Archegos Appeared, Then Vanished

One thing about margin lending is that if you borrow money to buy stocks, and your stocks go up, you automatically deleverage. If you use $15 of your own money and borrow $85 from your broker to buy $100 worth of stock,1 you have 85% leverage; if the stock then goes up to $200, you are down to 42.5% leverage. You still owe your broker $85, but now you have $200 worth of stock. If the stock then falls by 25% to $150, that’s fine: You are still in the black, and your broker still has ample security for its loan.

Money Stuff was off last week, and the big story of the week was Archegos Capital Management, the family office of former Tiger Asia manager Bill Hwang. The basic story of Archegos is that it extracted as much leverage as possible from a half dozen Wall Street banks to buy a concentrated portfolio of tech and media stocks (apparently partially hedged with short index positions2), and those stocks went up a lot, before going down a lot. One big position, for instance, was in ViacomCBS Inc., which was at $12.43 a year ago and got as high as $100.34 on March 22. Baidu Inc. went from $97.20 a year ago to $339.91 this February. Bloomberg reported last week that Archegos started with $200 million of assets in 2013 and peaked at almost $20 billion a couple of weeks ago, and that “much of those riches accrued in the past 12 to 24 months alone.” Which makes sense. If you put up $1 billion of your own money to buy $7 billion of stocks, and those stocks quadruple in a year, now you have $22 billion of your own money.