[HN Gopher] Bill Hwang of Archegos Capital lost $20B in two days
___________________________________________________________________
Bill Hwang of Archegos Capital lost $20B in two days
Author : haltingproblem
Score : 224 points
Date : 2021-05-12 16:24 UTC (6 hours ago)
(HTM) web link (www.bloomberg.com)
(TXT) w3m dump (www.bloomberg.com)
| ChrisArchitect wrote:
| news from a month ago posted in many articles on here
|
| more related discussion here:
|
| Credit Suisse Loses 4.7B
| https://news.ycombinator.com/item?id=26710344
| dang wrote:
| Ah good catch. I invited the OP to repost the OP because I
| hadn't seen the story discussed on HN yet. Oops.
| keeptrying wrote:
| His investors I do feel sorry for but honestly as long as he has
| $10M left (which I'm guessing he does), he'll be fine.
| Traster wrote:
| The entire point of this is that he had a family shop - he
| didn't have investors. He was investing with his own money
| along with a load of leverage. The real losers here are people
| like Credit Suisse who booked billions in losses to cover a
| client that was paying them maybe millions in fees.
| ur-whale wrote:
| https://archive.is/h4hWp
| paulpauper wrote:
| >richer men and women, of course, but their money is mostly tied
| up in businesses, real estate, complex investments, sports teams,
| and artwork. Hwang's $20 billion net worth was almost as liquid
| as a government stimulus check. And then, in two short days, it
| was gone.
|
| This is false. Stocks and real estate (in metro areas especially)
| is as liquid as cash. Tesla, google, msft,amazon , brk.a, are
| very liquid and trade hundreds of billions of dollars a day. The
| richest people in the world have almost all of their net worth in
| highly liquid stocks.
| Traster wrote:
| No I think this is actually a fair point, take Musk for
| example, he owns about 20% of TSLA which is worth ~120B and his
| total worth is ~150B. If Musk chose to liquidate that then we'd
| have to speculate quite broadly about what the new fair value
| for TSLA would be at. It has taken Gates literally decades to
| completely sell of his stake in MS.
| [deleted]
| grey-area wrote:
| It came out recently that Bill Hwang also funded the first 4 ETFs
| from ARKK.
| valuearb wrote:
| a conspiracy theory going around is that Bill was pumping up
| stocks that he and Cathie (ARKK) were buying through the use of
| "gamma squeeze", ie buying far out of the money call options.
|
| An example of how this works is let's say Tesla is trading at
| $500. You purchase call options to buy TSLA at $1,000 that
| expire in two days. These options are super cheap because the
| idea that TSLA will double in two days is ludicrous. But the
| market makers who sold you the call option have to buy TSLA
| shares to hedge their risk, driving TSLA's price up, and
| costing you much less to do it than just buying TSLA shares
| directly.
|
| This theory is mostly advanced by short sellers who were
| betting against some of Cathie and Bills key positions. It
| started with GSX, where widely circulated short research
| demonstrated compelling evidence it was a fraud. Yet it kept
| going up for months after, and didn't collapse until Bills fund
| did (Cathie did not own it AFAIK).
|
| So they have pointed to a weird set of far OOM calls being
| bought right before expiration on other Cathie positions like
| Tesla during their big runs. And that since Bill Hwangs
| collapse they are all down sharply.
|
| It sounds intriguing but could easily be coincidence. ARKK is
| down over 30% in last few months, but that was likely
| inevitable. If there was a magic gamma squeeze technique for
| keeping high fliers airborne she clearly isn't using it. She's
| stuck with concentrated bets in some illiquid positions of
| dubious value, and as her investors sell she will be forced to
| sell her positions in enough volume to crush their prices
| worse, driving ARKK down furth forcing more redemptions in an
| un-virtuous circle that ends very badly.
| kevstev wrote:
| FWIW I never heard the term "Gamma Squeeze" until it was
| thrown around in context of GME. I used to work in Options
| Market Making. I am not saying the concept didn't exist, but
| this seems largely an idea that has never proven itself in
| reality. I am not saying I am the end authority on this, but
| personally I would look VERY closely at anyone throwing these
| terms around. Google trends shows virtually zero mentions of
| the term until recently: https://trends.google.com/trends/exp
| lore?date=all&geo=US&q=G...
|
| Frankly, the amount of misinformation being thrown around in
| forums like WSB these days is shocking to me. Its like the
| same people that realized they could easily distort views on
| the political system realized that was small game compared to
| getting rich off pump and dumps.
| jedberg wrote:
| I'm not super familiar with ARKK. What does this imply and why
| was it revelatory that he was involved?
| endisneigh wrote:
| It basically just means that he pumped ARKK with debt and/or
| gains from leveraged investments. You could say that the
| implication is that ARKK's main investments, e.g. TSLA were
| also pumped.
|
| Given that most of ARKKs investments started to tank around
| the same time this fiasco happened, it could also imply some
| level of interconnectedness that investors were not
| explicitly made aware of (and they probably should've).
| speeder wrote:
| ARKK has been declining heavily lately, and according to some
| analysts it has been the culprit of a bunch of Nasdaq crashes
| the past 3 months.
|
| Seemly ARKK is focused on tech stocks, and as they keep
| losing share price they keep selling FAANG stocks to buy
| their own shares or smaller companies shares in an attempt to
| stall their losses.
|
| There was lots of speculation they were going to crash hard
| like Archegos did, and that was BEFORE the Archegos
| involvement was known.
| cj wrote:
| For anyone curious, ARKK holdings are public (as are all
| ETFs). Here's a PDF.
|
| https://ark-funds.com/wp-
| content/fundsiteliterature/holdings...
| grey-area wrote:
| I love that some of their ETFs also contain their other
| ETFs, it's turtles all the way down!
| hogFeast wrote:
| When ARKK blows up it will precipitate a change in how some
| ETFs operate. ARKK is basically Archegos-lite (with retail
| investors bag-holding, not investment banks), they have
| invested heavily in a few stocks, have cornered the price,
| and when the fire alarm goes off they are the fat guy that
| gets jammed in the fire door. The fundamental principle of
| an ETF is liquidity, ARKK has wilfully debauched the
| concept for their own gain.
|
| You are seeing this with a few other ETFs, particularly
| INRG...amazingly given that they blew up in 2008 for the
| same reason, but a lot of these are attempting to manage
| the concentration risk (INRG recently rebalanced). ARKK is
| just pure greed: marketing fiction, aggressively corner the
| market, fuck the customers, fuck the consequences.
| cowmoo728 wrote:
| https://en.wikipedia.org/wiki/Ark_Invest
|
| A layperson's summary:
|
| ARK funds are actively managed funds that invest in sector-
| specific "innovative" companies. For example, ARKQ is their
| autonomous + robotics ETF. ARK funds have been doing
| extraordinarily well in the past few years, despite the fact
| that highly targeted sector-specific funds tend to
| underperform because of the difficulty of evaluating early
| stage companies launching risky technology products. Cathie
| Wood, the founder, has been heralded as something of an
| investment genius for her ability to grow her funds so
| rapidly.
|
| Personal opinion:
|
| I'm scared of investing in the ARK funds because there
| appears to be a cult of personality around Cathie. She hit it
| big with Tesla, but most of her popularity seems to be built
| around her youtube channel fandom. There's an entire
| ecosystem of youtubers pumping ARK funds the same way there's
| an entire ecosystem of internet users pumping dogecoin. If
| her first four funds were heavily bankrolled by Bill Hwang,
| it would make me even more hesitant to ever invest in an ARK
| fund.
