A hedge fund liquidation has wiped billions from Chinese and US stocks, and no one knows what’s going to happen next

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Traders and investors are wondering whether more share sales will hit the market
  • Credit Suisse and Nomura warned they could take big hits from their exposure to a US hedge fund.
  • The fund, reported to be Archegos Capital Management, triggered $20 billion of selling on Friday.
  • Some analysts have said the selling could blow over, but others are worried it could have a wider impact.
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Two major banks have warned that they could face big losses from their exposure to a hedge fund that was forced to rapidly sell billions of dollars of stock on Friday, leaving traders and investors wondering what happens next.

Among the banks hit by the wave of selling was Credit Suisse, which said it and other unnamed lenders were in the process of selling positions related to the fund, with traders guessing about who is exposed ahead of the US market open.

Archegos Capital Management was at the root of around $20 billion of sales of companies such as US media group ViacomCBS and several Chinese tech stocks including Tencent and Baidu, according to reports over the weekend.

Archegos manages the wealth of Bill Hwang, a protege of the famous Tiger Management hedge fund who has previously pleaded guilty to wire fraud. Its website has been taken offline and the firm was unavailable for comment.

Morgan Stanley and Goldman Sachs, which acted as lenders to Archegos and processed some of its trades, forced the fund to sell shares to cover potential losses after the price of Viacom started to tumble, the Financial Times reported. The sales wiped around $35 billion of market value from certain companies on Friday.

Morgan Stanley and Goldman Sachs did not respond to a request for comment.

On Monday it became clear that other banks were caught up in Archegos' chunky sales when Credit Suisse and Japan's Nomura issued warnings to investors.

Credit Suisse's shares tumbled as much as 14% after it said the losses stemming from its involvement with a US fund could be "highly significant and material to our first quarter results." Nomura slumped 16% after it warned that it could take a $2 billion hit.

The Swiss bank said a "significant US-based hedge fund" failed to meet margin calls. A margin call is a demand from a lender that a borrower stump up more cash to cover potential losses on its bets.

Credit Suisse said it and a "a number of other banks" are currently in the process of selling the fund's investments, generating uncertainty about who's exposed. The bank declined to comment further.

Markets worry about more selling

"Billions of dollars in block trades went through on Friday," said Steen Jakobsen, chief investment officer at Saxo Bank, in an email. "And there is uncertainty over how much more of the hedge fund's holdings remain and could hit the market this week."

He added: "Whether the Archegos situation is a unique one is the top point on the agenda early this week."

Paul Donovan, chief economist at UBS Wealth Management, said in an email: "Investors are looking with some concern at the prospect of further large sales hitting financial markets."

Yet Donavan said the sales were so far relatively small and that the issue was unlikely to cause widespread damage.

"Does this have any economic implications? Probably not," he said. "Some parts of the financial system may experience losses, but it seems unlikely that this will threaten the financial system's stability."

But Bill Blain, strategist at London's Shard Capital, told Insider that markets are already seeing a wider impact, citing Nomura and Credit Suisse's warnings and subsequent share-price falls.

Blain said he suspected the problems at Archegos were due to "over leverage" - that is, when a firm borrows large amounts to fund investments, making it more vulnerable to shocks.

The strategist said that although banks are far safer since the financial crisis, the so-called non-bank financial sector is still engaged in highly risky activities.

"The amount of speculation out there is huge, and it's increasing," he added.

Blain said: "I think people are going to be looking very anxiously exactly what their margin positions are and that may itself trigger some market changes."

European banking stocks suffered on Monday morning, with Credit Suisse off by 13.7% at 7.40 a.m. EST, UBS down 3% and Deutsche Bank down 3.4%.

UBS and Deutsche Bank both declined to comment. But a person familiar with the matter said that although Deutsche Bank was involved, its exposure was a fraction of other banks'.

There were next to no signs of wider market stress on Monday morning, however, with US futures slightly down and bond yields only fractionally lower.

Read the original article on Business Insider

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