A multi-billion dollar hedge fund blowing up and being forced to liquidate its holdings would be a significant negative shock to the markets, you’d assume. Right?

Last night, after I first read about the Bill Hwang Archegos situation, I figured today would be a bloodbath–not just in stocks tied to Archegos, but across the board.

But the market was not really fazed by the Archegos meltdown:

Nasdaq -0.6%, S&P -0.09% and the Dow was actually up 0.3%.

The Russell 2000 small cap index did, however, get slammed pretty hard at -2.81%.

According to the S&P 500 heat map, certain sectors did pretty well today:

Communications, healthcare, consumer staples and utilities did great today, while tech, financials, consumer discretionaries and energy were crushed.

This resilience in the market shows me that there’s still not a lot of fear out there. A fearful market would’ve been limit down on the news that a multibillion dollar hedge fund was in the process of melting down. But this market just sort of shrugged it off and was able to limit the damage to the individual stocks most strongly tied to Archegos.

By the way, those names are:

  • VIAC: ViacomCBS is down over 50% in the past week.
  • Swiss investment bank Credit Suisse lost nearly 14% today after it released a statement warning of a “highly significant and material” hit to their Q1 earnings due to the forced liquidation of Archegos positions. Rumors are that CS’s losses are as high as $4 billion.
  • Nomura, a Japanese investment bank, warned of losses of up to $2 billion due to its association with an unnamed US firm, presumed by most to be Archegos. Its stock was down over 14%.

However, other investment banks like Goldman Sachs, Morgan Stanley and Deutsche Bank were relatively unaffected, even though they did have exposure to Archegos. Both Deutche and Morgan Stanley said they managed to avoid losses, but CNBC was unable to get a response from Goldman.

But the thing is, even though these big i-banks are taking a beating due to the forced liquidations (and of course some way more than others), and that itself has contagion risk for the rest of Wall Street, the actual stocks in question here that were held in mass quantities by Archegos are not dragging down the overall market.

So I guess Bill Hwang was leveraged by like 300% in a lot of these names, then got margin called and couldn’t come up with the money. What caused the margin call in the first place? I don’t know, but I’m assuming it had something to do with the meltdown in Chinese stocks that really got ugly last week.

Hwang had a lot of exposure to Chinese stocks. NY Post says:

Once the banks began liquidating his positions, it triggered selling by other investors to avoid losses on stocks that would soon be plummeting in value. Nine stocks bore the brunt of this sell off, including ViacomCBS, Discovery, Shopify, Chinese firms Tencent Music, Baidu, GSX, iQiyi Inc., Vipshop Holdings, and UK online retailer Farfetch.

I found this list of Hwang’s holdings circulating on social media:

Maybe the reason Amazon, CrowdStrike and MasterCard weren’t smashed was because the i-banks simply weren’t selling them. After all, AMZN was Hwang’s biggest holding, and it was actually up 0.78% today. I’m going to assume the i-banks that lent the shares to Hwang on margin simply opted not to liquidate names like AMZN, CRWD and MA.

But the highlighted stocks on the list got killed. And they were mostly China-based, which is probably why this blowup didn’t affect US stocks across the board.

Still, this blowup of a major hedge fund is a big deal. Remember that Melvin Capital almost blew up in January due to its heavy short position in GameStop. And earlier this month, a British hedge fund called Greensill Capital filed for bankruptcy, which led to heavy losses for SoftBank, a massive Japanese holding company and investment bank.

This is a story that bears monitoring, as due to the complex and interconnected nature of global financial markets, a blowup in one part of the world could begin a chain reaction that leads to blowups elsewhere. I doubt Archegos and Greensill are the only dominoes that will fall here. These hedge funds are leveraged to the gills, and the second things start getting out of control and the margin calls come in, things can get very ugly very fast.

I’m sure the Archegos blowup is now compelling i-banks to reassess their margin exposure with a lot of these over-leveraged hedge funds. Archegos is definitely not the only hedge fund to be leveraged to this degree. Margin debt is at very high levels:

While US markets were resilient today and the damage from Archegos was seemingly contained, I don’t think this is over quite yet. We don’t even know if Archegos has been fully liquidated yet.

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