Daily Comment (March 29, 2021)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Monday!  We are down to the elite eight in NCAA men’s basketball, and opening day is just around the corner!  U.S. equity futures are a bit lower this morning but off their worst levels of the overnight session.  Coverage starts today with reports that a large family office is facing massive margin calls, which have led to aggressive selling of select equities.  We look at who is behind the situation and its potential impact.  Up next is the latest on the Suez situation.  International news follows, with Myanmar and Germany’s supreme court featured.  China news is next; economics and policy follow, and we close with the latest on COVID-19.

Who is Bill Hwang?  He comes out of Tiger Management, a hedge fund of yesteryear run by Julian Robertson.  He was one of Robertson’s “tiger cubs,” fund managers who spun out of Tiger Management to start their own hedge funds.  Hwang took an initial stake of $23 million at the turn of the century and turned it into $8.0 billion by the end of 2007.  His firm is called Archegros Capital Management, and it is a “long/short” hedge fund.  Since 2007, his fortunes have been mixed.  He was caught in the massive short squeeze of Volkswagen (VWAGY, USD 32.53), which rose 82% in one day after Porsche (POAHY, USD, 10.29) announced it had purchased shares.  He also paid the SEC $44 million in fines over insider trading of Chinese bank stocks.  Hong Kong exchanges banned him from trading for four years in 2014.  In response to these legal challenges, as well as market issues, Hwang converted his hedge fund into a family office.

On Friday, Goldman Sachs (GS, USD, 327.39), Credit Suisse (CS, USD 12.87), and Morgan Stanley (MS, USD, 79.98),[1] who acted as prime brokers for Archegros, issued margin calls on the family office.  Nomura (NMR, USD, 6.61) and Credit Suisse have warned they may “incur substantial losses.”  Reports indicate that banks liquidated at least $30 billion (yes, with a “B”) of positions.  Hwang tends to run a concentrated portfolio with leverage, which accentuates both gains and losses.  His holdings appear to be weighted toward U.S. media companies and Chinese tech stocks.  It appears the brokers initiated the stock sales, meaning this was a forced margin liquidation.

Here is the “known/known”—the sales are massive and were done in blocks, suggesting the bankers were worried about losses and wanted to move quickly to get as much out of the collateral as they could.  This sort of action with a trader of this size isn’t common.  Here are the “known/unknowns”—first, hedge fund managers often participate in the same ideas, and thus the sharp declines in selected stocks may also have ramifications for other managers.  Second, the leverage may have been larger than one would expect.  Margin loans are fixed at 50%, but traders can increase their leverage through derivatives, e.g., options, swaps, single stock futures, etc.  We suspect Hwang’s positions were highly leveraged, which triggered the unified response.  Third, and perhaps most important, we don’t know yet if the selling is nearly complete or if there is more to come.  The initial weakness in stock index futures suggests worries were elevated; so far, it looks like we may be close to completion, and this event is just another tale of hubris and leverage.  It is also possible that we aren’t finished yet, and wider selling may still be possible.

Suez:  There is some good news on this front.  The combined efforts of tugboats and excavators, along with the moon (from high tide), have partially refloated the stuck container vessel.

(Source:  FleetMon)

The ship’s bow has been freed from the eastern bank, and the stern has been shifted into the channel.  However, even if the boat is freed, it will take weeks for traffic to normalize completely.  This is leading shippers to consider alternative routes.  Security of supply concerns are leading consumers to reconsider just-in-time inventory methodsInsurance firms are also facing a raft of claims.

International news:  Myanmar increasingly looks like a civil conflict, and the German Supreme Court throws a potential spanner into the Eurobond.

China:  The EU and China are engaging in dueling sanctions, and China and Iran formalize ties.

Economics and policy:  Infrastructure, taxes, and inflation lead the headlines.

COVID-19:  The number of reported cases is 127,285,692 with 2,785,365 fatalities.  In the U.S., there are 30,262,717 confirmed cases with 549,335 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors.  The CDC reports that 180,646,465 doses of the vaccine have been distributed with 143,462,691 doses injected.  The number receiving at least one dose is 93,631,163, while the number of second doses, which would grant the highest level of immunity, is 51,593,564.  The FT has a page on global vaccine distribution.


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[1] UBS (UBS, USD, 16.04) and Deutsche Bank (DB, USD, 12.35) also are listed as prime brokers, but we haven’t seen a direct mention that they were involved in margin sales.