Key Takeaways
- • Archegos Capital Management, a hedge fund restructured as a family office for former hedge fund executive Bill Hwang, has triggered losses at multiple banks, with Credit Suisse and Nomura warning of potentially large losses.
- • Early estimates put Credit Suisse's potential loss from the Archegos sell-off at $3 to $4 billion, according to the Financial Times, though the bank had not yet determined the final figure.
- • The episode is intensifying scrutiny of whether hedge funds that convert to family offices avoid SEC oversight under the Dodd-Frank framework while carrying far higher leverage than conventional family offices.
- • Goldman Sachs, Morgan Stanley, Citigroup, BNP Paribas, Deutsche Bank and UBS are reportedly affected to a lesser degree, per media reports.
- • Industry observers question whether regulators such as the SEC and US Treasury will restrict prime brokerage and hedge fund exposure levels to limit systemic risk.
Summary
The collapse of Archegos Capital Management, a New York-based entity operating as a family office for former hedge fund executive Bill Hwang, has raised questions about whether hedge funds that convert into family office structures are escaping regulatory oversight and taking on risk that a conventional family office would not tolerate. Losses have reached a number of banks, most notably Nomura and Credit Suisse, which have warned of potentially large losses. Goldman Sachs, Morgan Stanley, Citigroup, BNP Paribas, Deutsche Bank and UBS are reportedly affected to a lesser degree, according to media reports.
A trend of hedge funds converting to family offices over the past decade has been noted, with examples including George Soros, John Paulson, who exited the business and converted his operation in July of the prior year, Leon Cooperman, Steven A. Cohen, Eric Mindich, Jonathon Jacobson, and Clifton Robbins at Blue Harbour Group. Because such entities are not covered by the Securities and Exchange Commission, as they would be following the Dodd-Frank legislation enacted after the 2008 financial crisis, they fall outside that oversight. Alastair Graham, founder of the Highworth Research database on single family offices, said such hybrids exist for various reasons, including poor performance or a wish to wind down, and noted that Archegos's leverage is atypical, sitting at the extreme end of the spectrum. He suggested the SEC and US Treasury may press for tighter limits on prime brokerage and hedge fund exposure.
The episode also raises questions about whether banks' risk controls were adequate amid ultra-low interest rates and a search for yield. Sam Sudame, senior investment manager at WE Family Offices, said he would be surprised if banks did not have a handle on their exposures, while noting it was hard to tell whether the saga signals systemic issues. Michael Wagner, co-founder and COO at Omnia Family Wealth, which oversees about $2 billion in assets, argued that Archegos is more of a hedge fund in nature than a family office and described "some regulatory navigation" taking place.
Bill Hwang previously ran Tiger Asia Management, which at one point managed more than $5 billion. In 2012 Tiger Asia planned to wind down and return outside capital, pleaded guilty to a criminal fraud charge, and agreed to pay $44 million to settle civil allegations by US securities regulators of insider trading in Chinese bank stocks, according to the Wall Street Journal. The Tiger Asia business was later rebranded as Archegos. According to a Financial Times report, Credit Suisse has written down $450 million on its investment in York Capital, and clients could lose up to $3 billion from frozen funds linked to Greensill Capital. The report said the run of losses has put pressure on CEO Thomas Gottstein, and that the bank's board is investigating which executives were chiefly responsible for the Greensill and Archegos crises.
A trend of hedge funds converting to family offices over the past decade has been noted, with examples including George Soros, John Paulson, who exited the business and converted his operation in July of the prior year, Leon Cooperman, Steven A. Cohen, Eric Mindich, Jonathon Jacobson, and Clifton Robbins at Blue Harbour Group. Because such entities are not covered by the Securities and Exchange Commission, as they would be following the Dodd-Frank legislation enacted after the 2008 financial crisis, they fall outside that oversight. Alastair Graham, founder of the Highworth Research database on single family offices, said such hybrids exist for various reasons, including poor performance or a wish to wind down, and noted that Archegos's leverage is atypical, sitting at the extreme end of the spectrum. He suggested the SEC and US Treasury may press for tighter limits on prime brokerage and hedge fund exposure.
The episode also raises questions about whether banks' risk controls were adequate amid ultra-low interest rates and a search for yield. Sam Sudame, senior investment manager at WE Family Offices, said he would be surprised if banks did not have a handle on their exposures, while noting it was hard to tell whether the saga signals systemic issues. Michael Wagner, co-founder and COO at Omnia Family Wealth, which oversees about $2 billion in assets, argued that Archegos is more of a hedge fund in nature than a family office and described "some regulatory navigation" taking place.
Bill Hwang previously ran Tiger Asia Management, which at one point managed more than $5 billion. In 2012 Tiger Asia planned to wind down and return outside capital, pleaded guilty to a criminal fraud charge, and agreed to pay $44 million to settle civil allegations by US securities regulators of insider trading in Chinese bank stocks, according to the Wall Street Journal. The Tiger Asia business was later rebranded as Archegos. According to a Financial Times report, Credit Suisse has written down $450 million on its investment in York Capital, and clients could lose up to $3 billion from frozen funds linked to Greensill Capital. The report said the run of losses has put pressure on CEO Thomas Gottstein, and that the bank's board is investigating which executives were chiefly responsible for the Greensill and Archegos crises.
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