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Bloomberg
Block Trade Mess Revives Fierce Debate on ‘Leverage Gone Wrong’
(Bloomberg) -- What might be the largest margin call in history is ringing fresh alarm bells on Wall Street among those worried about hidden leverage and its potential to fry the financial system.The forced selling of more than $20 billion of apparently swap-linked shares at Bill Hwang’s Archegos Capital Management has set off a hunt for other areas of excess -- from margin debt to options and bloated balance sheets -- after stocks at the center of the fiasco plunged and investment banks warned of losses.As with most things in markets, opinions vary: Hwang’s travails are portrayed as everything from phase one of a long-overdue market comeuppance, to an isolated case of risk-taking run amok. While Wall Street may have sidestepped a systemic cataclysm, the blowup is an example of “leverage gone wrong” with ominous portents, said Sameer Samana, Wells Fargo Investment Institute’s senior global market strategist.“What it does make me think of is how much leverage in aggregate has now built up in the system” in brokerage accounts, options and credit, Samana said. “If a broader stock market pullback were to take shape, especially in the more widely owned areas of technology and technology-related stocks, a much bigger unwind would have to take place.”On Monday, at least, the S&P 500 Index was barely registering the weekend’s tribulations, its 57% rally since March 2020 intact.Margin DebtIn recent weeks, as stocks vaulted to new highs, investors have pointed to a worrying trend at brokerages: ballooning margin debt, which at $813 billion at the end February stood at historically high levels (the numbers are reported on a delay). What’s sometimes lost in the discussion is that such debt almost always rises with the value of equities.“It would be common sense for one to look at this and say, we have a normal amount of margin debt in the system right now for where the market is,” said Arthur Hogan, chief market strategist at National Securities Corp. “I don’t know that that would have been a clear signal as to what’s going on in some of these media stocks and send a warning signal, because you would suspect that in a rising market the margin debt is going to be higher.”But not every lens into the phenomenon is reassuring, according to Jason Goepfert, president of Sundial Capital Research. Assuming that it will exceed $831 billion when this month’s numbers are reported in April, margin debt will have grown more than 70% year-over-year, one of the sharpest expansions since 1931. That means the year-over-year change in debt will have exceeded the year-over-year change in the S&P 500 by more than 20 percentage points for three months running.“This kind of excessive and persistent growth in debt, on both an absolute and relative level, has been a boogeyman for forward returns,” Goepfert wrote in a recent note to clients. “The most effective use of the data, both on the upside and downside, has been the rate of change, including relative to the S&P. And that’s why it’s becoming to be a much larger concern.”Options FrenzySpeculative mania in the options market has also fueled bubble warnings for the better part of a year. Call contracts -- in which bulls pay a fraction of a stock’s price to bet it will rise -- became the playthings of newly minted day traders, whose enthusiasm for short-dated options is theorized to have fueled a series of bullish feedback loops, particularly in tech stocks.“As you’re in a bull market with a lot of liquidity, you start to get some areas of overconfidence and some investors let their guard down,” said Keith Lerner, chief market strategist at Truist Advisory Services. “It does suggest a level of overconfidence.”However, that call volume has eroded from February’s peaks suggests some of the craze for the products is diminishing. Over the past 20 days, an average of over 23.6 million calls have traded on U.S. exchanges. While still historically high, that’s down from nearly 29 million in late February.Credit Risk Written OffCompanies that have loaded up on debt have been rewarded mightily in the equity market. Stocks in a basket defined by their high leverage have gained over 17% year-to-date, ranking them as the best-performers this year among 17 quantitative styles tracked by Bloomberg. On the other side of the trade, profitability is one of the worst-performing factors, with those shares nursing losses of over 5%.Goldman Sachs Group Inc. data tells a similar story: S&P 500 firms with weak balance sheets are on track to beat out those with sturdier finances by over 17 percentage points this quarter -- the biggest margin of outperformance since at least 2006.Taken together, such statistics can be used to paint a picture of a market so frothy that investors are willing to disregard any qualms over credit risk. But it’s also true that those companies -- among the hardest hit by the coronavirus -- stand to benefit the most from the so-called reopening trade as vaccines are given and economic activity picks up. Along with the combined might of governmental fiscal aid and the Federal Reserve’s seemingly endless bond-buying, the stock market’s weakest links can have the biggest bounce.“These were the companies where investors were most concerned about not surviving, so they tend to get a relief rally,” said Truist’s Lerner. “Having the Fed with so much monetary stimulus and support makes investors more confident this won’t become systemic.”High Hedge Fund LeverageIt’s not just Hwang’s Archegos that loaded up on borrowed money to make trades. Average leverage across the 10 largest hedge funds clocked in at 15.9 as of June 2020, according to data from the Treasury Department’s Office of Financial Research. While that figure is down from a peak of 24.6 in June 2019, it’s far above the 5 average for the next 40 largest funds.That number dwarfs the amount of leverage Hwang was operating with. Market participants estimate that the family office’s total assets had grown to anywhere between $5 billion to $10 billion, while total positions may have topped $50 billion.But while the biggest hedge funds may have more leverage than Archegos outright, it’s important to consider what those funds are leveraged to, according to Bespoke Investment Group’s George Pearkes. For example, concentrating a smaller amount of leverage to handful of stocks is much riskier than putting a bigger amount of borrowed money in instruments like Treasuries or currencies, he said.“If an asset is less volatile, more leverage can be applied safely,” said Pearkes, a global macro strategist at the firm. “And that’s generally what’s going on with larger funds.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
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Yahoo Finance
Here's why Wall Street is terrified over 'Tiger Cub's' surprise portfolio blowup
Wall Street is looking over their backs following the portfolio blowup of whale Bill Hwang.
