Did markets dodge a bullet on Archegos collapse?
The fallout of Archegos Capital Management is potentially losses of $7-10bn as highly leveraged total return swaps soured when Chinese technology stocks and other bets underperformed relative to benchmark equity indices in the US. Nomura and Credit Suisse are the biggest losers from the forced liquidation that started with Morgan Stanley and Goldman Sachs, with Credit Suisse announcing today $4.7bn in losses and cutting dividends while firing several key executives. What is up and down here, and is more coming?
First, it seems the risk from Archegos is contained with only downward pressure in selected positions and no contagion risks spreading to other parts of the equity market. While total return swaps have suddenly become a new word for many, they are quite simple instruments and used a lot as they are a cost-effective way of expressing relative performance between groups of equities. The biggest fallout from Archegos is that the losses came from a family office which are not heavily regulated and many failing hedge fund owners have recently transformed into family offices to avoid regulatory oversight giving more flexibility on position sizes etc. The likely result of Archegos is that prime brokerage businesses (the investment banking division that deals with large hedge funds providing securities lending and leverage etc.) will scale down risk in general and increased their scrutiny of the risk of family offices. Credit Suisse is continuing to sell large blocks of equities today in positions related to Archegos.