Useful Lessons for Average Investors Following Archegos’ $30 Billion Hedge Fund Disaster

Stock Market - Arrow Graph Going Down on Display With Red and Green Figures.
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The most recent hedge fund blowup was a big one — Archegos, a hedge fund by Bill Hwang, lost over $30 billion after defaulting on margin calls, forcing a stock fire sale.

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In short, Archegos was able to borrow a lot of money — so much that its failure to make good on its debts created shockwaves large enough to ripple through global financial markets.

To simplify, Archegos made big investments in financial instruments called total return swaps, which are contracts negotiated by Wall Street banks that allow a user to take on the profit and loss of a portfolio of stocks or other underlying assets in exchange for a fee. This essentially allowed the inventor to make huge bets, or take position, without putting up the money up front. This strategy is essentially a fancy, financial way of saying “borrowing from the bank.”

Once some of these underlying assets started selling off and not doing well, Archegos and their bets began to fall, as well. The reason the fall was so cataclysmic was because almost every major Wall Street bank had heavily invested in the fund. Nomura reported losses of almost $3 billion, with Credit Suisse taking a $5 billion dollar hit. Morgan Stanley and UBS also incurred losses, with Goldman Sachs and Deutsche Bank able to get out before too much damage was incurred.

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One of the biggest problems with Hwang’s portfolio was that it was not diversified enough and was heavily leveraged. “Extending leverage is predicated on understanding the various risks associated with a trading strategy, and how the strategy is being executed,” Hedgeweek said.

One of Archegos’ biggest mistakes was that it was overly leveraged — and overly exposed. This comes as a convenient lesson for investors who either invest in hedge funds or invest on their own.

An important thing to take away from the Archegos fiasco is the fallout from big Wall Street players. Many 401(k)s, retirement accounts and IRAs have ETFs and mutual funds invested with these banks. It can be useful to check your holdings in your investment accounts, as it’s possible to have two or three funds in different retirement accounts held at different brokers that are all invested in the same underlying assets.

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This is one of the biggest things you as an investor want to avoid. Check your holdings to make sure you aren’t over-leveraged in any one area. For example, you might believe you are diversified by being invested in three different mutual funds and ETFs, but if each of those individual funds are highly invested in one particular fund or industry, this could spell a similar disaster for you that Archegos faced.

Another important lesson: beware of investing in hedge funds. Although hedge fund investing is not for everyone, nor will the average investor be able to meet the monetary requirements, it’s possible you could indirectly be linked to hedge funds based on other investments you’ve made.

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All too often, we invest somewhat blindly into 401(k)s, other retirement accounts or investment accounts. We largely trust in the institutions managing these funds to invest time in our best interest. However, it is your responsibility as an investor, in whatever capacity large or small, to at the very least check on your investments and follow the cardinal rule — diversification. It’s the best one can do to hedge the risk of Wall Street pros playing games that are far too reckless to risk your own money on.

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Last updated: October 4, 2021

About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 

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