| rvba wrote:
| > That Thursday his prime brokers held a series of emergency
| meetings.
|
| > The dilemma for Hwang's lenders was obvious. If the stocks in
| his swap accounts rebounded, everyone would be fine. But if even
| one bank flinched and started selling, they'd all be exposed to
| plummeting prices. Credit Suisse wanted to wait.
|
| Isnt this market manipulation?
|
| Assuming that they didnt sell? I mean, even if they sell, it
| still sounds like insider trading / collusion?
| spinny wrote:
| just pat him on the back and throw some taxpayer money as a bonus
| to the man
| endisneigh wrote:
| It's incredible that he managed to be that leveraged to begin
| with. So much of the modern economy is built up on debt and
| leverage. Sometimes I can't help but feel it will all unravel,
| very quickly. What will it take? An asteroid impact?
|
| Another strange thing is the following:
|
| > U.S. rules prevent individual investors from buying securities
| with more than 50% of the money borrowed on margin. No such
| limits apply to hedge funds and family offices. People familiar
| with Archegos say the firm steadily ramped up its leverage.
| Initially that meant about "2x," or $1 million borrowed for every
| $1 million of capital. By late March the leverage was 5x or more.
|
| Why are the rules not also applied to hedge funds? I wish I could
| say this is the only one, but from my knowledge there are a lot
| of rules that pretty much only apply to retail.
| kccqzy wrote:
| Retail investors have been circumventing their requirement
| inventively. Look up all the Robinhood people using deep ITM
| calls, or box spreads, or (not at Robinhood but at Schwab, IB,
| etc) Portfolio Margin to increase the leverage beyond 2x.
| zozbot234 wrote:
| > It's incredible that he managed to be that leveraged to begin
| with
|
| Is it really that incredible, in the age of WallStreetBets
| self-defined 'autists' and 'apes'? There are many ways aside
| from properly-defined 'margin' investment to do very risky
| bets.
| samsonradu wrote:
| I'm guessing parent is not familiar with the leverage on
| crypto platforms.
| https://www.binance.com/en/support/articles/360033162192
| grey-area wrote:
| This was not a hedge fund, it was a family office, a vehicle he
| chose after his last hedge fund blew up in 2013 and he was
| fined for fraud. He chose a family office probably because the
| disclosure requirements are not as arduous as hedge funds, then
| he lied to lots of banks about his exposure to ramp his own
| stocks multiple times by buying on margin with multiple
| partners, till it seems the banks found out and the last banks
| out were left holding the bag.
|
| Classic doubling down on failed leverage and classic signs of
| the massive bubble in financial assets about to implode.
| paulpauper wrote:
| People have been predicting bubble and crisis and collapse
| for a decade to no avail. large companies, especially in
| tech,are generating record profits and earnings. Hedge fund
| and trader blow-ups happen in good times and bad. This guy
| had no idea what he was doing. This is not an indictment on
| the US economy or financial system.
| [deleted]
| enkid wrote:
| The last crisis happened a little less than a decade ago,
| and crisises happen way more often than you seem to
| realize. 2008, 2001, 1987, 1973 all saw crashes due to some
| sort of crisis. It seems to happen about once a decade now.
| There was a period between 1929 and 1973 when they were
| less common, but before that, they seemed to happen at
| about that frequency as well.
| majormajor wrote:
| If you subscribe to a time-period thing, I guess a lot
| depends on how you look at the 2020 market fall and
| recovery... was it too fast to count??
| enkid wrote:
| I don't think it's related to a time period, more just
| random external factors. Obviously, there has to be some
| periodicity because a there's no such thing as a back to
| back crash, it would just bigger crash, but I don't think
| there's evidence that the market will have a done year
| every 8-12 years.
| dopamean wrote:
| This distinction between hedge fund and family office is of
| no use here. His fund was only a family office in that it
| didn't take money from investors. It operated just like a
| hedge fund and was not free of any rules that would have
| prevented this loss from happening had it been officially
| recognized as a hedge fund.
| valuearb wrote:
| By your definition a retail investor is no different than a
| hedge fund.
| DesiLurker wrote:
| >Why are the rules not also applied to hedge funds?
|
| I think thats the wrong approach, correct approach would be to
| have rules to protect the rest of economy from that hedge-
| fund's possible bad decisions. So yes you should have freedom
| to lose all your money so long as the risks are highlighted
| clearly (as in enforceable, good faith, non-fine-print
| legalese).
| neatze wrote:
| Theoretical maximum for hedge fund after 2008 was/is 12 to 1
| leverage (at least in my case), any brokerage account with
| 100K+ (if not mistaken) can get portfolio margin that is 6 to
| 1.
| warent wrote:
| I'm not sure I understand this fully. Are you saying that if
| you have an account with 1 million dollars in it, you could
| actually have 6 million invested with 5% returns, making
| something like 300k annually minus some margin fees?
| quickthrowman wrote:
| If you want to understand, the search terms are 'portfolio
| margin' (equities and equity/index options) and 'SPAN
| margin' (futures and futures options)
| the_local_host wrote:
| Yeah it's possible, but it makes more sense to think about
| negative outcomes before positive outcomes. With enough
| leverage, you lose half of your money if the market goes
| down 10%. With more leverage, you lose all your money if
| the market goes down a few percentage points, as your
| account gets liquidated on the spot.
| yellowstuff wrote:
| I work in levered hedge fund strategies, so I have some
| insight here, although I don't negotiate financing myself.
| Banks tailor leverage to your strategy, so if your strategy
| is just to go long good stocks you won't get anything like
| 6X leverage. 6X leverage is realistic for a strategy that
| is long and short equal dollar amounts, and also carefully
| controls other risks besides dollar exposures.
|
| Also, you have to be fairly big to get that kind of
| leverage. $100 million is probably too small but $1B might
| be enough.
|
| So you put up $1B of your own money, and a bank would let
| you go long $3B and short $3B. The idea is that your longs
| hedge your shorts well so you can't lose too much.
|
| Obviously, in the case of Archegos the shorts didn't hedge
| the longs well.
| neatze wrote:
| You can get up to 12 to 1 leverage with 5+ million
| dollars account with most brokerage firms, but it will be
| substantially depended on your reputation as manager,
| fees you willing to pay and most importantly your market
| exposure. Assuming regulations did not change since 2014
| or so.
| whoknowswhat11 wrote:
| Yes, but if the market goes south 20% the way it did just
| recently in 2020, they call you up and ask you to put in
| $5M more or they will liquidate everything that day. So
| it's not risk free.
| hogFeast wrote:
| But does that apply to family offices? It sounds a lot like
| he was personally liable for these trades, which would
| explain why he appeared to be leveraged more than 10 to 1.
| grecy wrote:
| > _Sometimes I can 't help but feel it will all unravel, very
| quickly. What will it take?_
|
| A global pandemic got close, but they've just been printing
| money as fast as possible to stave it off.
|
| Time will tell if that's a good long term strategy.
| singhrac wrote:
| Many are ignoring the fact that his leverage increased
| partially because the positions went up (a lot). If you buy
| $200mm of Viacom on $100mm of capital, that's 2x leverage. But
| if VIAC grows 2.5x (as it did between January and end of March)
| that's a $500mm position, so 5x leverage.
|
| Yes, you're entitled to the gains, but at the end of the day
| the prime brokers hold $500mm in VIAC stock and $100mm in cash.