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Bloomberg
China May Boost Cotton Imports to Cut Xinjiang Fiber in Exports
(Bloomberg) -- China could import more cotton to replace fiber from Xinjiang that’s being rejected by some Western companies and threatens to hurt its booming textile export industry.The U.S. bans entry of all products containing cotton from Xinjiang, which accounts for over 80% of China’s output, because of concern over the human rights situation in the region. Hennes & Mauritz AB, Nike Inc. and Adidas AG have become ensnared in the row, drawing consumer ire in China for pledges not to use cotton from the area, a major supplier in the global supply chain.“The only option right now may be to increase cotton imports as export orders for some textile mills will suffer if they use local fiber,” said Xu Yaguang, an analyst with Huatai Futures. Xu sees so-called extra cotton import quotas this year returning to the 2019 level of 800,000 tons with an increased requirement for high-quality fiber. The government issued 400,000 tons of extra quotas in 2020, and has not so far issued any for 2021.Consumption of Xinjiang cotton could drop by as much as 20% as the export outlook for products containing cotton from the region is not very bright, said Wu Faxin, a veteran cotton trader with industry portal shaxianbao.cn. Wu expects exporting countries such as Brazil and those in Africa to benefit from the additional demand.Wu Yan, head of the Better Cotton Initiative (BCI) in China, told state television the decision by its headquarters to cut ties with Xinjiang growers will block about 500,000 tons of fiber from the region from entering the global supply chain. The group in China said it has not found any forced labor in Xinjiang since 2012. Members include world retailers and brands such as H&M and Nike.Job CutsSome cotton yarn factories in Xinjiang are cutting employees because of poor sales after some global brands chose not to source cotton and yarn from the region, the China Daily reported Monday, citing a local official. Suppliers of the retail brands no longer place orders with local producers. “The real victims of the false accusations of ‘forced labor’ in Xinjiang are the large numbers of vulnerable cotton growers and textile workers,” it said.Some analysts also doubt that the U.S. can effectively test for Xinjiang cotton in every shipment of textile products. Apart from exporting finished goods, top textile shipper China also sends intermediate products to third countries. Vietnam, for example, sources 50% of its cotton yarn from China and more than 60% of its cotton cloth, according to Huatai’s Xu.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
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FX Empire
EUR/USD Price Forecast – Euro Continues to Look Soft
The Euro continues to look soft as we have fallen a bit during the trading session on Monday. That being said, the market is choppy to say the least.
