His personal wealth went from 1.5 to more than 35 billion dollars in a year, and now, more than a year later, Bill Hwang (58) faces a prison sentence of 380 years. The founder of Archegos Capital Management, which was defunct in March 2021, was charged last week with its chief financial officer Patrick Halligan for market manipulation and other fraudulent practices. And that for someone who once described himself as ‘a little kid who thinks, ‘Where can I invest to please our God?’
The lawsuit that starts on May 19 is equally about the reputable investment banks that have massively lent and lost money to Hwang. Because: because of Bill they went naked. The estimated losses of, among others, Credit Suisse, Morgan Stanley, Nomura and Deutsche Bank are in total around USD 10 billion.
In a nutshell, where it went wrong: Archegos manipulated the prices of companies in which it invested, and lied to the banks and securities houses involved in these transactions. Not really Christian of Hwang, whose Korean father was a pastor and his mother a missionary.
family capital
Perhaps those banks were misled by what was written on the box. Officially, Archegos, founded in 2013, was a family office, say a prudent steward of family capital that must pass to the next generations. That the family capital came from Hwang himself should have set off alarm bells. Just like the not so cautious growth of the fund. In less than ten years, assets under management went from $200 million to nearly $36 billion.
What’s more, the banks knew what they were up to with Hwang, who studied economics at the Universities of California and Carnegie Mellon. In 2012, he was forced to close his Tiger Asia Management investment fund after being convicted of insider trading in Chinese bank stocks. Despite that dubious reputation, Hwang was able to take up to $160 billion in positions at Archegos with bank loans.
Hwang mainly speculated on the price appreciation of a limited number of media and tech stocks. He bought more than 70 percent of the shares of some of those companies, such as with the Chinese online tutoring agency GSX Techedu. In practice, he drove the price, and therefore the value of his investments, up by buying more.
How come no one realized how many risks Hwang was taking? Normally, an investor must disclose their position publicly once a certain percentage of the shareholding in a company has been exceeded. But Archegos not only bought stocks from other investors, it also bought financial instruments from investment banks that mimic the share price.
Banks earned good money from this service . To hedge against losses, they often took the underlying stocks into their own portfolio. So they did not appear on Archegos’ own balance sheet. Hwang promised every investment bank that she was the only one he did such deals with, but in reality they were all in the same stock.
Price drop
Things went completely wrong when, in early 2021, ViacomCBS – of which Archegos owned more than 50 percent – wanted to issue new shares. The media company wanted to take advantage of the recent tripling of its share price, a result of the corona pandemic that had made streaming services wildly popular with investors. A group of shareholders did not want to divide future profits among several mouths, and sold its shares.
As a result, the exchange rate fell sharply, at which Archegos owed money to the banks. Money it didn’t have. Once the banks realized what was going on, panic erupted. They hurriedly sold the shares they had held for Hwang, contributing to the fall in prices that marked Archegos’ death sentence. Some banks were still able to limit the losses, others were hit hard. One of these is Credit Suisse, which was left with a hangover of about 4 billion euros.
The big question is how Hwang could believe this wouldn’t end in tears. His shareholding was so high that a ‘pump and dump’ (creating a fatal hype and then selling and disappearing with the money and the northern sun) was impossible in practice. One of the theories is that he was trying to trap speculators who had bet on a fall in price, in order to push the price of his investments further up.
Hopefully the lawsuit will show the correct answer. Hwang pleads innocent on all 11 charges.
3x Bill Hwang
Bill Hwang was born in South Korea as Sung Kook Hwang, but Americanized his first name after moving to the United States as a teenager. For Archegos he resorted to ancient Greek. It means ‘he who shows the way’.
He is one of the ‘Tiger Cubs’, protégés of Julian Robertson, the head of the infamous hedge fund Tiger Management. These tiger cubs later set up their own funds. Robertson once called Hwang “the Michael Jordan of Asian investing.”
Hwang is a man of faith and co-founder of the charity Grace & Mercy Foundation. According to Bloomberg news agency, he occasionally takes the bus, doesn’t want to hear about a private jet, and lives in a relatively modest house in New Jersey, “at least, which is modest for billionaires.”