| The prime brokers should not have been lied to, should not have
| been allowed to get these positions on swaps, and finally
| should have had an internal risk alert that says "this client
| is way past their leverage budget!".
| Grustaf wrote:
| No, you put in 100 and then made 300, so your equity is 400
| hence your leverage is down to 1.25x. Another way to see it
| is that the size of your loan is always 100, it doesn't grow
| just because you made a lucky bet.
| bhk wrote:
| I think you have it backwards. Leverage is the ratio of your
| notional stake to your net equity. If you buy $200mm of
| Viacom with $100mm then you have $100mm of debt. When it goes
| up 2.5X, you now hold $500mm stock and still have debt of
| $100mm -- net equity $400mm -- so your leverage becomes
| relatively small. In the Archegos case, a lot of their
| positions were swaps, so instead of outright ownership they
| held contracts with banks, but similar logic applies. The
| problems happen when the assets go down, not up.
| thesausageking wrote:
| If a billionaire wants to blow their money on a risky bet, why
| should the SEC stop it? The $20B he "lost" went into the market
| and everyone, including retail investors, benefitted. The
| losers are Hwang and the banks Credit Suisse and Nomura, each
| of which will do a better job of assessing this kind of risk in
| the future. Hwang didn't have any outside capital so no one's
| 401k or personal holdings were affected.
| Lt_Riza_Hawkeye wrote:
| > If a billionaire wants to blow their money on a risky bet,
| why should the SEC stop it?
|
| It's not "their money" to blow. 80% of that money was
| borrowed from others and he now cannot afford to pay them
| back. Yes, the SEC should definitely care
| kovacs wrote:
| The idea that he only hurt himself is simply not true.
| Behavior like this distorts markets and price discovery.
| Speaking of discovery (DISCK/DISKA), that's one of the stocks
| he bought and ran up from low $20s to $60s. Everyone who
| bought along the way thinking that the company had turned the
| corner because of their new streaming platform and that it
| was now in favor on Wall St. has been crushed. Yes, the
| market is volatile, but it's even more volatile when we allow
| some participants to come into the market loaded with cheap
| money and create havoc. If we're going to allow this
| unbridled behavior it undermines confidence in the "market".
| I know I've lost complete confidence in it since the GFC and
| now with the antics of the Fed over the past year. Knowing
| that there's no true price signal on anything makes you not
| want to buy anything, or else accept that the activity is
| nothing more than a turn at the craps table.
|
| And yes, in theory you should be fine long term, but the
| problem is it depends on your time window. The market can go
| nowhere for decades because of all the future profits that
| get pulled forward. We're staring that exact scenario in the
| face right now is my guess.
|
| All this is to say but one thing... end the Fed. Their
| recklessness is enabling this kind of crap.
| teachingassist wrote:
| > Everyone who bought along the way... has been crushed.
|
| Everyone who was crushed was under-diversified. Individual
| stocks fall by 50% all the time.
| nielsbot wrote:
| That was the home mortgage crisis.
| semilattice wrote:
| >What will it take? An asteroid impact?
|
| I think dislodging US dollar from being 'reserve currency', and
| subsequently removing US (and UK) financial and judicial
| systems from being the 'international financial litigation and
| contract management' realms -- will do it.
|
| If it USD is replaced by a gold-backed crypto currency network
| that uses something other than 'Proof-of-Work' to ensure
| resiliency against attack. This will be 50% of the steps to get
| to the above.
|
| Replacement of US and UK judicial systems as 'arbitrators' of
| the contract terms -- will be harder to replace, however.
|
| Overall US dollar seems, now supporting what some would call,
| 'perception based' economy.
|
| Where majority of the leverage are afforded to non-material
| based businesses (Ad networks, financial services, legal
| services, etc).
|
| This kind of focus, perhaps affects the _direction_ of the
| world progress.
|
| Not sure if this 'skewing' is good or bad for the world and
| future generations.
|
| For long time, there was no alternative to Western world ideals
| and approaches in many respects.
|
| But the trust in these has been quickly eroding, and it started
| decades ago.
|
| We might be at the 'apex' of the trust erosion process, but yet
| to see where it will go.
|
| Right now, whether it is a 48K USD for an influencer's ticktock
| post, or 60K USD + for a bitcoin, or 20 Bln USD losses by a
| small hedge fund.
|
| This all hardly makes any sense ... to many. Unless you look at
| it as faint indicators of the USD super-volcano-sized
| inflation, erupting.
| paxys wrote:
| People should be allowed to take risks. There is nothing
| inherently wrong with being extremely leveraged, as long as you
| are prepared for the outcome. This is why the common joe does
| not have access to such investments, but accredited investors
| do.
| endisneigh wrote:
| > People should be allowed to take risks
|
| Agreed.
|
| > There is nothing inherently wrong with being extremely
| leveraged, as long as you are prepared for the outcome. This
| is why the common joe does not have access to such
| investments, but accredited investors do.
|
| The downside of an overleveraged investment will affect the
| "common joe" - given that, what justification is there to
| allow hedge funds to do it? They receive all the upside, but
| not all of the downside.
| paxys wrote:
| The justification is that going from $50B to $5B isn't as
| bad as going from $50K to $5K.
|
| If people don't have money to eat or pay rent then it's a
| larger societal problem. Beyond that, you are on your own.
| [deleted]
| ALittleLight wrote:
| I don't get it. You can go bankrupt without any leverage
| and definitely with 2:1. I could just put 100% of money
| in options and lose it all.
| dragonwriter wrote:
| > You can go bankrupt without any leverage
|
| You have to borrow something to have a debt that cannot
| be repaid.
| selectodude wrote:
| >Why are the rules not also applied to hedge funds?
|
| Because the idea is that people who have enough money to invest
| in a hedge fund have enough money to lose it all and not end up
| on welfare.
| endisneigh wrote:
| I've heard this before, but you could argue that corporate
| welfare in the form of stimulus is a thing.
|
| Personally, I'd argue that if what you're saying is the
| actual position governments take, then there should be way
| more scrutiny towards organizations, given that they'll come
| screaming for help in the form of tax cuts or stimulus if
| they fail (either the failing organizations directly or those
| affected by the failing organization).
| selectodude wrote:
| That's fine, but you'd have to argue with somebody else. I
| don't work for the SEC.
| endisneigh wrote:
| > That's fine, but you'd have to argue with somebody
| else. I don't work for the SEC.
|
| I never claimed you did, we're having a discussion, no?
| lol.
| selectodude wrote:
| I wasn't making a value judgement on the rationale behind
| why hedgies can lever tf up, just why the regulations are
| different depending on how much money you have to lever.
| xkjkls wrote:
| When have hedge funders been bailed out?
| the_local_host wrote:
| Long Term Capital Management was bailed out.
|
| https://en.wikipedia.org/wiki/Long-
| Term_Capital_Management
| xadhominemx wrote:
| It wasn't really bailed out. Equity investors lost all
| their money. Banks bought the assets at depressed
| valuations and made enormous profits. Kind of the
| opposite of a bailout in many ways.
| dangerboysteve wrote:
| There was a great PBS Nova episode on that. Black-Scholes
| don't fail me know... until it did. No video but a link
| to the dvd purchase https://www.pbs.org/wgbh/nova/teacher
| s/programs/2704_stockma...
| canadianfella wrote:
| > Black-Scholes don't fail me know... until it did.
|
| What does this sentence mean?