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Biden administration threatens tariffs on UK goods in 'tech tax' row
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Bloomberg
One of World’s Greatest Hidden Fortunes Is Wiped Out in Days
(Bloomberg) -- From his perch high above Midtown Manhattan, just across from Carnegie Hall, Bill Hwang was quietly building one of the world’s greatest fortunes.Even on Wall Street, few ever noticed him -- until suddenly, everyone did.Hwang and his private investment firm, Archegos Capital Management, are now at the center of one of the biggest margin calls of all time -- a multibillion-dollar fiasco involving secretive market bets that were dangerously leveraged and unwound in a blink.Hwang’s most recent ascent can be pieced together from stocks dumped by banks in recent days -- ViacomCBS Inc., Discovery Inc. GSX Techedu Inc., Baidu Inc. -- all of which had soared this year, sometimes confounding traders who couldn’t fathom why.One part of Hwang’s portfolio, which has been traded in blocks since Friday by Goldman Sachs Group Inc., Morgan Stanley and Wells Fargo & Co., was worth almost $40 billion last week. Bankers reckon that Archegos’s net capital -- essentially Hwang’s wealth -- had reached north of $10 billion. And as disposals keep emerging, estimates of his firm’s total positions keep climbing: tens of billions, $50 billion, even more than $100 billion.It evaporated in mere days.“I’ve never seen anything like this -- how quiet it was, how concentrated, and how fast it disappeared,” said Mike Novogratz, a career macro investor and former partner at Goldman Sachs who’s been trading since 1994. “This has to be one of the single greatest losses of personal wealth in history.”Late Monday in New York, Archegos broke days of silence on the episode.“This is a challenging time for the family office of Archegos Capital Management, our partners and employees,” Karen Kessler, a spokesperson for the firm, said in an emailed statement. “All plans are being discussed as Mr. Hwang and the team determine the best path forward.”The cascade of trading losses has reverberated from New York to Zurich to Tokyo and beyond, and leaves myriad unanswered questions, including the big one: How could someone take such big risks, facilitated by so many banks, under the noses of regulators the world over?One part of the answer is that Hwang set up as a family office with limited oversight and then employed financial derivatives to amass big stakes in companies without ever having to disclose them. Another part is that global banks embraced him as a lucrative customer, despite a record of insider trading and attempted market manipulation that drove him out of the hedge fund business a decade ago.A disciple of hedge-fund legend Julian Robertson, Sung Kook “Bill” Hwang shuttered Tiger Asia Management and Tiger Asia Partners after settling an SEC civil lawsuit in 2012 accusing them of insider trading and manipulating Chinese banks stocks. Hwang and the firms paid $44 million, and he agreed to be barred from the investment advisory industry.He soon opened Archegos -- Greek for “one who leads the way” -- and structured it as a family office.Family offices that exclusively manage one fortune are generally exempt from registering as investment advisers with the U.S. Securities and Exchange Commission. So they don’t have to disclose their owners, executives or how much they manage -- rules designed to protect outsiders who invest in a fund. That approach makes sense for small family offices, but if they swell to the size of a hedge fund whale they can still pose risks, this time to outsiders in the broader market.“This does raise questions about the regulation of family offices once again,” said Tyler Gellasch, a former SEC aide who now runs the Healthy Markets trade group. “The question is if it’s just friends and family why do we care? The answer is that they can have significant market impacts, and the SEC’s regulatory regime even after Dodd-Frank doesn’t clearly reflect that.”Valuable CustomerArchegos established trading partnerships with firms including Nomura Holdings Inc., Morgan Stanley, Deutsche Bank AG and Credit Suisse Group AG. For a time after the SEC case, Goldman refused to do business with him on compliance grounds, but relented as rivals profited by meeting his needs.The full picture of his holdings is still emerging, and it’s not clear what positions derailed, or what hedges he had set up.One reason is that Hwang never filed a 13F report of his holdings, which every investment manager holding more than $100 million in U.S. equities must fill out at the end of each quarter. That’s because he appears to have structured his trades using total return swaps, essentially putting the positions on the banks’ balance sheets. Swaps also enable investors to add a lot of leverage to a portfolio.Morgan Stanley and Goldman Sachs, for instance, are listed as the largest holders of GSX Techedu, a Chinese online tutoring company that’s been repeatedly targeted by short sellers. Banks may own shares for a variety of reasons that include hedging swap exposures from trades with their customers.‘Unhappy Investors’Goldman increased its position 54% in January, according to regulatory filings. Overall, banks reported holding at least 68% of GSX’s outstanding shares, according to a Bloomberg analysis of filings. Banks held at least 40% of IQIYI Inc, a Chinese video entertainment company, and 29% of ViacomCBS -- all of which Archegos had bet on big.