Traders Brace For More Turmoil After Archegos Forced Liquidations

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by Tyler Durden
Sunday, Mar 28, 2021 - 05:00 PM

Yesterday, in the aftermath of Friday's bizarre, furious liquidation which saw a dramatic plunge in the price of various Chinese tech stocks...

... as well as a collapse in the price of media giants such as ViacomCBS and Discovery...

... which wiped out $33BN of value off all the companies involved as Goldman Sachs and Morgan Stanley sold blocks of shares worth $20BN at discount prices throughout the day, we pointed to Tiger Cub Bill Hwang's Archegos Capital Management family office and asked if "This Was The Fund That Sparked The Massive Media Stock Liquidations."

Today, both the FT and Bloomberg confirm that it was indeed Hwang responsible for the forced unwinds that shook the market on Friday.

Archegos Capital, a private investment firm, was behind billions of dollars worth of share sales that captivated Wall Street on Friday — a fire sale that has left traders scrambling to calculate how much more it has to offload, according to people with knowledge of the matter. The fund, which had large exposures to ViacomCBS and several Chinese technology stocks, was hit hard after shares of the US media group began to tumble on Tuesday and Wednesday.

As we speculated, the initial plunge in media names prompted a margin call from one of Archegos’ prime brokers, which in turn then prompted a cascade of similar cash calls from other Prime Brokers said FT sources. According to Bloomberg, Morgan Stanley traded about $13 billion, including Farfetch, Discovery, Baidu and GSX Techedu, while Goldman Sachs sold $6.6 billion worth of shares of Baidu, Tencent Music Entertainment Group and Vipshop Holdings. That sale was followed by the sale of $3.9 billion of shares including ViacomCBS Inc. and iQiyi, a Goldman email to clients said.

At the same time, traders buying the large blocks of stock - which were being intermediated by such firms as Goldman Sachs - were told the share sales had been prompted by a “forced deleveraging” by a fund.

Meanwhile, adding insult to injury, a handful of completely clueless sellside "analysts" who had no idea a fund was forced to dump its positions and were scrambling to explain the price action, rushed to downgrade companies such as ViacomCBS - because on Wall Street, price dictates fundamentals apparently - and only added to the liquidation frenzy even though their arguments were completely false (just as they had been on the upside when these same clueless penguins rushed to upgrade the companies).

In any case, Archegos is now finished: as the FT reports, "the firm’s website is no longer available and the company did not return multiple requests for comment. The fund’s head trader in New York hung up the phone when contacted by the Financial Times."

Not surprisingly, this is not the Hwang's first forced unwind: the New York-based asset manager previously ran the Tiger Asia hedge fund but he returned cash to investors in 2012 when he admitted wire fraud relating to Chinese bank stocks. Hwang paid $44MM in fines to settle illegal trading charges with the SEC in 2012, and in 2014 he was banned from trading in Hong Kong.

While the forced liquidations at Archegos - which describes itself as a “purposeful community of investment industry professionals” whose core values are "Excellence, Integrity, Learning/Doing/Teaching, Caring/Sharing" and others according to an archived version of its now deleted website - only hit its own P&L as it does not manage outside money, there is plenty of "outside money" invested in the names that got hit on Friday as countless shareholders were crushed.

For those other investors, the question - as we asked earlier - is whether the fire sales are over. Some traders say the pattern of recent selling, which ran for several days but reached a peak on Friday, suggests the bulk has been completed. Others think the scale of leverage that Archegos appears to have used means billions of dollars' worth of positions could still remain to be sold.

According to the FT, Archegos' name is a biblical Greek word meaning chief, leader, or prince, used in relation to Jesus. In a 2018 YouTube video, Hwang said his investments were “not all about money”, adding that “God certainly has a long-term view”.

"We love seeing in our little eyes what God is doing through investing and capitalism and how . . . it can be done better."

But while Hwang may believe he is God, or at least Jesus (and certainly would love to have his money) others don't have that kind of patience, and asBloomberg writes this morning, global traders are bracing for what’s shaping up to be "one of the most anticipated opens for U.S. equities in months" following an extraordinary $20 billion wave of block trades Friday that rattled investors worldwide.

Sharif Farha, a Dubai-based portfolio manager at Safehouse Global Consumer Fund, said ViacomCBS and Discovery may actually recover on Monday and noted that the market’s fundamentals remain intact.
“The correction was not structural,” he said, and he is right: anyone who bought at Friday's lows on the forced selling is likely set to make a killing in the coming days.

While Farha expects benign price action to start the day, but anticipation for Monday’s open remains high: “Traders everywhere know the story and will be glued to their screens,” he said.

To be sure, the possibility of additional block trades - either at Hwang or other funds that have similar exposure - looms over the market, while the traditional end-of-quarter volatility which we discussed last week may contribute to sharper swings on high-flying stocks. ViacomCBS and Discovery have rallied this year.

Then again, what has soared higher may just come down and stay down: “What most people appear to have missed is that both of these companies have seen their share prices almost quadruple since October last year,” CMC Markets analyst Michael Hewson said in a note on Sunday, referring to ViacomCBS and Discovery.

It didn't help that last Monday ViacomCBS reported an offering of $2 billion in shares after closing at a record high. The stock fell 9.1% the following day. On Friday, a downgrade by Wells Fargo and the large block trades compounded the selling pressure. it has since wiped out more than half its value in just the past 5 days!

Meanwhile, as Bloomberg notes Viacom and Discovery shares are also echoing volatility in a host of companies that soared on lockdown trades, including Zillow Group and Peloton and to some degree the entire blank-check SPAC space. Earlier this month, data compiled by Susquehanna showed that volatility futures expiring three months from now were hovering 20% above the average level or prior instances when the VIX traded at 20.

“We have seen an increase in volatility in equities capital markets, tech, working-from-home names with retail stepping back and more rotation to value in the last few weeks,” said Barclays strategist Emmanuel Cau. "It may have hurt a number of funds that were overly exposed to these trades."

“The markets could start trading in a friendly manner at the beginning of the week,” said Andreas Lipkow, Comdirect Bank strategist, echoing what we said in "Brace For A Frenzy Of Stock Buying On March 29." He added that "although there is currently some major profit-taking and unusual block trade activities, these market asymmetries can currently still be processed well.”

But perhaps just as remarkable as the Archegos liquidation, was the elephant in the room, namely the action in the last minutes of trading on Friday. U.S. equities notched their biggest gain in three weeks on Friday which saw the S&P 500 explode 1.7% higher after trading in the red for much of the day, as the bull market celebrated its first anniversary since hitting pandemic-era lows.

We hope that this is not what the Fed has in mind when it talks about "price stability."