| paulpauper wrote:
| the investors lost everything. it is like a margin
| account that goes from +$30k to -$30k. the bailout gets
| it to zero. investors still losse everything.
| xkjkls wrote:
| LTCM wasn't bailed out, all the investors in it got
| screwed. Banks took 90% control of all of their assets,
| and the 10% that was left to the original capital
| managers was still far less than many of the debts
| accrued.
| xkjkls wrote:
| I suppose this really calls into question, what bail out
| means to you. If we label every private company
| transaction for a struggling company as a bail out,
| rather than the traditional one where only ones where the
| government steps in, then it's almost impossible for
| anything to not get bailed out.
| selectodude wrote:
| By other banks. Not the taxpayer.
| omgwtfbyobbq wrote:
| Under supervision of the Fed.
|
| https://en.wikipedia.org/wiki/Long-
| Term_Capital_Management
| cronix wrote:
| How about this?
|
| > "This bailout is for the honest, hard-working hedge
| fund people who should be assured of making money," said
| Biden today.
|
| > "We spent trillions of taxpayer's money to bail out
| giant financial institutions who finally had their
| irresponsible business practices come back to bite them,
| and it's only fair we do the same in this latest crisis."
|
| > "So, it's only fair that these hedge funds, who once
| again were more irresponsible with money be helped out by
| the taxpayer without repercussion."
|
| > Biden revealed that the trillion-dollar package is set
| to be rolled out in the coming weeks with no demands for
| greater regulation or change to business practices.
|
| https://www.betootaadvocate.com/world-news/democrats-
| announc...
| selectodude wrote:
| That article is what we in the biz call "satire".
| Ericson2314 wrote:
| Still, ain't like the banks are going to bail out regular
| people for making some stupid investment.
| xkjkls wrote:
| They do all the time. Every mortgage refinance is a
| bailout by the same conception that you are using.
| Ericson2314 wrote:
| There are refinances but there is also good ol'
| foreclosure. How many rich financiers have actually "lost
| everything"?
|
| Coperate limited liability + allowed to leverage more +
| your friendly competitors bail you out is a suspicious
| combo, even if each of those in isolation is totally
| fine.
| mason55 wrote:
| I'm not sure of the actual point of this whole thread,
| but regular people make bad investments and get bailed
| out all the time: it's called bankruptcy.
| Ericson2314 wrote:
| Bankruptcy hurts more because no limited liability. And
| when the other bailouts are more like "refinancing" as
| the other reply points out, the institutional bailouts
| hurt even less.
| turkeytotal wrote:
| Happens all the time.
|
| e.g. https://www.nytimes.com/2020/07/23/business/economy/
| hedge-fu...
| valuearb wrote:
| Didn't happen in that article. Fed providing liquidity
| wasn't specific to hedge funds at all.
|
| " It remains unclear how big of a role hedge funds played
| in March's meltdown -- even how many and which funds were
| involved remains hazy. "
| turkeytotal wrote:
| Specific or not (yes many different types of institutions
| can access these markets), hedge funds are known for
| taking highly leveraged bets with this overnight cash.
| There is a huge market for sponsored repo trades.
|
| Hedge funds were most certainly a part of this problem,
| and were bailed out.
| endisneigh wrote:
| Hedge funds are bailed out by banks frequently. Said
| banks have and continue to receive bailouts funded by the
| taxpayer. I argue it's basically the same thing, just a
| step removed.
|
| I haven't heard of any hedge fund being given a bailout
| from the government directly, though.
| xadhominemx wrote:
| Can you point to an example of a hedge fund being bailed
| out by a bank?
| jimbilly22 wrote:
| Off the top, Bear Stearns bailed out its main hedge fund
| after it had to liquidate in what ended up being a
| precursor to the financial crisis. It happens fairly
| often.
| xadhominemx wrote:
| Bear Stearns made investors partially whole... definitely
| not a bailout because are you point out they owned the
| GP. It's actually a horrible example.
| endisneigh wrote:
| The most recent example I can think of is Melvin Capital
| (a few months ago). They were bailed out by Citadel.
| Citadel was bailed out by US tax payers in 2009 via AIG.
|
| Unfortunately things are very opaque because of the said
| interconnectedness this article discusses.
| eloff wrote:
| That logic has a few holes in it. Being bailed out by an
| entity that was bailed out by the government does not
| make you bailed out by the government.
| endisneigh wrote:
| Why not? Are they not bailed out indirectly?
| eloff wrote:
| No. That's not taxpayer money anymore.
|
| If you buy a car at a dealership and they take that money
| and donate it to ISIS, did you just support terrorism?
| No, the dealer did. You only bought a car.
| endisneigh wrote:
| We'll have to agree to disagree on this one. Personally,
| if I give you a dollar and you give that dollar to
| someone else, I'd say that I had _indirectly_ given the
| final person a dollar.
| eloff wrote:
| It's indirect. So that doesn't make it a bailout anymore.
| endisneigh wrote:
| That's not what bailout means...
|
| The direct or indirectness of the money flow is unrelated
| to whether or not something is a bailout.
| eloff wrote:
| A bailout is a discrete event.
|
| It happened, it's over. Citadel still exists as a company
| thanks to the AG bailout. That does not mean everything
| citadel ever buys is now a government bailout.
|
| That's just silly.
| [deleted]
| nrmitchi wrote:
| Seriously?
|
| > The most recent example I can think of is Melvin
| Capital (a few months ago). They were bailed out by
| Citadel.
|
| Citadel buying a controlling interest in a fund that was
| historically very profitable and hit a huge a landmine,
| allowing them to buy at a huge discount, isn't really a
| "bailout" in the same way you're suggesting. Citadel
| didn't slide them a couple billion dollars under the
| table and say "don't worry about it, you get me next
| time".
|
| > Citadel was bailed out by US tax payers in 2009 via AIG
|
| This was, quite literally 12 years ago. These events are
| in no way related. Almost every bank was subsidized in
| 2008/2009. This isn't some unscrupulous "tax payer to
| hedge fund" hidden money pipeline.
| endisneigh wrote:
| > Citadel buying a controlling interest in a fund that
| was historically very profitable and hit a huge a
| landmine, allowing them to buy at a huge discount, isn't
| really a "bailout" in the same way you're suggesting.
| Citadel didn't slide them a couple billion dollars under
| the table and say "don't worry about it, you get me next
| time".
|
| Sure, but the context is that they were doing very poorly
| and needed liquidity to survive. They received it. That
| is being bailed out, no? The entire point I'm making is
| that they receive incredible assistance when very poor
| decisions are made.
|
| > This was, quite literally 12 years ago. These events
| are in no way related. Almost every bank was subsidized
| in 2008/2009. This isn't some unscrupulous "tax payer to
| hedge fund" hidden money pipeline.
|
| Yes, that is my point exactly. Many of these banks
| wouldn't exist if it weren't for the tax payer.
| nrmitchi wrote:
| > Sure, but the context is that they were doing very
| poorly and needed liquidity to survive. They received it.
| That is being bailed out, no?
|
| No, it is not. If they were given free money, or a loan
| with basically no interest, or some other sweetheart
| deal, that would be a bailout.
|
| Someone taking advantage of your misfortunate in order to
| buy you at a discount as not a "bail out".
| endisneigh wrote:
| I see, we're using different definitions. I'm using the
| Oxford definition of bailout:
|
| - an act of giving financial assistance to a failing
| business or economy to save it from collapse.
