.
The fallout has hit banks: Nomura shares fell 16% as it warned of a $2bn loss at its US unit, Credit Suisse said a ‘significant US-based hedge fund defaulted on margin calls’ last week and that this would have ‘highly significant and material’ impact on first quarter results.
Shares fell 14% in early trade. European banks were offered this morning amid some uncertainty about who else might be on the hook for losses. UBS declined 4% and Deutsche Bank dropped 5%, with the Stoxx 600 bank sector down over 1%.
Despite the stress this is causing among banking stocks, there is no sign of contagion in broader markets with the DAX hitting a fresh all-time high this morning. US indices leapt late on Friday afternoon, pushing the S&P 500 to a record closing high but with the quarter end and a holiday-shortened week we are expecting volatility.
Chinese tech giants involved
As well as the tumble in the two US mass media stocks, reports indicate that Deutsche Bank, Goldman Sachs and Morgan Stanley forced Archegos to liquidate trades in a number of big China tech stocks on Friday. Archegos had built up a large stake in companies like Baidu and Farfetch, which had started to sell off in March. A new SEC rule aimed at Chinese stocks listed in the US, which requires firms to submit documents to establish that they are not owned or controlled by a governmental entity in a foreign jurisdiction, had exacerbated a decline in some big China tech names of late. This heaped more pressure on Archegos.
Systemic worries? I don’t think is systemically risky in itself – Archegos was massively levered and it appears to have been too concentrated in a number of risky stocks – but when we look at this and think about the GameStop saga and the decline in Tesla as two examples – what we’re seeing are more and more pockets of very unusual trading activity in some stocks.
Shares in ViacomCBS and Discovery had been bid up to the rafters this year and came tumbling down, taking Archegos with them. ViacomCBS was up over 170% YTD and Discovery was +150% YTD before last week’s unravelling.
ViacomCBS stock offering was the spark
The spark that led to the margin call seems to have been a massive $3bn stock offering by ViacomCBS which prompted selling last Tuesday and Wednesday. Archegos may have been trying to squeeze shorts in those US media names – according to Refinitiv short interest stands at 18% of Viacom and 28% of Discovery shares. Attempting a short squeeze alone is a risky game (should have gone to /wallstreetbets). At the other end, GSX Techdu, which has been under heavy activity short-seller attacks, finally broke down. The stock fell 40% on Friday on large block trade sales, possibly by Archegos as part of the fire sale.
You worry that this sort of frothy trading activity in turn creates pockets of distress among investors and banks that leads to larger unwinds and losses for financials. Leveraged family funds blowing up is nothing new though and I’d think that whatever impact this has on the banks, it will be a quarter or two of profit at worst.
Excessive valuations in some names and sectors have created pockets of distress when things start to unravel. It’s a worry and a symptom of excess liquidity. And coming so soon after the Greensill fiasco, you have to wonder about what this says about Credit Suisse risk management if it can be saddled with such heavy losses from one fund. The Swiss financial watchdog Finma says it is aware of the hedge fund case and notes that several banks are involved.