THE COLLAPSE

OF ARCHEGOS
CAPITAL:
EXPLAINED
June 2022
1
BRIEF PROFILE
– ARCHEGOS
CAPITAL
 BRIEF PROFILE – ARCHEGOS CAPITAL

• Archegos Capital Management is a family office that primarily invests in the US, Chinese, and
Japanese stock markets.
• A family office is a private entity that provides investment or wealth management services for ultra-high net worth
investors. They serve very wealthy families, generally those with over $100 million (~Rs 735 crore) in investable
assets.
• Archegos Capital was founded by Bill Hwang, a former equity analyst at US-based Tiger Management (which no
longer exists).
• In 2012, he was found guilty of insider trading and was charged by the Securities and Exchange Commission (SEC).
Bill Hwang and the firms he managed had to pay $44 million to settle all charges.
• He was also forced to stay away from the investment advisory business. Thus, Hwang converted his firms into a
family office. A point to be noted is that family offices are outside the regulatory scrutiny of the SEC.
• Most of their information or transactions are not available in the public domain.
2
HOW THE
ARCHEGOS
CAPITAL
FIRE SALE
WENT
DOWN
 DIARY OF A MELTDOWN:
HOW THE ARCHEGOS CAPITAL FIRE SALE WENT
Hwang called banks to hold Nomura Holdings Inc DOWN
off on selling the shares flagged a possible $2 billion
loss, while
Credit Suisse obliged Credit Suisse disclosed a
Goldman & others started “material impact,” with
selling shares to free up cash sources putting the losses at
$1 billion to $4 billion.
Wednesday Friday Tues/Wed/Thurs
24th March 2021 26th March 2021 30th Mar to 01st Apr 2021

