More than a year after we wrote "All You Ever Wanted To Know About Gamma, Op-Ex, And Option-Driven Equity Flows" in which we said that "Gamma has the potential to be one of the most important non-fundamental flows in equity markets" the SEC appears to have finally caught up and is targeting the one fund that masterfully used a gamma squeeze to ramp a handful of stocks before suffering a spectacular blow up.
According to Bloomberg, an SEC investigation into the collapse of Bill Hwang’s Archegos Capital Management is examining whether the firm engaged in market manipulation. Specifically, the agency best known for Sucking Elon's C***, is "scrutinizing the firm’s trading activity, including whether it concealed the size of its bets on public companies." Authorities are also reviewing whether Archegos bought multiple stakes in the same companies across several banks in an effort to avoid triggering public disclosure rules. He, of course, he did, much to the chagrin of short sellers who were forced to cover and suffer tremendous losses.
Man, that’s a real hard one - right up there with “Who’s buried in Grant’s tomb” and “What color was George Washington’s white horse?” pic.twitter.com/ng94sc0Yej— MuddyWatersResearch (@muddywatersre) October 8, 2021
As a customary disclaimer, Bloomberg notes that the opening of an SEC probe is typically a preliminary step and doesn’t mean Hwang, who hasn’t been accused of wrongdoing, will face an enforcement action, but it is hardly good news for other funds (or CEOs) who have used and abused gamma squeezes - whether using options, or levered instruments like Total Return Swaps - to force a melt up in underlying stocks.
As a reminder, Archegos amassed a concentrated portfolio of stocks well in excess of $100 billion by using borrowed money in the form of TRS, which kept the exposure on the books of the various prime brokers working with Archegos, thus allowing Hwang to hide his full exposure. His funded imploded in March as some of the stocks tumbled, triggering margin calls from banks, which then dumped Hwang’s holdings.
The pain was especially acute for the fund's prime brokers such as Credit Suisse, Nomura and Morgan Stanley, who collectively lost more than $10 billion, prompting internal investigations and the forced departures of senior executives. Regulators, meanwhile, are discussing whether to revise rules exempting family offices like Hwang’s from tougher oversight.
The probe takes place after SEC head Gary Gensler said that "more stringent disclosure laws may be warranted for investment firms after the Archegos debacle, and he later signaled plans to make more industry data publicly available." So far the SEC has not released any guidance or regulations on the matter.
Amusingly, this will be the second time the SEC has probed Hwang: the first time was in 2012, when after years of investigations by authorities in the U.S. and Hong Kong, the SEC accused his former firm, Tiger Asia, of insider trading and manipulation of Chinese bank stocks. Hwang settled that case without admitting or denying wrongdoing, and Tiger Asia pleaded guilty in the U.S. to wire fraud. At that point, Hwang closed his firm and opened Archegos.