Caution: Protect Yourself Against Bill Hwang
Last week, you probably hadn’t heard of Archegos Capital…
Or a guy named Bill Hwang.
But his hedge fund nearly destroyed a handful of companies, threatened to burn some of Wall Street’s most storied banks and could still lead to a market crash.
It gets better…
Hwang, an admitted insider trader, should not have even been allowed to trade.
But Goldman Sachs, Morgan Stanley, Credit Suisse and Deutsche Bank lent him billions to do it!
So how did this disgraced hedge fund manager get money from Wall Street’s biggest banks to buy boatloads of overvalued stock?
I thought you’d never ask…
Today, I’ll answer those burning questions and show you how to protect your portfolio from guys like Hwang.
Fooled the Street
Bill Hwang started off as a protégé of one of Wall Street’s famed hedge fund managers — Julian Robertson.
He went on to start his own fund, Tiger Asia Management, which he later closed in 2012 after Hwang pleaded guilty to insider trading.
He bounced back, however, opening another fund he named Archegos Capital.
Hwang set up this firm as a “family office” which exempted it from normal SEC reporting requirements for investment firms.
Along with its status as a family office, Archegos dealt almost exclusively with trades called “total return swaps,” which allow the fund to own the total return of a stock for a certain size and period of time, at an agreed-upon price. Swap arrangements let funds put up a fraction of the cash it would normally require to take on positions of these sizes, while making potential profits bigger.
Added bonus — swaps aren’t included in the SEC’s reporting requirements.
So despite owning tens of billions of dollars (even a speculated $100 billion) in exposure to U.S.-traded companies, Archegos had to disclose close to nothing (if not absolutely nothing) to the SEC.
With no checks and balances, Archegos made massively risky bets using borrowed money.
The bets were centered on media companies like Discovery and ViacomCBS — the latter of which started with a stock price around $100 in the middle of last week that has since cratered to half that at about $47 this week.
Viacom’s surge since this time last year was impressive… maybe even a little unbelievable.
VIAC seemed to agree and announced it would be selling $3 billion or more of stock to fund streaming content.
The market didn’t take this well, guessing that Viacom knew it was overpriced. So shares took a turn and fell 23% Wednesday.
This was the beginning of the end for Bill Hwang.
The drop threatened his long bet on Viacom, and his lenders demanded he put up some collateral in order to stay in his position.
When he failed to do so, banks were forced to liquidate his trades — billions upon billions of dollars worth of trades.
The stocks he held huge positions in tanked, with the market shaving off around $30 billion of Viacom’s value.
The thing is, Viacom’s financials never justified the ripping rally in its shares.
Sure, its shows and movies are valuable. But not enough to deserve a forward P/E (price-earnings ratio) of 24 — up 300% since the start of the year.
Investors were already skeptical about Viacom’s business moves throughout 2020.
But the promise of future earnings attracted big betters like Hwang who put everything on Viacom’s success.
And at the first stumble, it all came crashing down. Now some are worried Archegos’ failure is only the beginning.
But don’t worry, we’ve got you covered.
Safe Outside the Impact Zones
It might be easier to say that Bill Hwang was some sort of mastermind that pulled the wool over the eyes of the smartest on the street.
But I don’t think that is the case.
Chief market strategist Matt Maley from institutional trading firm Miller Tabak puts it like this: “If there is one thing we have learned over the past 12 years (since the financial crisis) it is that big positions put on by big leveraged investors tend to be crowded positions. In other words, the concern right now is that there could be other leveraged players in the global system that have very similar positions.”¹
The fear when it comes to guys like Hwang is that it’s not just one single firm propping up unworthy companies, but a whole group of under-the-radar hedge funds moving the market in ways we can’t even see.
Because besides throwing a wrench in the market’s flow when they fail, they also threaten your retirement account with their unrestricted risk-taking.
But luckily you’re not alone in safeguarding against this.
Look, we all know there are overpriced stocks in the market right now.
But how hollow are the values of some of the market’s most costly companies?
There’s no way to know for sure… if there’s one thing, however, that the Archegos debacle can teach us is to generally try and stay away from supercrowded and expensive names.
Companies that rely too heavily on future earnings are setting up for a big letdown if things don’t turn out just right.
The issue then becomes… what does that leave you with to trade?
If you’re not sure where to look on your own, every week at Technology Profits Daily, we highlight a number of opportunities in little-known stocks not yet on the radar of the Hwangs of Wall Street.
They come with risks of their own, but at least that risk is one you agreed to, not the consequence of some hedge fund taking on more than it can possibly handle.
And diversifying your portfolio with these types of smaller stocks is a great way to make sure that when someone like Bill Hwang sends a ripple through the market, your account is sitting pretty outside the shock waves.