|
| I personally wouldn't consider a zero-interest loan to be
| a bailout. If I buy a car and receive a no interest loan
| I wouldn't consider myself to be "bailed out", per your
| definition; nor would I consider receiving a dollar from
| a friend for a pack of gum to be a "bailout".
| xkjkls wrote:
| Under that definition, bail outs are a fundamentally
| great part of capitalism. "Bail outs" in general parlance
| almost always correspond with government propping up
| businesses that would otherwise go bankrupt.
| endisneigh wrote:
| indeed - however the different between bailing out your
| local barber and a bank is that when you bailout a bank
| the upside is contained, but the downside is spread,
| whereas with the barber, since barbers don't
| fundamentally engage in activities that allow for
| exponential gain the bailout is more directly given to
| citizens in the form of services, not captured by rich
| people.
| valuearb wrote:
| So you can't?
| endisneigh wrote:
| Can't what?
| wizzwizz4 wrote:
| Presumably, can't provide an example. You provided an
| example, so you can't.
| endisneigh wrote:
| I honestly don't follow.
| wizzwizz4 wrote:
| _Oh_ , they were criticising your example! Okay, that
| makes more sense.
|
| When somebody asks for an example of A, and you provide
| an example of B, they might assume you can't provide an
| example of A.
| goatinaboat wrote:
| _The most recent example I can think of is Melvin Capital
| (a few months ago). They were bailed out by Citadel.
| Citadel was bailed out by US tax payers in 2009 via AIG._
|
| Wait a second. Citadel is a fund manager. AIG is an
| insurance company. Neither are banks.
| xkjkls wrote:
| When does "one institution investing in another become a
| bail out"? Also, why are "bail outs" bad at all?
| nytgop77 wrote:
| bail outs are undermining the "invisible hand" . Bad
| decisions dont get penalized, so actors start evaluating
| decisions diferently.
| lordnacho wrote:
| The implicit hand under the market in fact better than a
| bailout, there's no embarrassment. Hedge funds get to
| borrow money, which they use to get long the market that
| is implicitly supported, which accrues more capital to
| the funds, which they can use to borrow more money.
|
| Your average saver cannot just do this, being limited to
| 2x as per other comments.
| smabie wrote:
| Your average saver could buy futures, which allow for
| very high leverage.
| xkjkls wrote:
| There are reasons institutions are less willing to loan
| your average saver money in the same way as hedge funds.
| jimbilly22 wrote:
| Long Term Capital Management was bailed out by the
| government.
|
| Or, the Fed organized it.
|
| They ended up leveraged 100 to 1 and had trillions in
| bonds.
| xkjkls wrote:
| Banks take equity positions in struggling hedge funds as
| they do for everything they loan money too. Is a
| homeowner who instead of defaulting on their mortgage
| refinanced with less equity being bailed out?
| samstave wrote:
| We talk about corporate welfare, but we never look at
| political welfare.
|
| All these politicians profiting off of every transaction,
| insidertrading, zero accountability or transparency and
| zero fucking term limits.
|
| The elephant in the data center is politicians and their
| grift.
| dnautics wrote:
| Political welfare in the non-personal-profit sense is at
| least equally insidious. Possibly worse, because at least
| when a politician hides $70,000 in their freezer you can
| put a number on it and it's obviously shameful. A lot of
| political welfare is taking away from one group of people
| and giving to another group of people who were lucky
| enough to be under the auspices of someone more
| charismatic.
| humanistbot wrote:
| Except when they are "too big to fail" and get massive
| government corporate welfare....
| LatteLazy wrote:
| Too big to fail applies to banks not hedge funds. If the
| hedge fund goes bust no one bails them out.
| scott00 wrote:
| Avoidance of margin regulation was not really a factor in what
| happened here. For exchange traded stocks in the US there are
| two margining schemes: Reg T and portfolio margin. Reg T is
| available to anybody and gets you 2x. PM is harder to get, but
| not that hard: IB will give PM to accounts with at least 100k.
| PM gets you 6.66x. I think swaps can be used to do better than
| PM, but Huang didn't need swaps to get 5x.
| istjohn wrote:
| Paywall: https://archive.is/h4hWp
| kpennell wrote:
| https://github.com/iamadamdev/bypass-paywalls-chrome
| paulpauper wrote:
| if you have $200 million why take such risk. instead diversify in
| FAANG+MSFT+TESLA with no leverage and make 40%/year easy as pie
|
| https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
| xxpor wrote:
| Not that I agree with this comment, but it just made me realize
| FAANG doesn't include MS, even though every time it's used it
| probably implies it.
| suyash wrote:
| this looks like a good site, can you do future projections with
| this tool ?
| cheschire wrote:
| Greed, probably. 40% isn't enough for some people, they'd
| rather make multiple hundreds of percent profit in options
| trading.
| drexlspivey wrote:
| Amazing, let me find my time machine to go to 2025 and pick my
| stocks
| mason55 wrote:
| Why work to be CTO when being an engineering manager is plenty
| to lead a comfortable life? Why work to be a senior engineer
| when being a junior engineer is so much less stressful?
|
| People have lots of reasons for continuing to push towards
| bigger things and for some of them that doesn't stop no matter
| how much they have.
| paulpauper wrote:
| if you fail as a CTO you probably still have your old job or
| can work somewhere else. you still keep your skills. if your
| investment blows up, you have to start from zero again.
| pkulak wrote:
| Ctrl-F for "The first in a cascade of events" and start reading
| there.
| IMTDb wrote:
| > [After being convicted for wire fraud] When he informed [his
| mother] that the fines and disgorgements totaled more than $60
| million, she replied, "Oh, dear. You did well, Sung Kook. Our
| America is going through a difficult time. Consider the amount
| you are paying as a tax."
|
| No. You "did not well". It's not a tax, it's a fine for being a
| cheater, you should not be allowed to own or trade any financial
| product. The fact that he was not prevented from doing any more
| business is the real issue here.
| tacon wrote:
| I had a deja vu moment in the article, when the banks realized
| that the first one to sell would have an advantage. Then
| overnight they dumped their positions, done by the time the
| market opened the next day. That is pretty much the plot of the
| excellent movie "Margin Call" (2011):
|
| https://en.wikipedia.org/wiki/Margin_Call
| fallingfrog wrote:
| In the words of Steve Eisman, "They mistook leverage for genius."
|
| Any big, overleveraged bet is going to go bad eventually, no
| matter how well researched.
| dragonwriter wrote:
| > Any big, overleveraged bet is going to go bad eventually
|
| Gambler's Ruin proves any _open-ended_ bet (effectively, a
| series of bets over time) will, "big" and "overleveraged" don't
| actually matter here, except in terms of what the consequences
| are when failure occurs.
|
| Of course, "eventually" is a slippery thing, no one is actually
| doing it with an infinite time horizon, and over any finite
| horizon failure is not guaranteed (though increasingly likely
| the longer the horizon.)
| _wldu wrote:
| Leverage is often framed as being sophisticated and savvy when
| in reality it's just reckless gambling. The house normally
| wins. Unsophisticated people realize this.
| fairity wrote:
| Whether it's reckless gambling depends entirely on the bet
| being made.
|
| There exist bets that carry little to no risk, and whose
| returns exceed the cost of leverage.
|
| In Hwang's case, he seemed to be uninterested in risk
| management, in which case your generalization probably holds
| true.
