Thematic Spotlight: Archegos

The following is an excerpt from Weiss' latest Thematic Spotlight, which focuses on timely thoughts at the intersection of policy and markets.

… Archegos was characterized as a family office, not an SEC-registered advisor, which is required to disclose its positions to both its counterparties and the market at large; one will not find an Archegos ‘13F.’

As importantly, the word “diversified” is doing a lot of work in contrasting between Archegos and other funds. Said differently, Hwang’s firm ran at a reckless level of concentration along three distinct vectors:

(1) Portfolio concentration: relatively few and highly correlated positions

Several individual positions were in excess of 10% of long market value (LMV) and the overall long book appeared to be highly correlated bets on Chinese internet firms as well as midcap US media and e-commerce companies. From media accounts, the short book was mostly index and ETF hedges which couldn’t possibly offset specific and correlated risks apart from some crude beta minimization. This was particularly true when realized risks were as much endogenous as exogenous.

(2) Position concentration: company stake sizes relative to float / daily liquidity

Hwang built effective economic ownership stakes in a whopping 10-20% range of several companies such as Baidu, Viacom, and GSX TechEdu (as evidenced by block trade sizes and the time series of swap counterparty filings). Aggregating his swap positions, Hwang would effectively be either the largest or a top 3-4 shareholder (alongside Vanguard, Blackrock, and T. Rowe Price) in many of his positions, unbeknownst to both the market and, for the most part, the management of the underlying companies. In most instances, these aggregate positions would constitute 5-10x average daily trading volume in such holdings, creating substantial effective illiquidity by virtue of the portfolio construction, despite most positions being nominally considered liquid, public equities.

(3) Financing concentration: using swap counterparties to amplify rather than spread positioning risk

Access the rest of the document by downloading here.