Trader Insights

Markets That Matter – 2021 April – Newsletter

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In this section, our Senior Trader has provided high quality proprietary charts, commentary and analysis.

Hope you all had a great Easter!

We have a newly formatted monthly newsletter to digest and enjoy.

Latest Market Stories

A few people who may not have had a good Easter include those involved in the Archegos Capital Management LLC saga.

That is both internally at the firm and externally at the large investment banks who took on their flow. 

At the time of writing, it is estimated by Credit Suisse that their own loss maybe north of $4bn!

Who are Archegos Capital Management?

A family office based in the US who had an estimated $10bn of assets.

What happened?

They received a margin call as they had large exposure to ViacomCBS, as well as several Chinese tech stocks, which took a huge hit in Friday’s trading. 

They had to default on their positions which has led to a huge unwinding of their positions by their prime brokers, including many of the worlds largest investment banks.

Who made the errors?

Nomura can expect their entire second half of financial year earnings to be wiped out from this loss. It is said that both Nomura and Credit Suisse were slower to react in offloading the share blocks to the market than some of their peers (Financial Times).

It appears the leverage provided to Archegos allowed for ‘total market exposure’ of circa $60bn, despite the firm’s total AUM of around $10bn. It is reported that Credit Suisse is expected to announce the firing of two of their main chiefs, unsurprisingly including the head of the risk.

And of course, you would expect whoever managed to leave such exposure to the stocks at Archegos might be in a spot of trouble too!

What could this mean for markets?

Well, markets don’t seem to care at this stage aside from the individual stocks, with Nomura (Japan’s largest investment bank) currently down around 16% – this chart from Bloomberg showing that as the largest move down since 1974!

Something of this magnitude, while certainly not a small amount of dollars, is unlikely to create the kind of panic and systemic issues which the collapse of Bear Stearns unduly brought about in 2008. 

Why does this matter to you?

Few reasons – firstly, it is a large scale example of extremely poor risk management. Hedge funds blowing up isn’t exactly a new thing, you don’t have to look back too far and you will find large name examples of Long Term Capital Management and Bear Stearns. 

However, it looks like classic misuse of leverage and greed has led to positions held in the market which were heavily correlated on similar tech stocks and that was simply too big.

It should be a lesson of what can happen when you do not look after the downside first. 

Secondly, as mentioned above, it doesn’t appear this will cause systemic risk to the market – although it’s worth reading more on the LTCM and Bear Stearns collapses to see the knock-on effects a large fund blow-up can have. 

To continue reading this article…


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