The moves on Friday were staggering. Major U.S. entertainment companies ViacomCBS Inc. and Discovery Inc. both dropped 27%, their biggest declines ever. In all, $35 billion was wiped off of a range of bellwether stocks.
The U.S. listings of Chinese tech giants Baidu Inc. and Tencent Music Entertainment Group were also caught up in the episode. There were also extreme moves in smaller stocks, with the likes of Chinese online education provider GSX Techedu Inc. falling 42%.
Wild rumors swept the market as traders struggled to work out what was going on. Was a big fund in trouble and being liquidated? Was this the start of a wider correction in the market? Here’s what we know about what happened:
What triggered the falls?
Investment banks said to include Goldman Sachs Group Inc. and Morgan Stanley sold a series of huge chunks of shares. Those are known as block trades and are relatively commonplace in markets. Typically, a deal is negotiated privately and transacts when the markets are closed.
What was abnormal about the trades Friday was their size -- some of the chunks exceeded $1 billion according to Bloomberg calculations -- and the fact that several of them hit during normal trading hours.
Why were traders so unnerved?
Sizeable block trades -- especially those that value shares below the ongoing trading price as some of those on Friday did -- are always unnerving for investors, especially when the seller isn’t clear. Put simply, the fear is that someone else somewhere knows something bad you don’t.
That’s why shares in Baidu’s peers like Chinese giant Alibaba Group Holding Ltd. also fell sharply in the morning frenzy as traders tried to get out in front of whatever was going on. Alibaba later recovered after Wall Street realized the mayhem was driven by specific rather than sector-wide sales.
So who’s behind the trades?
Archegos Capital Management, the family office of trader Bill Hwang, was behind the unprecedented selling, Bloomberg reported.
Hwang has had a long and controversial career. A protege of Tiger Management hedge-fund legend Julian Robertson, the so-called tiger cub struck out on his own and built Tiger Asia Management in New York partly with money from his former boss. Hwang's multi-billion dollar Asia-focused hedge fund produced stellar returns. Then in 2012, he pleaded guilty to insider trading on some Chinese bank stocks and agreed to criminal and civil settlements of more than $60 million, later closing down the fund.
That didn’t mean he stopped investing, though. Instead, Hwang focused on running his own money out of a family office -- Archegos -- which grew to be bigger than many better-known hedge funds. Such set-ups that manage money for wealthy families don’t usually have outside investors, meaning they are free to take bigger risks and are often under less regulatory scrutiny.
In this case, Bloomberg reported that Archegos had used derivatives contracts with brokers -- known as swaps -- to gain substantial additional leverage. That meant that the firm didn’t have to disclose its holdings in regulatory filings, since the positions were on the banks’ balance sheets.
So what went wrong for Hwang?
He was forced by his bankers to sell more than $20 billion worth of shares after some trading positions moved against him, people directly familiar with the trades told Bloomberg, asking not to be named because the details aren’t public.
As the bets went wrong, Hwang’s prime brokers started demanding he provide more collateral and then exercised their right to liquidate his positions to recover their money.
Prime brokers are the investment banks that lend hedge funds and family offices securities and cash and also process trades for them. Once some banks began to liquidate positions, a dash to sell was triggered among others to avoid losses on stocks that would soon be plummeting in value.
Neither Hwang, Goldman or Morgan Stanley have yet made any public comment.
Which stocks were affected?
Nine stocks bore the brunt of the selling: online and entertainment companies ViacomCBS, Discovery and Shopify Inc.; Chinese firms Tencent Music, Baidu, GSX, iQiyi Inc., Vipshop Holdings Ltd.; and U.K. online retailer Farfetch Ltd.
Some of them were already under pressure before the block trades. After-school tutoring company GSX withstood attacks from short sellers who alleged many users were robots, before tumbling in October following a Credit Suisse Group AG stock downgrade as the broker said it faced increased competition.
ViacomCBS and Discovery were also cut at Wells Fargo & Co. on Friday as Wall Street turned more cautious about their ability to expand into the tough TV streaming market.
What happens now?
Traders around the world are on high alert as they wait to see whether more block trades come through and if the fire sale by Hwang’s family office will have a fallout on the wider financial system. In Asia, equities shrugged off the travails the firm faced, rising instead on the back of Wall Street’s record close. Questions are also being asked about why so many big banks lent so much money to a family office whose founder had a checkered past.
On Monday, Nomura Holdings Inc. warned of a “significant” potential loss from an unnamed U.S. client, said to be Archegos, according to people familiar with the matter. The Japanese investment bank declined to comment further. Credit Suisse Group AG also said it may face losses after a U.S.-based hedge fund defaulted on margin calls.
There are also questions about whether there is more pain ahead for other hedge funds. Many have exposure to the same basket of stocks as Hwang’s family office and with the U.S. economy rebounding, some of the speculative capital that ploughed into Chinese shares is exiting.
Some analysts see a chance for profit, though. In notes to clients, Citigroup Inc. suggested that the unexpected dislocation meant a buying opportunity for the likes of Baidu, Tencent Music and Vipshop.
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— With assistance by Takashi Nakamichi, Sridhar Natarajan, Katherine Burton, Hema Parmar, Crystal Tse, Erik Schatzker, Bei Hu, Gillian Tan, and Drew Singer
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March 29, 2021 at 04:29PM
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Goldman Block Trade: What To Know About Bill Hwang, Viacom, Discovery Stock Sale - Bloomberg
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