| fennecfoxen wrote:
| Leverage still makes lots of sense if you can put your
| liabilities in a separate limited-liability container. If you
| win, you win big; if you lose, you lose a finite amount in
| the form of the down payment, get a percentage of the value
| back as something you can deduct from your taxes, while
| whoever lent you money is stuck with your asset.
|
| (This does become problematic at scale when you borrow from
| the government or taxpayer-backed entities, like when Fannie
| Mae originates your commercial real-estate venture's
| mortgage.)
| fallingfrog wrote:
| How is that possible/legal? Is that some kind of structure
| that wealthy people have access to but regular people
| don't?
|
| It sounds like you're describing a way to externalize your
| losses to the bank or to the public, which is indeed the
| best way to make money fast, but is parasitic on society as
| a whole.
| fighterpilot wrote:
| It is both possible and legal for anyone in an agency
| relationship, be it an executive at a company or a hedge
| fund manager.
|
| Executive - take a massive unjustified risk (in terms of
| company direction), if it works out, get a huge bonus, if
| it doesn't work, get fired (by the board)
|
| Hedge fund manager - take a massive unjustified risk (in
| terms of a trade), if it works out, get a huge bonus, if
| it doesn't work, get fired (by your clients)
|
| These are both long call options with the premium equal
| to the opportunity cost of missed salary and the
| reputational impact.
|
| Individuals can't do it because they're not an agent for
| another group or another individual.
| friesfreeze wrote:
| Limited liability entities (e.g. corporations, LLCs, etc)
| are one of the legal cornerstones our economy. Anyone can
| form one, but it takes expert (thus expensive) advice
| from a lawyer to make sure you are in compliance and thus
| really protected - either as a shareholder or an agent of
| the company. This makes sense when a lot of money is at
| stake.
|
| To be clear: the entity is liable for the debts it incurs
| but not necessarily its shareholders or agents. If it
| cannot pay its debts it goes into bankruptcy and is
| either reorganized with its creditors as its new owners
| or liquidated and sold.
| fennecfoxen wrote:
| This is something anyone has access to. The price of
| registering and maintaining some sort of corporation
| (LLC, etc) is in the $100-$400/yr range depending on
| state. Most people obviously don't find it's worth the
| hassle, obviously, and it comes with additional troubles
| like paperwork and taxes, but the barrier is not all that
| steep.
|
| The limited-liability corporation structure moreover has
| some majorly useful properties for society. For instance,
| you probably own some shares of a major pharmaceutical
| company in your portfolio (through a retirement fund). If
| the company loses a lawsuit related to, say, the opioid
| epidemic, and owes billions, and goes totally bankrupt,
| then you can 100% lose your stake in the company as it is
| turned over to creditors -- but those creditors cannot go
| after you personally as an owner of the corporation for
| every dollar that you own; your liability is limited.
| This has democratized investing _a lot,_ and individual
| investors benefit quite a bit, as they have lesser risk
| tolerance than the billionaires.
|
| However, the limitation of liability is a reason prudent
| lenders ought consider the risks inherent in lending to
| you. For instance, if you bring an adequate down payment,
| and you are using the proceeds to purchase an asset that
| has some reasonable value -- the worst case is they're
| stuck with a building still worth something, plus the
| down payment. The problem, again, is when taxpayers end
| up becoming _imprudent_ lenders because of policy or
| bailouts.
| fallingfrog wrote:
| I thought there was some kind of separation between
| ownership and management in an llc? Like, the company is
| its own entity, it makes its own decisions, and it can
| borrow money by itself. And then the individual
| shareholders are not liable for the company's debts.
|
| But you're saying that the sole shareholder can also be
| the management?
|
| I guess in that case it's really up to the bank or
| brokerage to have enough sense to not lend your llc money
| if the business plan is to fly to Vegas and put it all on
| red..
| nradov wrote:
| Yes which is exactly why banks and brokerages don't lend
| to LLCs without significant collateral and/or co-signers.
| fennecfoxen wrote:
| > But you're saying that the sole shareholder can also be
| the management?
|
| Yeah, there are plenty of single-owner LLCs. It's the go-
| to small-company structure.
| twic wrote:
| Creating a limited company purely to Dockerise your own
| wild trades might not work, though - that might be a
| piercable veil:
|
| https://en.wikipedia.org/wiki/Piercing_the_corporate_veil
| #Un...
| fennecfoxen wrote:
| Yeah, the "holding corp with a business plan to buy a
| building with a down payment and a mortgage -- renovating
| it, collecting rent and deprecation, and later selling,
| hopefully for a profit" is a pretty normal thing, and
| describing a huge portion of commercial real estate (n.b.
| this means real estate owned for profit, not in the
| SimCity zoning sense). A failure leaves the lender owning
| the building. This is expected.
|
| A single owner running insanely levered stock trades,
| though, could easily be found grossly undercapitalized,
| and that's another matter entirely.
| nradov wrote:
| It's not that simple. Banks have tighter lending standards
| for LLCs. It's not like any random person can form an LLC,
| borrow money from a bank or brokerage, YOLO it in the stock
| market, and walk away if the bet goes bad. In reality the
| lender will usually demand significant collateral and/or
| require the LLC owner to accept personal liability. LLCs
| have their uses but they aren't financial magic.
| WanderPanda wrote:
| Smoothbrain apes realise this
| swarnie_ wrote:
| The four million new users spamming WSB with comments like
| this have fundamentality ruined the sub this year.
|
| Congrats on killing it....
| hogFeast wrote:
| Leverage constraints are one of the primary sources of market
| inefficiency.
|
| I don't know who you think the house is...is it the
| investment banks? They are holding the bag for $5bn+.
| whoknowswhat11 wrote:
| The house wins in lots of cases because of capital
| differences. You often end up in a forced sell LOW situation
| with leverage. Ie, market swings up and down 10%, then up and
| down 20%, at some point on a down swing if you are levered up
| a lot house calls you up for an extra $5B which you don't
| have, so they sell everything out from under you. So you can
| end up selling low not high in these models.
| BiteCode_dev wrote:
| Someone is going to quote fooled by randomness in 3, 2, 1...
| nabla9 wrote:
| > "I try to invest according to the word of God and the power of
| the Holy Spirit"*
|
| >When the smoke finally cleared, Goldman, Deutsche Bank AG,
| Morgan Stanley, and Wells Fargo had escaped the Archegos fire
| sale unscathed.
|
| Bible lesson:
|
| _For to everyone who has will more be given, and he will have an
| abundance. But from the one who has not, even what he has will be
| taken away._ Matthew 25:29
| CyanLite2 wrote:
| Lemme guess.... levered up 100:1 to invest in dogecoin?
| lordnacho wrote:
| Seems pretty straightforward to me, as a former fund manager. He
| had swaps so he could get leverage, and then had some
| concentrated positions in some shares. They went the wrong way,
| it ate up all of his capital, and it ate up some of the lenders'
| capital as well. The thing to remember is it didn't blow up the
| entire financial system, the banks still have capital left, it's
| just one guy who took a risk and some banks who took a risk on
| him.
|
| At the other end of the market, retail spreadbetting, this
| happens all the time. Perhaps not the spreadbetting co blowing up
| like on the CHF trade, but punters lose their stash when they are
| leveraged every day. It's basically the business model for some
| of these shops.
|
| The only minor insight this affair gives is that a lot of fund
| managers are just taking bigger risks, not being better selectors
| of investments. Eg you could just Martingale bet for a long time
| and probably look ok, until you look stupid. There's plenty of
| ways to make it skewed as well, so it's not 50/50 each day
| whether you make money, you can trade the skewness for the blowup
| risk.