Stock sale by media
company Viacom CBS and
its stock had fallen 9%
Collateral call to Archegos’
to cover exposure on Equity
Derivatives - Swaps
Thursday
Goldman sold more than
25th March
2021 $10.5Bn worth of shares
Morgan Stanley offloaded $8
billion worth of shares.
Deutsche Bank sold $4 billion
of shares related to the
Archegos swaps
Monday
Mitsubishi UFJ Financial Group
29th March 2021 reported it was on hook for
potentially $300Mn
Credit Suisse loss increased
estimated to $5Bn
Mizuho Financial Group Inc
reported loss of $90Mn
3
ARCHEGOS AND
DERIVATIVES:
WHAT WENT
WRONG WITH
RISK
MANAGEMENT?
• Inadequacies in the Risk Management Framework
• Credit Suisse’s Credit Risk Management Unit received regular and
comprehensive management information in respect of Archegos and its
portfolio.
• Further risk management was provided by the risk team within Credit
Suisse’s Prime Services business unit. The bank therefore had a good level
of visibility and oversight of the risks posed by its prime brokerage clients.
• However, a lack of empowerment of those tasked with managing the bank’s
credit risk hindered the operational effectiveness of a theoretically well-
designed framework.
• The firm’s risk managers intended to ask Archegos for additional margin to
reflect the increased credit risk associated with its portfolio but were
prevented from doing so as this was deemed not to be in the interests of the
bank by those responsible for managing the relationship.
• Concerns had also previously been raised internally at Credit Suisse
regarding the effectiveness of the Prime Services Risk Team, specifically a
lack of staffing, failure to replace senior staff, and a lack of risk
management experience in its leadership.
• Failures of Governance
• In 2020, Credit Suisse established its Counterparty Oversight
Committee (CPOC) after incurring losses in a relationship with a
hedge fund called Malachite Capital Management.
• The Report noted that CPOC had identified issues and
recommended solutions relating to Archegos as early as September
2020. The committee drew up an action for the Credit Risk
Management unit to monitor for changes in the risk profile of
Archegos and to discuss again at a future meeting.
• However, CPOC failed to establish deadlines and assign
ownership for the actions it recommended, with the result that
substantive measures were not taken, and that Archegos was not
discussed at committee level again until March 2021.
• Further failures of governance
• The Firm’s CEO and CRO “only became aware of the
bank’s exposure to Archegos in the days leading up to the
forced liquidation of the fund.”
• We can speculate that the Firm’s C-Suite was not closer to
Archegos because, from a revenue perspective, this was not
a significant client.
• It’s worth noting that Credit Suisse made just $17.5 million
in Archegos fees in 2019 for exposure to a potential $20
billion loss (at the peak of the fund’s activities) – suggesting
commercial considerations had become entirely untethered
from an assessment of risk.
• Client Due Diligence
• In 2021, Archegos founder Bill Hwang Sung Kook pleaded
guilty to charges of wire-fraud in the US. Subsequently in
October 2014, a Hong Kong market misconduct tribunal banned
Hwang from trading securities in Hong Kong for four years after
he was found guilty of insider trading.
• The Report found no evidence that Credit Suisse had taken any
mitigating actions in response to the risk posed by Hwang’s
previous transgressions. This was despite the bank being made
aware of the adverse news through a 2015 compliance review.
• Furthermore, the Prime Services business unit sought to resume
trading with Archegos in Asia following the lifting of Hwang’s
ban in Hong Kong in 2018. Another reputational risk review was
conducted in response, but Compliance’s concerns regarding
Hwang were dismissed with no substantial rationale.
4
RISK
MANAGEMENT
LESSONS FROM
THIS ARCHEGOS
SAGA
• Use of Leverage
• Hedge funds love to make money through leverage
especially in times like these where rates are near zero.
• Leverage is a double-edged sword where it can amplify
both profits and losses.
• Archegos started with a normal leverage of 2x and when it
tasted success, kept increasing the leverage and before the
blow up the leverage stood at a massive 5x.
• Well governed hedge funds and institutions will have
internal checks and balances that will limit the leverage in
anticipation of troubles. However, Archegos being a single
man company, did not enjoy that luxury.
• Use of Derivative Products
• Archegos did not directly own the underlying stocks but
instead owned them indirectly through the prime brokers
through the swaps described earlier.
• In this method, it can escape regulatory scrutiny as regulators
cannot find out the positions being built up by Archegos.
• Also, Archegos can work with several prime brokers at the
same time. While each prime broker can have his exposure
worked out, they will not have a composite view of Archegos
total exposure to a particular stock.
• Role of Prime Brokers
• From the prime brokers point of view, lending is a juicy
business as they are covered by the underlying stocks as
collateral and can always demand more (margins) when
needed.
• However, this works well for small changes in stock prices.
However, for large and abrupt changes in stock price
(especially on the downside) lending can be a serious
business if proper due diligence is ignored while lending
• Concentrated portfolios can be dangerous
• Archegos ran a highly concentrated portfolio both at a stock
level and at sector level. Ignoring the benefits of portfolio
diversification can cause serious problems in sudden market
meltdowns.
• Running a concentrated portfolio that too on a levered basis
will need very high levels of stock research and ability to
withstand long periods of “against the wind” scenarios.
• In hedge funds run by a single person like Archegos, both
these factors can be missing.
• Don’t wait for the client to decide
• Up to what point one can wait to trigger a margin call is a
subjective question especially when dealing with stocks that
has manageable interim volatility.
• When several prime brokers are involved in lending to the
same client for the same stock, a steep fall in the underlying
stock price will put them in a situation where if one pulls the
trigger, the whole ship can fall. Before pulling the trigger,
prime brokers normally consult the client to see if additional
comfort can be obtained in the form of higher collateral or
margin money.
• In most of such situations, the client instead of putting up
with additional collateral, will try and argue about the
correctness of his call and punctuate the need to maintain
patience. This can be a recipe for disaster.
• The biggest risk management lesson here is not to wait for
the client’s decision.
5
KEY POINTS OF
CREDIT SUISSE
ARCHEGOS
POST-MORTEM
• ARCHEGOS RELATIONSHIP WITH CREDIT
SUISSE
• Credit Suisse's relationship with Archegos head Bill Hwang began in
2003 through his Tiger Asia fund.
• In 2012, Tiger Asia and Hwang settled insider trading allegations with
the U.S. Securities and Exchange Commission. In 2014, Hwang and
Archegos were banned from trading securities in Hong Kong for four
years.
• Credit Suisse continued to do business with Archegos both during and
after these criminal and regulatory matters, the report said.
• Credit Suisse conducted two reputational risk reviews of Archegos, but
the first did not begin until "years" after the SEC and DOJ resolutions.
• In 2015, a routine compliance review of Archegos picked up negative
news about Hwang, which led Prime Services to subject Archegos to a
reputational risk review.
• ARCHEGOS RISK MANAGEMENT 2012-2019
• Credit Suisse's risk management internal credit rating of Archegos
improved several rungs between 2012 and 2016 due to the fund's
increasing net asset value (NAV), which grew from $500 million in
2012 to $3.9 billion in 2016.
• In 2019 Archegos asked Credit Suisse to materially lower its swap
margin requirements, from around a 15-25% initial margin. Credit
Suisse agreed to a new standard swap margin rate of 7.5% in May
2019.
• This led Archegos to "significantly increase its swap exposure with
Credit Suisse".
• In November 2019, an annual credit review of Archegos
recommended maintaining its BB- rating and more than doubling the
fund's risk limit, despite a 40% decline in its net asset value.
• If you don't invest in risk management, it
doesn't matter what business you're in, it's a
risky business.
- Gary Cohn
• American Pulitzer Prize-winning Investigative Reporter