Global banks may lose more than $6 billion from the downfall of US investment firm Archegos Capital and regulators and investors fear the episode could reverberate more widely.
Japan’s Nomura and Credit Suisse of Switzerland issued warnings of major losses from money lent to Archegos for equity derivatives trades, triggering a worldwide sell-off in banking stocks.
Morgan Stanley fell by 2.6 per cent and Goldman Sachs by 1.7 per cent on Monday.
Nomura shares were down 16.3 per cent at market close, a record one-day fall, while Credit Suisse suffered a 14 per cent drop, its biggest fall in a year. Deutsche Bank fell by 5 per cent and UBS was off 3.8 per cent.
Losses at Archegos Capital, a family office run by Bill Hwang, sparked a fire sale of stocks including ViacomCBS and Discovery on Friday.
“This is a challenging time for the family office of Archegos Capital Management, our partners and employees,” said spokeswoman Karen Kessler.
“All plans are being discussed as Mr Hwang and the team determine the best path forward.”
Archegos was unable to meet banks’ calls for more collateral to secure equity swap trades they had partly financed.
After those positions fell sharply in value, lenders sold big blocks of securities to recoup what they were owed.
“When you have people making certain bets based on what has outperformed in the past and the tide turns, they get burnt,” said Richard Bernstein, chief executive of Richard Bernstein Advisers.
"The question is how much leverage they used."
The problems started last week when a disappointing stock sale by media company ViacomCBS triggered devastating bank margin calls for Archegos. Shares in ViacomCBS fell by 23 per cent last Wednesday after it sold shares at a price that diluted its value.
While stocks typically decline after share sales, ViacomCBS was also hurt by analyst downgrades amid concerns that its stock was over-valued.
ViacomCBS shares extended their declines on Thursday, falling by 30 per cent from the previous Monday’s close. This set off alarm bells at Archegos’ prime brokers and prompted them to offload stock in all of Archegos’ investments.
Goldman and Morgan Stanley were quick to offload shares on Friday, averting a material financial blow.
Deutsche Bank said it had significantly reduced its exposure to Archegos without incurring any losses and was managing down its “immaterial remaining client positions”, on which it did not expect to incur a loss.
However, other banks faced more serious repercussions.
Nomura, Japan’s largest investment bank, issued a warning of a possible $2bn loss while Credit Suisse said a default on margin calls by a US-based fund could be “highly significant and material” to its first-quarter results.
Credit Suisse’s losses are expected to be at least $1bn but could reach $4bn. The investment bank declined to comment on loss estimates.
Investors questioned if the full impact of Archegos’ problem had been realised.
Market observers noted that only in February, hedge funds took major losses on short positions during the run-up in GameStop stock.
Hedge fund deleveraging also contributed to the turmoil in the US Treasuries market in March last year.
In the case of Archegos, the opaque and complex nature of its derivative trades, its lightly regulated structure as a family office and high leverage – fuelled by historically low interest rates – prompted concerns about potential systemic risk.
When you have people making certain bets based on what has outperformed in the past and the tide turns they get burned. The question is how much leverage they used
Regulators in the US, Switzerland, the UK and Japan are monitoring developments.
Archegos bought derivatives known as total return swaps, which allow investors to bet on stock price moves without owning the underlying securities. The fund posts collateral against the securities rather than buying them outright with cash.
Archegos’ positions were highly leveraged. The fund had assets of about $10bn but held positions worth more than $50bn.
Thomas Hayes, chairman of Great Hill Capital in New York, said Mr Hwang was known to run “a very concentrated, highly leveraged book”.
The underlying shares were held by Archegos’ prime brokers, which lent it money and structured and processed its trades. They included Goldman Sachs, Morgan Stanley, Deutsche Bank, Credit Suisse and Nomura.
Unwinding the positions led banks to sell large blocks of stock. Shares of ViacomCBS and Discovery each tumbled by about 27 per cent on Friday, while US-listed shares of China-based Baidu and Tencent Music plunged by as much as 33.5 per cent and 48.5 per cent last week.
Mr Hwang, who ran Tiger Asia from 2001 to 2012, renamed the hedge fund Archegos Capital and converted it to a family office, according to the fund’s website. Family offices act as private wealth managers and have lower disclosure requirements than other investment companies.
Hedge fund managers said they wondered why Mr Hwang, whom several described as a “smart guy”, had made such big bets on ViacomCBS and Discovery, given the large wagers against the companies.
The pair are not considered to be high-growth plays, in contrast to other media stocks that have outperformed during the Covid-19 pandemic.
Mr Hwang and his firm paid $44 million in 2012 to settle Securities and Exchange Commission insider trading charges.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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Men: Hamad Nawad and Khalid Al Balushi (56kg), Omar Al Fadhli and Saeed Al Mazroui (62kg), Taleb Al Kirbi and Humaid Al Kaabi (69kg), Mohammed Al Qubaisi and Saud Al Hammadi (70kg), Khalfan Belhol and Mohammad Haitham Radhi (85kg), Faisal Al Ketbi and Zayed Al Kaabi (94kg)
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Houthis: Iran-backed rebels who occupy Sanaa and run unrecognised government
Yemeni government: Exiled government in Aden led by eight-member Presidential Leadership Council
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Ways to control drones
Countries have been coming up with ways to restrict and monitor the use of non-commercial drones to keep them from trespassing on controlled areas such as airports.
"Drones vary in size and some can be as big as a small city car - so imagine the impact of one hitting an airplane. It's a huge risk, especially when commercial airliners are not designed to make or take sudden evasive manoeuvres like drones can" says Saj Ahmed, chief analyst at London-based StrategicAero Research.
New measures have now been taken to monitor drone activity, Geo-fencing technology is one.
It's a method designed to prevent drones from drifting into banned areas. The technology uses GPS location signals to stop its machines flying close to airports and other restricted zones.
The European commission has recently announced a blueprint to make drone use in low-level airspace safe, secure and environmentally friendly. This process is called “U-Space” – it covers altitudes of up to 150 metres. It is also noteworthy that that UK Civil Aviation Authority recommends drones to be flown at no higher than 400ft. “U-Space” technology will be governed by a system similar to air traffic control management, which will be automated using tools like geo-fencing.
The UAE has drawn serious measures to ensure users register their devices under strict new laws. Authorities have urged that users must obtain approval in advance before flying the drones, non registered drone use in Dubai will result in a fine of up to twenty thousand dirhams under a new resolution approved by Sheikh Hamdan bin Mohammed, Crown Prince of Dubai.
Mr Ahmad suggest that "Hefty fines running into hundreds of thousands of dollars need to compensate for the cost of airport disruption and flight diversions to lengthy jail spells, confiscation of travel rights and use of drones for a lengthy period" must be enforced in order to reduce airport intrusion.
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Director: Manuel Calvo
Stars: Yassir Al Saggaf and Fatima Al Banawi
Rating: 2/5
MATCH INFO
Uefa Champions League, Group C
Liverpool v Red Star Belgrade
Anfield, Liverpool
Wednesday, 11pm (UAE)