| [deleted]
| chollida1 wrote:
| > The only minor insight this affair gives is that a lot of
| fund managers are just taking bigger risks
|
| Really? I think there are several take aways that will affect
| the markets for a while.
|
| 1) Prime brokers were blind to his exposure, using multiple
| prime brokers and also not having to report controlling
| interest in shares controlled by Swaps let one player control
| an amount of shares on single firms that no prime broker would
| ever let their clients control.
|
| I'm fairly certain we'll see some overhaul on the swap side to
| shed more light on what positions they hold, similar to what
| hedge funds have to file quarterly.
|
| 2) Family offices have kind of slid under hte radar, hedge
| funds have to file quarterly docs on what they hold and report
| when they control more than 5 or 10%, depending on the
| jurisdiction. Family offices side step this requirement due to
| a quirk in securities law.
|
| Again I expect this "loop hole" to be closed.
|
| 3) One firm essentially was responsible for most of the share
| price gain for a few individual stocks, specifically viacom
| where he bought almost all of viacoms share price appreciation.
| This bullying technique was common in the 80s bond markets due
| to the small number of players who could buy up bond positions
| to push them around. Those markets were reformed such that this
| doesn't really happen too often anymore. Bill, found a cunning
| way to do this in the securities markets.
|
| The SEC is going to look at t his very closely, remember their
| mandate is to have orderly markets and this ordeal was anything
| but orderly.
| caffeine wrote:
| Agree that large holdings should be reported but disagree
| they FO should need to publish their portfolios, that seems
| like a massive violation of privacy.
| lordnacho wrote:
| But are those major? Major would be if someone could blow up
| so much that we take down Lehmans again, despite all the
| stuff that's been put in place since.
|
| The PB thing is interesting to me, I never took a massive
| position across PBs but I had assumed if I did they would ask
| whether I was doing the same trade everywhere. At least when
| executing FX trades electronically, they all said it was a
| big no-no to split the trade across banks.
|
| > I'm fairly certain we'll see some overhaul on the swap side
| to shed more light on what positions they hold, similar to
| what hedge funds have to file quarterly.
|
| I bet someone with a bit of crypto knowledge could invent a
| way to report this without revealing exactly who has what. At
| least it sounds like one of those zero knowledge games.
|
| The FO thing yeah, maybe they shouldn't have that loophole.
|
| Single price mover, yeah, I don't think it's healthy. In
| general I like transparency.
| dralley wrote:
| Well, it may not have blown up any banks, but Credit Suisse is
| kind of imploding right now.
| anonymouse008 wrote:
| I'm not a fund manager - and only took a few classes, so I'm
| probably way off in this line of questioning...
|
| Do you think he and potential compatriots gained additional
| exposure through the options chain? I'm still struggling to
| understand how there were $Xm+ weeklies significantly OTM on
| TSLA and other names the Monday of expiry. Could it be seen as
| a good investment strategy if you had exposure in other
| vehicles that just needed to cover the premium (assuming the
| greeks were right)?
| lordnacho wrote:
| I haven't looked at the data but he could certainly have
| bought some kind of structured product to enhance his bet
| further, which would turn up in the options.
|
| Normally the bank would look at your total position and work
| out from there what they thought your daily risk was, and
| thus how much margin to ask for. What isn't so easy is to
| spot the massive whale who's taken the same position with all
| the banks, so big that he moves the market the wrong way when
| it goes badly. Then your risk model is pretty useless.
| [deleted]
| eqvinox wrote:
| So, uh... when is it "betting on stocks" (as in that article) and
| when is it "investing in stocks"?
|
| This has a slight taste of Newspeak...
| jmccaf wrote:
| There is a joke about the irregular English conjugation of the
| verb "invest":
|
| - I invest
|
| - you trade
|
| - they speculate
| banbanbang wrote:
| If you think this is bad wait till you find out how much of
| current equity market is leveraged on top of crypto. The
| contagion will be massive and nothing like we ever experienced.
| That makes it even more dangerous because the Fed and CBs will
| not be able to do anything about it in coming weeks and months.
| wilsonfiifi wrote:
| To put that amount into perspective That's like 1/2 to 1/3 of the
| GDP of quite a few sub-Saharan countries! Yikes!
| avrionov wrote:
| Great point. His loss is bigger than the GDP of the bottom 80
| countries in the world. 113 Laos
| 20,440 114 Afghanistan 19,938 115 Mali
| 19,912 116 Lebanon (2020) 19,126 117 Zambia
| 18,955 118 Burkina Faso 18,853 119 Botswana
| 18,726 120 Gabon 18,362 121 Benin
| 17,327 122 Albania 17,138 123 Palestine[n 7]
| 16,481 124 Malta 16,476 125 Guinea
| 16,339 126 Georgia 16,163 127 Niger
| 15,899 128 Brunei 15,278 129 Madagascar
| 14,746 130 Jamaica 14,600 131 Mongolia 14,233
| 132 Mozambique 13,957 133 North Macedonia 13,821
| 134 Chad 12,531 135 Nicaragua 12,283
| 136 Armenia 12,251 137 Mauritius 12,212 138
| Republic of the Congo 12,022 139 Moldova[n 8] 11,998
| 140 Equatorial Guinea 11,726 141 Bahamas 11,706
| 142 Namibia 11,381 143 Rwanda 10,633 144
| Malawi 9,268 145 Mauritania 9,239 146 Kosovo
| 8,810 147 Togo 8,627 148 Tajikistan
| 7,825 149 Kyrgyzstan 7,470 150 Guyana 7,255
| . . . 192 Tuvalu 57
| markus_zhang wrote:
| I'm just curious how does HN prioritize posts. TBH I don't think
| this is very relevant to HN overall, plus it doesn't have a lot
| of up-votes and 0 discussion (till now). How does it show up in
| the front page at all?
| endisneigh wrote:
| I'm curious why you don't think it's relevant to HN, or do you
| think finance in general is irrelevant?
| markus_zhang wrote:
| The problem is if finance is very relevant then pretty much
| we should be able to see a whole range of financial topics
| here. I still consider HN to be more tech related, but again
| this is just my POV. And if the community thinks finance is
| at least equally relevant then I'm fine.
|
| I mean I don't "hate" this post, I'm just curious how
| relevant it is to HN community. And I could be on the wrong
| end.
| brokencode wrote:
| Stories are relevant if people find them interesting, and
| that's about all the rhyme or reason there is to it.
| Somebody losing $20 billion in a matter of days is very
| eye-catching.
| plank_time wrote:
| You are definitely on the wrong end. HN is for any articles
| that are interesting, with a bias towards tech but not
| exclusively about it. This is a fascinating article and I'm
| glad that it was posted.
| totalZero wrote:
| Ignoring all the ways that tech and finance crisscross one
| another these days and focusing specifically on HN: Y
| Combinator is a venture capital firm, and startups are
| businesses. HN is inextricably tied to finance.
| b0afc375b5 wrote:
| Agreed. I would say fin tech is somewhat relevant, since it
| has the tech component. But finance in general does not
| interest me at all. And that's coming from a former
| accountant.
| ghostbrainalpha wrote:
| Bill Hwang was definitely a "hacker" of the finance system.
| edoceo wrote:
| Zero Cool now has Zero Cash.
| GavinMcG wrote:
| It had 9 points at 26 minutes when you posted this and has 26
| points now, at 34 minutes. [Edit: 124 at 1:10!]