“I’m sure there are a number of really unhappy investors who have bought those names over the last couple of weeks,” and now regret it, Doug Cifu, chief executive officer of electronic-trading firm Virtu Financial Inc., said Monday in an interview on Bloomberg TV. He predicted regulators will examine whether “there should be more transparency and disclosure by a family office.”Without the need to market his fund to external investors, Hwang’s strategies and performance remained secret from the outside world. Even as his fortune swelled, the 50-something kept a low profile. Despite once working for Robertson’s Tiger Management, he wasn’t well-known on Wall Street or in New York social circles.Hwang is a trustee of the Fuller Theology Seminary, and co-founder of the Grace and Mercy Foundation, whose mission is to serve the poor and oppressed. The foundation had assets approaching $500 million at the end of 2018, according to its latest filing.“It’s not all about the money, you know,” he said in a rare interview with a Fuller Institute executive in 2018, in which he spoke about his calling as an investor and his Christian faith. “It’s about the long term, and God certainly has a long-term view.”His extraordinary run of fortune turned early last week as ViacomCBS Inc. announced a secondary offering of its shares. Its stock price plunged 9% the next day.The value of other securities believed to be in Archegos’ portfolio based on the positions that were block traded followed.By Thursday’s close, the value of the portfolio fell 27% -- more than enough to wipe out the equity of an investor who market participants estimate was six to eight times levered.“You have to wonder who else is out there with one of these invisible fortunes,” said Novogratz. “The psychology of all that leverage with no risk management, it’s almost nihilism.”(Adds comment from Archegos in 8th paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
9h ago
Bloomberg
Cathie Wood’s ETFs Ditch Ownership Caps, Add SPAC Warning
(Bloomberg) -- Cathie Wood has spent months defending Ark Investment Management from critics who say the money manager has too much cash tied up in too few stocks. The firm’s latest move is handing them fresh ammunition.In a filing late last week, Ark altered the prospectuses for its exchange-traded funds to remove clauses limiting its exposure and concentration risks.The changes eliminate a 30% cap on how much of each fund’s assets could be invested in the securities of a single entity, and a 20% limit on the amount of a company’s shares an ETF could own.It also introduced language acknowledging funds may buy into blank-check firms and noting the risks of buying shares in special-purpose acquisition companies that haven’t yet decided what businesses they’ll own. The ARK Autonomous Technology & Robotics ETF (ticker ARKQ) last week bought shares of a SPAC backed by tennis star Serena Williams.These are eye-catching changes for Ark, founded by Wood in 2014. Concerns have swirled around the New York-based firm in recent months after a stellar year saw ETF assets surge at one point to more than $60 billion. Ark invests in companies involved with disruptive trends, which mean it has a limited pool of targets in which to deploy that money.“It seems like they’re willing to take on more single-stock risk if they truly believe in a company,” said Mohit Bajaj, director of ETFs for WallachBeth Capital. “It’s truly active management.”Testing the LimitIn February as its flagship product, the Ark Innovation ETF (ARKK), peaked, the firm controlled 20% or more of at least three companies, according to data compiled by Bloomberg. This was spread across several funds, so didn’t yet test the 20% cap that’s now removed from prospectuses.In addition to deleting the general limits, the March 26 filing removed caps on ownership of depositary receipts, rights, warrants, preferred securities and convertibles.A representative for Ark didn’t immediately respond to a request for comment.The adjustments come on the eve of Ark’s first new ETF launch in two years. The ARK Space Exploration ETF (ARKX) is due to begin trading on Tuesday, according the firm’s website.In a nod to the kinds of concentration risk some investors fret about, the new ETF’s second-biggest holding will actually be another Wood product -- 6.1% of the fund will be invested in Ark’s 3D Printing ETF (PRNT).“When you have a situation where the risk is concentrated and there is a lot of leverage in the system, it creates even bigger risks,” said Matt Maley, chief market strategist at Miller Tabak + Co.(Updates with ARKX fund information in final paragraphs, analyst comment)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
18h ago
Reuters
S&P 500 ends a hair lower; hedge fund default concerns hit banks
The S&P 500 ended just slightly in the red on Monday, with bank shares falling amid warnings of potential losses from a hedge fund's default on margin calls, while optimism over the economy limited the day's declines. The Dow ended higher, with shares of planemaker Boeing Co rising 2.3% after the company reached a deal with U.S. budget carrier Southwest Airlines Co for a variant of the 737 MAX aircraft. Nomura and Credit Suisse are facing billions of dollars in losses after a U.S. hedge fund, named by sources as Archegos Capital, defaulted on margin calls, putting investors on edge about who else might have been caught out.
23h ago
Reuters
Oil slips as Suez opens, focus turns to OPEC+ output cuts
Oil prices fell on Tuesday as the Suez Canal reopened to traffic, while focus turned to an OPEC+ meeting this week that is likely to agree an extension to supply curbs amid disappointing demand prospects. Brent crude was down 50 cents, or 0.8%, at $64.48 a barrel by 0851 GMT. Ships were moving through the Suez Canal again on Tuesday after tugs refloated the giant Ever Given container carrier, which had been blocking a narrow section of the passage for almost a week, causing a huge build-up of vessels around the waterway.
30m ago
CoinDesk
Market Wrap: Bitcoin, Ether Gain After Visa Deal as Stocks Struggle With Archegos Margin Call
The quick recovery to near $58,000 demonstrates stronger confidence from investors in the oldest and largest cryptocurrency.
13h ago

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