A massive margin call affected a little-known family office last Friday, incurring billions of dollars in losses for certain banks involved and jolted the overall volatility in the broader market.
Archegos Capital Management's leveraged bets in ViacomCBS blew up and ignited a whopping $20 billion wave of forced liquidation at a slew of Wall Street banks, some of which face losses that could be "highly significant."
Who is behind Archegos?
Archegos Capital Management is the family investment vehicle founded by former Tiger Management analyst Bill Hwang in 2013. He was a protege and one of the so-called "tiger cubs" of legendary hedge fund manager Julian Robertson who mentored and supported some of the best-performing investors including Stephen Mandel, Lee Ainslie and Chase Coleman.
Hwang started out as a stock salesman at Hyundai Securities in the early 1990s.
Before Archegos, Hwang built New York-based hedge fund Tiger Asia Management which focused on Asian investments. In 2012, Hwang pleaded guilty to insider trading of Chinese bank stocks and agreed to pay $44 million to settle charges from the Securities and Exchange Commission. The federal agency alleged that he used confidential information received in private placement offerings to short sell three Chinese bank stocks.
After the settlement, Hwang closed Tiger Asia Management and Archegos was born.
Archegos is a Greek biblical word for leader or prince.
"This is a challenging time for the family office of Archegos Capital Management, our partners and employees," Karen Kessler, a spokesperson for Archegos, told CNBC. "All plans are being discussed as Mr. Hwang and the team determine the best path forward."
What went wrong?
Archegos held large and leveraged bets in U.S. media stocks ViacomCBS and Discovery, as well as a few Chinese internet ADRs including Baidu, Tencent and Vipshop. Some of the positions were held via total return swaps, a type of derivative that allows investors to take big, levered stakes without disclosing those positions publicly.
These bets started to go south after ViacomCBS' $3 billion stock offering through Morgan Stanley and JPMorgan earlier in the week fell apart. It triggered a domino effect where prime brokers rushed to exit the positions on Archegos' behalf and resulted in a massive margin call.
In a margin call, brokerages demand that an investor deposit additional money or securities into the account when a position falls sharply in value. Brokerages usually sell the securities in block trades, often at a discount to the current share price, in an attempt to recover losses.
Nomura, a prime broker of Archegos, on Monday warned of a "significant loss" estimated at $2 billion from the unwind of the trades.
Credit Suisse said the loss resulting from this exit could be "highly significant and material" to its first-quarter results.
$500 million charity
Hwang also has a charity called "Grace and Mercy Foundation" with $500 million in assets, according to the latest tax filings, spotted by CNBC's Robert Frank.
The foundation has maintained a low profile in the charity world, even with its enormous size.
The charity has created generous tax write-offs for Hwang's investments.
For example, Hwang donated a $20 million gain in Amazon stock in the latest year, which allowed him to avoid the capital-gains tax and get a tax deduction.
Hwang donated $16 million in the latest year to Korean Christian causes.
— CNBC's Robert Frank contributed reporting.
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