Inside the story of the Tiger (Julian H. Robertson Jr) and his Cub (Bill Hwang of Archegos Capital)
J.H Robertson, a Stock Broker and a former Navy Officer founded a Hedge Fund called the “Tiger Management Corp.” in 1980 with $8 Million as Capital.
To understand, Hedge funds are unregulated pools of money that use riskier strategies like derivatives and short-selling to boost returns. By leveraging their investments, hedge funds can boost substantial returns. However, when the bets go against the fund, the losses can be huge.
Robertson managed to increase the fund’s asset to $7.2 Billion by 1996 through his steady commitment to buying the best undervalued stocks and shorting the worst. This strategy worked wonders for him for 20 years until the dotcom bubble, where the earnings and price considerations took a back seat to the momentum. His bets on value stocks backfired as investors turned their attention to high-octane technology and internet companies that often had no earnings and no product. Unwilling to join this rage, he stuck to value investing and saw his holdings decline substantially which eventually led to the closure of his fund which was once considered one of the best.
"If he and Warren Buffett are the rational investors of our age, then this is a sign that the rational investor has given up," said Barry Colvin”
THE TIGER CUB RISES
After Liquidating 75% of his fund, Robertson handed over $25 Million to Bill Hwang to start his own fund called the “Tiger Asia Management” which grew to $5 Billion at its peak. Many of the analysts and managers who Robertson mentored started their own hedge funds known as the “Tiger Cubs”. Hwang was considered one of the most successful in them. In 2012, Hwang was charged by the SEC for insider trading of two Chinese bank stocks, China Construction Bank Corp and Bank of China Ltd, ahead of share placements by those companies in 2008 and 2009. The trading activity had resulted in a freeze on Tiger’s assets, a ban from trading in Hong Kong and a fine of $44 million to the SEC.
In 2013, Hwang converted Tiger Asia to a family office called Archegos Capital, which was less regulated than a hedge fund. Archegos Capital Managed $10 Billion of Family Money.
THE MARGIN CALL
Archegos’s holdings were mainly in the form of Total Return Swaps.
A total return swap allows the party receiving the total return to gain exposure and benefit from a reference asset without actually owning it. These swaps are popular with hedge funds because they provide the benefit of a large exposure to an asset with a minimal cash outlay.
Since the positions were on the bank’s balance sheets, Archegos did not have to disclose its holdings, while it would have to disclose them if they had regular stocks. The fund was also heavily leveraged and did business with many banks.
In this type of contract, a margin call occurs when the value of the underlying asset falls below a specified limit. In this situation, the first party has to either deposit more money with the bank or sell off the securities held.
Bill Hwang borrowed billions of dollars from wall street banks to build huge positions in some American and Chinese stocks. He was the single largest shareholder of ViacomCBS, his total exposure to stocks like Discovery Communications, along with Chinese majors Baidu Inc. and Tencent Holdings is unknown because of the Total Return Swaps.
The precipitous fall in the market price of ViacomCBS and the rest of his portfolio triggered margin calls. When Archegos could not pay, the banks sold off the assets and Hwang’s net worth crippled overnight. It was one of the biggest collapse of an investment firm since the 2008 crisis.
The collapse of Archegos had multiple effects, Viacom’s share price halved in a week and two of the lending banks revealed loss of billions.
The SEC is expected to increase the oversight of family offices that control a huge amount of assets and increase the transparency in the derivatives market. Bill Hwang has been laying low and has not issued any official statement since the incident.
By:
Gursidak Singh
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