Wall Street head scratching over the recent, meteoric rise and fall of ViacomCBS and Discovery shares ended Monday with some aha! news — a little known, now bankrupt hedge fund had invested heavily then was forced to sell massive blocks of stock in the two companies.
On Monday, Credit Suisse and Nomura revealed that they will incur large losses from the collapse of an unnamed client reported to be Archegos Capital Management, the family office of Bill Hwang, a former manager of Tiger Asia, after the fund defaulted on margin calls by the banks.
Family offices manage wealthy family assets and are exempt from SEC disclosure rules that require other funds and investors to report large holdings in publicly traded companies. That allowed Archegos to build up substantial positions in both media companies, driving a massive upturn in the stocks. The shares had momentum of their own on new streaming launches and a shift into so-called value stocks as the economy recovers. But the speed and extent of the gains — that saw ViaomCBS surge to over $100 from $14 and Discovery jump to near $80 from $30 in a matter of months – was hard to explain.
Analysts eventually began to downgrade the shares mostly on price – meaning they thought the stocks were too expensive. That triggered downward spirals in the stocks, eroded the value of Archegos’ holdings and resulted in margin calls by banks that forced more sales and pushed the shares even lower.
The downturn Friday was so dramatic that Discovery sought to reassure in a statement noting, “trading activity is not the result of insider transactions or transactions by Advance/Newhouse Programming Partnership or its affiliates,” which are investors in the company. The company also reiterated financial guidance and that it’s “pleased with the execution of its strategy, both with respect to its traditional business and the direct to consumer roll out.”
Funds that hold margin accounts with banks can borrow money against the investments in their account. A margin call is when a broker demands an investor deposit additional money or securities into the account — usually when the value of securities in the account falls. It forces an investor to either deposit more money in the account or sell some of the assets held there.
Nomura estimated its exposure to Archegos at roughly $2 billion, while Credit Suisse said its hit was “premature to quantify.” Shares in both banks plummeted by more than 10% Monday.
ViacomCBS and Discovery shares were down, respectively, by 8% and 3% in late morning trade. Stocks of Chinese Internet companies like Tencent Music and Baidu, another group of companies where Archegos held large positions, also continued to dip. Altogether, the fund is thought to have sold share worth an estimated $3 billion.
The big reveal raised more questions about risk to the financial system. It caused an uproar in a market that’s already jittery over intense volatility in select stocks earlier this year (led by GameStop and AMC Entertainment) caused by retail investors sharing advice on Reddit chat rooms and trading aggressively online via Robin Hood or other e-brokerages.
Thousands of family offices around the globe manage of $6 trillion in assets, according to CNBC, but are except from rules it the landmark 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that require most investors to disclose significant holdings in publicly traded company. Family offices fought hard and won a special carve-out if they serve a single family and don’t give investment advice. The entities are established by wealthy families to manage their wealth and provide services like tax and estate planning to members. The argument was that they tend to be conservative to preserve wealth.
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