|
| A whole community can't instantly evaluate the article. Give
| things a chance!
| gruez wrote:
| AFAIK it's a combination score + recency, with penalties if
| it's flagged and/or getting a lot of comments.
| ddalex wrote:
| Loss of a hundred dollars is a tragedy... the loss of billion is
| a statistic
| Ericson2314 wrote:
| If someone lost $20B in 2 days, what did they have to begin with?
| Probably not a "real" $20B.
|
| We really need to stop mixing up our stock and flows, and putting
| dollar amounts derived from the latter to the former in ways that
| make no sense.
| mizzack wrote:
| A lot less than $20B. That's why creditors are eating losses.
| [deleted]
| headmelted wrote:
| The article implies he was worth $20bn and lost all of it,
| which could easily be the case if he was leveraged 5:1 and had
| $100bn AUM in the fund.
|
| The circumstances are quite surprising given that this was his
| family office. From previous stories it sounded like Archegos
| was a hedge fund that blew up and lost investor money - but
| reading this it seems he was gambling with swaps on his own
| money plus whatever investment banks would lend him.
|
| It kind of sounds like he screwed up in losing his fortune, but
| rather than any kind of fraud the banks in question just
| screwed up worse by not doing proper diligence on their
| borrower (although obviously we don't have insight into what
| was disclosed to the lenders, so who knows?).
|
| "If you owe the bank a thousand bucks you have a problem, if
| you owe the bank a million bucks they have a problem" comes to
| mind.
| hogFeast wrote:
| The swaps are the lending instrument.
|
| He used CFDs which are a type of OTC derivative. Instead of
| buying the stock, you put up some margin and (usually)
| promise to swap cash daily based on the movement in an
| underlying stock (or basket of stocks) i.e. instead of buying
| F, you promise to pay/receive the loss/gain in F stock every
| day.
|
| The leverage comes, of course, when investment banks say you
| can pay/receive the cash flows on a position worth X shares
| but only need to put margin that is significantly less than
| the actual purchase price for X shares i.e. for a $100
| notional exposure, you only need to put up $5 in margin.
|
| Something to bear in mind if this sounds confusing. The risk
| doesn't go anywhere. If an investment bank agrees to pay the
| gain in the share price of AMZN, they hedge their risk by
| buying shares. There are a few unique things about the case,
| it seems implausible that Archegos weren't aware they were
| cornering the market for certain stocks through investment
| banks hedging their exposure, but the macro point is that the
| risk hasn't disappeared.
|
| Amazingly, this happened in 2007 too (everyone thought that
| the MBS market was deep and liquid...no, it was pretty much
| all owned by some particularly dense bankers in
| Germany/Japan/etc.). People forget that risk doesn't go
| anywhere and there is a point where risk-taking is just too
| high relative to the actual productivity of the underlying
| assets.
|
| Also, I don't the detail is out there. But the $20bn, I
| believe, refers to the gross leveraged position. It is very
| likely that he was leveraging every bit of equity he had on
| the way up (it doesn't matter anyway, all of his equity is
| going to be wiped out).
| snarf21 wrote:
| Yeah, this isn't investing. This is gambling.
| MR4D wrote:
| Worse - it's gambling with other people's money and then
| charging 2-and-20 on it.
|
| Actually, now that I think of it, it's even worse that that!
| - its taking other people's money, then leveraging it, and
| _then_ charging 2-and-20.
|
| Who needs to be a criminal when you can just do this instead?
| pradn wrote:
| It was his family office, not a public-ish hedge fund.
| alborzb wrote:
| It's a family office, not a public investment fund, so I
| don't think the "other's people's money" phrase is valid
| here.
|
| It's kind of fuzzy just how much of it was leveraged, but
| there's more clarity into the situation of the family
| office in this article -- https://www.ft.com/content/c31983
| 9d-d185-4e8a-bbc7-659bebe58...
| dragontamer wrote:
| Archegos Capital was largely Bill Hwang (and his family's)
| money.
|
| No one really weeps for this guy. This is absolutely a
| situation where you can be Nelson (from the Simpsons) and
| just laugh at this idiot's mistake, without feeling bad
| about it. Overleveraging billions of your own money, and
| losing it all in a couple of days takes a certain level of
| recklessness.
|
| There were a few banks that got caught up in this issue
| (Credit Suisse lost $5 billion on this). But once again, we
| can just sit back and laugh at Credit Suisse for failing to
| account for the risk in granting Bill Hwang leverage.
|
| Not like an "Evil Laugh" or anything, but... sometimes
| investors make a mistake (be it a fund like Archegos
| Capital, or a bank like Credit Suisse). When they make
| mistakes, they loose $Billions. That's part of the risks
| they take when they do their business. Fair game when they
| lose on their bets.
| grey-area wrote:
| Credit Suisse investors lost that money, so it came out
| of the pensions and investments of ordinary people who
| invested in that bank. There were real losers here.
| dragontamer wrote:
| No more than how the London Whale lost $Billions for JP
| Morgan (and therefore damaged JP Morgan's shareholders).
| When you invest into a bank, its understood that the bank
| will play with your money in ways that could lose it.
|
| There's no guarantee that any of this crap makes money.
| Investors make the decision that they're willing to risk
| money for the opportunity to make more money later.
| That's fundamental to the stock market (and bond market).
| grey-area wrote:
| That's fine but I think it's disingenuous to pretend
| there are no losers here.
|
| When schemes like archegos blow up, it often costs a lot
| of people who don't even know they have invested in
| stocks (e.g their pension fund does) some of their life
| savings.
| dragontamer wrote:
| > When schemes like Archegos blow up
|
| Archegos isn't a "scheme". Its a private hedge fund for
| Bill Hwang's family.
|
| I mean, it really sucks for him and his family to lose
| $20,000,000,000 in a couple of days. But... this dude was
| playing with fire.
|
| And yeah, sucks for Credit Susie who was left "holding
| the bag" on Archegos's margin calls (all other banks
| liquidated ahead of time and got out safely. Credit Susie
| was slow on the uptake and was left with a $5 Billion
| bill).
|
| But guess what? Lending $Billions to reckless
| billionaires sometimes causes your bank to lose money.
| That's well within the risk-reward calculus. And a "big
| wall street bank" losing single-digit $Billions on a bet
| happens at least a few times each year: its not even that
| rare of an incident. This is literally the business
| they're in. (Indeed: banks like Credit Susie lend money
| somewhat recklessly because they know they can afford the
| loss if the bet goes sideways. I doubt anyone at Credit
| Susie is going to even get fired over this incident, its
| really not that big a deal.)
|
| Honestly, this implosion is great entertainment because
| everything happened correctly. The damage is almost
| entirely isolated to Bill Hwang and his closest
| associates (family members, and some unfortunate church-
| members who got roped in). But it seems like Bill Hwang
| was a relatively honest fellow: so he didn't really screw
| anyone else over aside from himself.
|
| Pretty much everyone in this story got "what they
| deserved". They played with fire, and then they got
| burned. This isn't a 2007 or 2008 situation where the
| fire spread and hurt someone else: this disaster is
| almost entirely "contained" to only the circle of
| reckless players.
| MR4D wrote:
| > Archegos Capital was largely Bill Hwang (and his
| family's) money.
|
| You make a good point. I completely forgot that part.
| Kindof important too.
| RobRivera wrote:
| ssshhhh - don't speak the true-true
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