Lessons from the collapse of Archegos Capital Management
Updated: Mar 11, 2025
Lessons from the collapse of Archegos Capital Management
Writer: Klinsmann Lee
Archegos Capital Management:
Archegos Capital was a family office set up by Bill Hwang, a protégé of Julian Robertson who founded the well-known hedge fund Tiger Management.
With a leftover capital of $200 million from his shuttered Tiger Asia Hedge Fund, Bill was able to turn his family office into $20 billion over 7 years since 2013. [1]
The success of Archegos Capital was based on using high leverage and investing in a portfolio of concentrated stocks for a long period.
To leverage its position, Archegos Capital had utilised Total Return Swap, a form of derivative contract.
Derivative Contract: Financial contract that derives its value from an underlying asset, entered between a buy and sell party.
Total Return Swap: Derivative contract entered with investment banks where Archegos will bear the loss if the stock price falls or take the profits if the stock price rises. The returns are calculated daily. [2]
The investment banks are the actual owners of the stock. This provides anonymity to Archegos Capital as the ultimate stock owner.
Archegoes Capital will pay a fee to enter into this total return swap.
· Archegos Capital is only required to put up small capital to secure those positions.
Without the knowledge of other banks, Archegos Capital has privately entered Total Return Swap contracts with 6 other investment banks such as Credit Suisse, Morgan Stanley, UBS, etc.
Event:
On 26th March 2021, major US-listed stocks such as ViacomCBS, Baidu Inc, Tencent Music Entertainment Group and others plummeted. ViacomCBS shares were down 27% when the market closed. [3]
The cause of the event was a forced liquidation by the investment banks in the positions held on behalf of Archegos Capital Management as the family office failed to meet the required margin call.
The catalyst began a few days prior when ViacomCBS announced a secondary offering to raise more capital. The stock subsequently declined 29% over the next two days after the announcement. [4]
As ViacomCBS stock declined, major investment banks such as Credit Suisse, and Morgan Stanley requested Bill to put up more collateral (margin) for his position.
Investment banks liquidated Bills’ position as a result of the following reasons:
Leverage: Archegos is highly leveraged at 5x (For every $1 capital, Archegos can invest $5 of position). With the rapid drop in ViacomCBS's stock price, the collateral demanded greatly exceeds the little buffer of capital that Bill has in place.
Overconfidence: Bankers pleaded with Bill to sell some shares, take the loss and survive. However, Bill refused and hoped that ViacomCBS stock would rebound as a result.
Optimal Strategy: With the possibility of Archegos defaulting, investment banks' best strategy is to quickly liquidate their position, held on behalf of Archegos, to take back the cash and minimise loss.
Following the sale, Credit Suisse reported $5.5 billion in losses, Nomura reported nearly $3 billion and Morgan Stanley under $1 billion. Other investment banks such as Goldman Sachs reported immaterial loss. Archegoes Capital defaulted. [5]
Lessons:
Risk Management:
Risk Management is fundamental to the success of business operations, investment and many things.
Archegos Capital utilises high leverage to maximise return in its investment strategies. Yet, there was a lack of diversification or the use of a hedge to offset the risk it should have taken.
The risk management mainly performed is Bill’s conviction that those stocks are undervalued.
Leverage is a two-sided sword. When the stock price is rising, it helps to maximise the return. Yet, when the stock price drops, your loss will also be maximised. In the case of Archegos Capital, the drop of ViacomCBS is so fast and the leverage utilised by Archegos Capital is so high that it erased the collateral put forward by Archegos. With such a drop in the stock price, Bill had no additional collateral to put forward. This resulted in a forced liquidation by investment banks on his position.
At the same time, Bill ignored the advice of bankers earlier to sell shares, take losses and survive. His strong conviction and confidence blinded his ability to recognise that the ability to maintain cash flows is very important when facing a default. Bill could have been very right about ViacomCBS in the mid-run. However, he was not able to meet the margin call when required in the short run.
The ability to recognise the right amount of leverage to use is very important to business and investment success.
Risk means opportunity. Risk also means loss.
Long Term Investment:
Archegos Capital applies a long-term investment strategy that leads to its success.
At the same time, Bill was able to hold onto those shares (Google, Netflix, etc.) and reinvest his profits into those shares (purchasing more total return swaps). [6]
Bill’s ability to choose stocks with realised growth potential and being committed to his investment is admirable. For many investors, it is common to take profits when the stock price rises. For Bill, he is willing to ignore those fluctuations and stick to his conviction.
His success is the ability to hold onto those shares while utilising high leverage created his once net worth of $20 billion.
Game Theory:
The optimal outcome for Archegoes Capital is that the stock price of ViacomCBS rebounded. In this case, both Archegoes Capital and investment banks will endure little loss.
To achieve this optimal outcome, all investment banks needed to hold onto the position on behalf of Archegoes Capital.
However, investment banks are each taking a lot of risk in doing so, if ViacomCBS stock price continues to go down and Archegoes defaulted.
The optimal strategy for Investment Banks is to sell their stock position on behalf of Archegoes Capital and minimise the loss.
As ViacomCBS’ stock price falls, the collateral put up by Archegoes Capital will not be able to cover it.
As Archegoes Capital is unable to put up more collateral and with the value of the position going down (due to the fall of the price), investment banks will need to cover the loss instead.
On 25 March 2021, Morgan Stanley offloaded some positions with the consent of Archegos Capital. [7]
As Morgan Stanley and Goldman Sachs offloaded their trades, other investment banks followed.
The outcome was investment banks bracing for the door to exit their position.
Summary:
The collapse of Archegoes Capital is a lesson on risk management, the power of long-term investment and game theory.
Leverage is a two-sided sword. It helps to maximise your return or your loss.
In the finance world, the courage to take loss and survive is important. This requires strong judgment.
Other Information:
Please see the “references” section to acknowledge the sources used in this article. For any mistakes made in this article, feel free and let me know.
Reference:
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