Lessons From The Archegos Blow up
When we have events like this, look less at the event itself and more at what we can learn from it...
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We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://financialsource.co
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We have a question from Lordson, asking us about the recent fall out from the Archegos Capital Management, asking what the issue was all about and what we should make of it.
When we have events like this, I tend to look less at the event itself and more at what we can learn from these type of events because there is a learning opportunity in most of these type of events.
So, we’ll take a look at what happened and then we’ll take a look at what we can learn from it.
So, let’s start with what happened. The fund in the middle of this debacle is a Family Office, called Archegos Capital Management.
The fund was basically forced to sell $20 billion in stocks due to a margin call that they got on positions that they were running some crazy high leverage on. To give you an idea, according to CNBC, some of their positions were running at 8:1 and 20:1 leverage, which is absolutely massive.
That’s the type of leverage that you would expect retail traders to trade at, some of them even higher of course, but that’s not the type of leverage on positions that runs into the billions. So, very high leverage.
Now, the question then becomes why was he allowed to run leverage this high without nobody noticing, and why has this led to so much damage for brokers like Nomura and Credit Suisse. That is where the type of derivatives used for these trades comes into focus.
According to sources, the fund didn’t buy actual stock positions, but instead traded his positions as total return swaps and contracts for difference, meaning that the stock names he traded were not sitting on his books, in terms of the underlying stocks, they were sitting with the prime brokers.
So, the sequence of events, from various sources on the matter, says the issues started piling on weeks ago when the price of some of the most highly levered names the fund owned started to push lower.
Two examples of the stocks in question is stocks like VIACOM and DISCOVERY. So, you can see, these names were pushing down hard way before we had the block trades on Friday. Why were these stocks going down so hard?
Well, Michael Hewson from CMC wrote an excellent article about these names, where he explained that they were always due for strong pullbacks after the insane run higher that they enjoyed from the start of the year, with VIACOM being up almost 180% from just the start of the year to where it peaked and DISCOVERY up almost 160% from the start of the year to where it peaked.
These names were trading much higher than their fundamentals suggested they should, being driven higher purely by speculation and frenzied buying, as well as momentum chasers no doubt jumping in highly levered to chase the move higher.
So, it’s not that something materially changed for these names, they were due pullbacks, and when you go up with 180% in 10 weeks it shouldn’t surprise to see a pullback that runs in double digits as well.
For more detail - watch the video
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If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://financialsource.co
-----
We have a question from Lordson, asking us about the recent fall out from the Archegos Capital Management, asking what the issue was all about and what we should make of it.
When we have events like this, I tend to look less at the event itself and more at what we can learn from these type of events because there is a learning opportunity in most of these type of events.
So, we’ll take a look at what happened and then we’ll take a look at what we can learn from it.
So, let’s start with what happened. The fund in the middle of this debacle is a Family Office, called Archegos Capital Management.
The fund was basically forced to sell $20 billion in stocks due to a margin call that they got on positions that they were running some crazy high leverage on. To give you an idea, according to CNBC, some of their positions were running at 8:1 and 20:1 leverage, which is absolutely massive.
That’s the type of leverage that you would expect retail traders to trade at, some of them even higher of course, but that’s not the type of leverage on positions that runs into the billions. So, very high leverage.
Now, the question then becomes why was he allowed to run leverage this high without nobody noticing, and why has this led to so much damage for brokers like Nomura and Credit Suisse. That is where the type of derivatives used for these trades comes into focus.
According to sources, the fund didn’t buy actual stock positions, but instead traded his positions as total return swaps and contracts for difference, meaning that the stock names he traded were not sitting on his books, in terms of the underlying stocks, they were sitting with the prime brokers.
So, the sequence of events, from various sources on the matter, says the issues started piling on weeks ago when the price of some of the most highly levered names the fund owned started to push lower.
Two examples of the stocks in question is stocks like VIACOM and DISCOVERY. So, you can see, these names were pushing down hard way before we had the block trades on Friday. Why were these stocks going down so hard?
Well, Michael Hewson from CMC wrote an excellent article about these names, where he explained that they were always due for strong pullbacks after the insane run higher that they enjoyed from the start of the year, with VIACOM being up almost 180% from just the start of the year to where it peaked and DISCOVERY up almost 160% from the start of the year to where it peaked.
These names were trading much higher than their fundamentals suggested they should, being driven higher purely by speculation and frenzied buying, as well as momentum chasers no doubt jumping in highly levered to chase the move higher.
So, it’s not that something materially changed for these names, they were due pullbacks, and when you go up with 180% in 10 weeks it shouldn’t surprise to see a pullback that runs in double digits as well.
For more detail - watch the video
-----
If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
