Wall Street is making headlines again this week, but it is not because of GameStop or AMC. This headline involves a small hedge fund with the potential for billions in losses to its lenders.
Archegos Capital Management
Archegos is a small New York-based family investment office run by Bill Hwang, a Wall Street veteran. According to CNBC, Archegos “held large and leveraged bets in U.S. media stocks ViacomCBS and Discovery,” in addition to several Chinese technology stocks.
ViacomCBS was planning to issue a $3 billion stock offering until the deal fell through earlier this week. Amidst this development, brokers involved in the deal “rushed to exit the positions on Archegos’ behalf.” Following these exits, Archegos was hit with a margin call, leading the fund to default on its payments.
What is a Margin Call?
Many hedge funds and large investors make leveraged bets on stocks using margin accounts. A margin account allows an investor to borrow money from brokers to buy financial products, normally stocks. This means that an investor uses leverage to buy a larger amount of stock than the investor has in cash or other assets. This technique is commonly referred to as buying “on margin,” and it comes with heightened risk.
This is where margin calls come into play. When an investor purchases stocks on margin, the broker requires the borrower to have a minimum amount of collateral to secure the position. If the investor fails to meet this minimum throughout any point while holding the stock, then the broker will issue a margin call.
A margin call often occurs after the investor’s position is performing poorly. Following the occurrence of a margin call, the borrower is required to deposit more money into the margin account or sell assets to meet the minimum collateral requirement. If the investor cannot satisfy this minimum, then the borrower will likely default on the position, leading to losses for the broker.
Archegos Margin Call
Archegos was faced with a margin call after ViacomCBS plummeted from over $100 per share on March 22 to less than $45 per share on March 29. This represents a one-week decline of more than 50%, which is a dramatic move. Thus, Archegos was forced to default on its position.
According to Reuters, multiple lenders for Archegos “may have to write down more than $6 billion” following Archegos’ default. Lenders that are writing down losses most notably include Credit Suisse and Nomura.