Understand the sharp fall of the family office Archegos in 5 minutes (EN/FR)

----------------------- ENGLISH VERSION ----------------------

(French Version below)

Archegos went bankrupt last Monday, liquidating nearly $30,000 in positions. Following the fall in the share price of ViacomCBS, a company in which Archegos had heavily invested, one of Archegos' brokers requested additional funds from the company to cover the depreciation of this investment. The banks that had themselves invested in Archegos then made similar requests for liquidity. Unable to meet their demands, Archegos was forced to liquidate its positions.

What is the Archegos fund and what happened?

Archegos is a family office, i.e. an investment boutique dedicated solely to the management of the family assets of its founder, Bill Hwang. It is this status that allows it to take even greater risks than hedge funds because it escapes the regulatory and transparency standards imposed on investment funds since the 2008 financial crisis.

Archegos operated by investing in derivatives, i.e. financial products backed by these listed securities. So, the banks would buy the shares of the listed companies and Archegos would make benefit if the shares rose and would have to pay to cover the losses if the shares fell.

Let's take a specific example to understand the mechanism.

Let's imagine that a family office has 5 billion in equity and that it invests with a leverage of 10 in a company X.

The family office cannot invest 50 billion in company X, so it will call on a bank, give it the 5 billion and the bank will invest 50 billion in company X.

The bank requires a 5 billion margin (the amount invested by the family office in the bank). Since the leverage is 10, if the price of company X falls by 5%, the margin falls by 50%. If the margin falls below 40%, the bank automatically demands liquidity to increase it, and if it does not receive it, the bank sells all its positions in company X. In the case of Archegos, Archegos was unable to pay the margins following the fall in ViacomCBS, which is why the banks sold their positions.

Why was Archegos’ strategy so risky?

Most of its investments were in the technology sector in Asia. All the gains from these investments were reinvested in the same sector. It is this concentration that caused its downfall, as the announcement of a capital increase in ViacomCBS, was enough to make investors lose confidence. Generally, investment funds and family offices diversify their investments so that their investments are much less risky.

What are the repercussions for the banks that invested in Archegos?

Credit Suisse is expected to lose $3 billion from the investment while Nomura is expected to lose about $2 billion. Goldman Sachs and Deutsch Bank are not so heavily affected by the crisis.

Indeed, on Friday $20 billion of securities were sold in a few hours, causing the stock market to fall. The banks that were the slowest to sell their positions are the ones that have recorded the biggest losses.

This event raises the question of how to regulate family offices in order to avoid disrupting the financial markets. However, events of this magnitude are not frequent since the last similar crash dates back to 1998 and concerned the hedge fund LTCM.

----------------------- FRENCH VERSION ----------------------

Comprendre la chute brutale du Family Office Archegos en 5 minutes

Archegos a fait faillite lundi dernier en liquidant près de 30 milliards de dollars de positions. Suite à la baisse du cours des actions de ViacomCBS, une société dans laquelle Archegos avait fortement investi, l’un des courtiers d’Archegos a alors demandé des fonds supplémentaires à cette dernière pour couvrir la dépréciation de cet investissement. Les banques ayant elles-mêmes investi dans Archegos ont alors fait des demandes similaires de liquidité. Ne pouvant répondre à leurs demandes, Archegos a dû procéder à cette liquidation forcée de ses positions.

Quel est ce fond Archegos et que s’est-il passé ?

Archegos est un family office , c’est à dire une boutique d’investissement consacrée uniquement à la gestion du patrimoine familiale de son fondateur, Bill Hwang. C’est ce statut qui lui permet de prendre de plus grands risques que les hedge funds car il échappe aux normes de régularisations et de transparence imposées aux fonds d’investissement depuis la crise financière de 2008.

Le fonctionnement d’Archegos consistait à investir dans des dérivés, c’est-à-dire des produits financiers adossés à ces titres cotés. Ainsi les banques achetaient des actions de sociétés cotées et Archegos touchait une partie des bénéfices si les titres augmentaient et devait payer pour couvrir les pertes si ces titres chutaient.

Prenons un exemple précis pour bien comprendre le mécanisme.

Imaginons qu’un family office a 5 milliards de fonds propres et qu’il investit avec un effet levier de 10 dans une entreprise X.

Le family office ne peut pas investir 50 milliards dans l’entreprise X, il va donc faire appel à une banque, lui donner les 5 milliards et la banque va investir 50 milliards dans l’entreprise X.

La banque exige 5 milliards de marge (le montant investi par le family office dans la banque). Puisque l’effet de levier est de 10, si le cours de l’entreprise X baisse de 5%, l