Who took the other side of this bet? Ie who made 4.7b?
Credit Suisse Takes $4.7B Hit on Archegos Meltdown
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Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown
#62As a former fund manager, I have some things to explain and some things to ask. First, the thing to explain: Basically CS was one of several Prime Brokers. This basically means the guy who lends money to the speculators. Same as buying a house, you have a down payment that's your money, and then a bank lends you between 115% (boom times) and 30% (safe as houses) of the value of the house. If the house falls in value…
> From what I gather, Archegos had $10B of equity in total? Typically (sensibly) you don't put all your eggs in one basket as a fund, even a quite concentrated fund. It was $20B. Hwang's whole schtick from the outset of his family office was to hyper lever up on high growth companies. By doing this he went from $1B to $20B of actual capital in about 2 years. Then he blew up spectacularly because he was levered up abo…
> Big Short style doesn't always end in a lionizing outcome.
That movie was the worse thing that ever happened for a generation of traders. It reinforces all the worse biases traders tend to have. The moral of the story was to make a single concentrated bet, to throw risk management to the wind, to double down as you lost money, and to completely ignore any expert that disagreed with your investment thesis.
In reality for every Michael Burry, there's 100 stubborn overconfident idiots who YOLO everything into a bet that blows up in their face. First off, it's much better to make as many small independent bets than to have one big trade. It's also better to make trades with a fixed, ideally short, time horizon. Even if you're ultimately right, without a catalyst, the market can remain irrational longer than you can remain solvent.
Finally the best traders tend to be extremely open minded and willing to change their views on a dime. The human mind is heavily biased towards overconfidence. Good traders should be flipping their views as evidence comes in. This has been empirically verified by Philip Tetlock. The best forecasters are those who are quickest to change their mind. If they hear some expert with an opposing opinion, they don't dig in their heels like the heroes of The Big Short.
The problem is the qualities that make a great narrative hero are almost exactly the opposite of those that make a great trader or forecaster. We love a story about a bold contrarian, who goes all in on a single bet, and sticks to his guns no matter what obstacles come his way. The story practically writes itself.
But it's precisely this mythologizing that causes this style of trading to be the least rewarded in the market. Everybody wants to be the hero of their own story. There's way too many Michael Burry wannabes, and not nearly enough George Soroses.
Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown
#63Earlier quoted context omitted.
This comment reminded me of that awesome scene by Jeremy Irons in Margin Call :-)
Be first, be smarter or cheat
Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown
#64As a former fund manager, I have some things to explain and some things to ask. First, the thing to explain: Basically CS was one of several Prime Brokers. This basically means the guy who lends money to the speculators. Same as buying a house, you have a down payment that's your money, and then a bank lends you between 115% (boom times) and 30% (safe as houses) of the value of the house. If the house falls in value…
if you are levered 10 to 1 and the stock has an implied vol of 10% you only need a 1 SD move to eat all your capital. Viacom is now at 60% implied vol so they could get those losses with a position as small as $10 billion.
To be fair, Archegos hedged their beta exposure with short index futures. The implied vol includes both the beta vol and the idiosyncratic vol. A hedged position should be a lot less vol than being naked long.
Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown
#65History doesn't repeat but it surely rhymes.
Long Term Capital Management 94-98.
Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown
#66"Archegos was a fund run by and managing the personal fortune of Bill Hwang, an investor who had built up large positions in companies worth billions of pounds, despite a previous insider trading conviction." "Credit Suisse’s investment bank under Chin acted as prime broker to Archegos funds, lending it large sums of money to allow it to build up bigger positions in the shareholdings of quoted companies. Hwang had pl…
I don't work in hedge funds and have only a superficial understanding, but it seems the operative word of "hedge" was completely ignore here. He plowed a huge chunk of his positions into two companies and didn't offset with any swaps or other risk absorbers. This seems like downright malpractice and not just a bad luck.
Archegos was hedged. All of its long positions were matched with short index futures, and the fund was running at or near market neutral.
Hedging doesn't mean zero risk. It just means removing the risk of whatever it is being hedged. In this case it wasn't a general market decline that took out Archegos. It was a decline in the specific basket of stocks they were holding relative to the broader market.
Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown
#67Earlier quoted context omitted.
Has anyone senior working at Credit Suisse lost any money here? There's your answer. (Perhaps in hypothecated future gains in share options - but even there, maybe not.)
Lara Warner (Chief Risk Officer), was fired today, so I guess she's lost a fair bit.
Did any of the people fired have to pay back their bonuses? Will they be unable to walk into new jobs?
Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown
#68Highly leveraged firms blowing up often happen at major market tops.
Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown
#69Was this a black swan event [1] (in Taleb's jargon)?
If so, this high-leverage approach to investing is a swan hatchery downwind of a coal plant.
Re: Credit Suisse Takes $4.7B Hit on Archegos Meltdown
#70The "Total Return Swaps" are very interesting instruments. I'm unclear how the banks can justify the paltry premiums compared to massive risks involved, other than the implicit guarantees that a Fed inspired bull market may achieve:
https://www.investopedia.com/terms/t/totalreturnswap.asp
How did Goldman survive unscathed? Their exposure was less than JPMC, but they seem to have liquidated before the impact of the block trades hit the market price. Curious!
https://www.cnbc.com/2021/04/06/goldmans-risk-controls-worke...