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> From what I gather, Archegos had $10B of equity in total? Typically (sensibly) you don't put all your eggs in one basket as a fund, even a quite concentrated

> From what I gather, Archegos had $10B of equity in total? Typically (sensibly) you don't put all your eggs in one basket as a fund, even a quite concentrated fund. It was $20B. Hwang's whole schtick from the outset of his family office was to hyper lever up on high growth companies. By doing this he went from $1B to $20B of actual capital in about 2 years. Then he blew up spectacularly because he was levered up about 5x in a ridiculous concentration. There's no royal road to excess returns, etc. He probably could have kept this going longer, but sooner or later one of his superholdings was going to have a market event sparking a loss (like VIAC) and even his volume wasn't going to be able to prop up the price anymore. Chain reaction from there. This is a good cautionary tale: going around to a bunch of banks and getting crazy leverage Big Short style doesn't always end in a lionizing outcome. In fact it usually doesn't. What sucks is the leverage is going to be demonized here, when the actual problem is Hwang's lack of transparency (albeit legal) to his brokers and his frankly stupid risk management. Plenty of funds safely chug along for years running at 3-4x leverage, they just have the good sense to keep beta < 1 and stay roughly market neutral in their long/short holdings...

clairity 5y ago
yeah, that's just called gambling and stupid money. a basic task of money management is monitoring how correlated a portfolio is, and putting all of it in one basket is the opposite being mindful in that way. it's also a good reminder of an economic reason for why we don't want wealth concentrating, because the chances of it be allocated efficiently fall. concentration worsens the effect of poor allocation. if that money was split among 1000 investors, a few would act stupidly, but a few would allocate exceptionally, and the many would be somewhat average, giving a much better overall outcome for the same amount of capital. the more widely dispersed capital is, and the more dynamic an economy is, the more opportunities for capital to find its best use. it makes sense then why efforts along these lines (dispersion and dynamism) are vehemently opposed by the already wealthy. it's not because of capitalistic purity, but the threat it represents to their own power and influence.
manishsharan 5y ago
>> hyper lever up on high growth companies ViacomeCBS was a high growth company? wtf?
- fractionalhare 5y ago
  No, he wasn't exclusively concentrated in tech or growth.
lotsofpulp 5y ago
>What sucks is the leverage is going to be demonized here, when the actual problem is Hwang's lack of transparency (albeit legal) to his brokers and his frankly stupid risk management. Seems to me the onus is on CS and other prime brokers to require Hwang to disclose or otherwise do due diligence on his other bets.
- fractionalhare 5y ago
  They can wag their finger, but they don't legally have recourse for finding out this information ahead of time if Hwang and his existing lenders don't volunteer it. That's just the current state of play with margin lending.
  - lotsofpulp 5y ago
    Then the onus is on CS to correctly price that risk, or not lend the funds.
    - fractionalhare 5y ago
      And that is why heads of risk lost their jobs this week!
dcolkitt 5y ago
> Big Short style doesn't always end in a lionizing outcome. That movie was the worse thing that ever happened for a generation of traders. It reinforces all the worse biases traders tend to have. The moral of the story was to make a single concentrated bet, to throw risk management to the wind, to double down as you lost money, and to completely ignore any expert that disagreed with your investment thesis. In reality for every Michael Burry, there's 100 stubborn overconfident idiots who YOLO everything into a bet that blows up in their face. First off, it's much better to make as many small independent bets than to have one big trade. It's also better to make trades with a fixed, ideally short, time horizon. Even if you're ultimately right, without a catalyst, the market can remain irrational longer than you can remain solvent. Finally the best traders tend to be extremely open minded and willing to change their views on a dime. The human mind is heavily biased towards overconfidence. Good traders should be flipping their views as evidence comes in. This has been empirically verified by Philip Tetlock. The best forecasters are those who are quickest to change their mind. If they hear some expert with an opposing opinion, they don't dig in their heels like the heroes of The Big Short. The problem is the qualities that make a great narrative hero are almost exactly the opposite of those that make a great trader or forecaster. We love a story about a bold contrarian, who goes all in on a single bet, and sticks to his guns no matter what obstacles come his way. The story practically writes itself. But it's precisely this mythologizing that causes this style of trading to be the least rewarded in the market. Everybody wants to be the hero of their own story. There's way too many Michael Burry wannabes, and not nearly enough George Soroses.
occamrazor 5y ago
Personally I don’t understand why so many people are blaming Hwang and Archegos. He lost his own money and the money of the banks who gave him leverage _without_ a proper risk assessment. I haven’t seen any claims that Hwang lied to the banks and it’s the banks’ job to do due diligence and apply sane risk management practices.
- lordnacho 5y ago
  I think it's more an awe for the scale of capital destruction. In the end this isn't a domino that topples the whole financial system, risk was taken by a guy who had money, and banks who are capitalized to lose money now and again.
- fractionalhare 5y ago
  I don't personally have any skin in the game, but of course I blame him for losing his money. It's his fault, who else would I blame? Pretty cut and dry case of terrible risk management here. What seems controversial? Nobody held a gun to his head and told him to load up crazy leverage on a highly concentrated basket of equities... And the banks that lent him money didn't have transparency as to his leverage elsewhere.

clairity 5y ago

yeah, that's just called gambling and stupid money. a basic task of money management is monitoring how correlated a portfolio is, and putting all of it in one basket is the opposite being mindful in that way. it's also a good reminder of an economic reason for why we don't want wealth concentrating, because the chances of it be allocated efficiently fall. concentration worsens the effect of poor allocation. if that money was split among 1000 investors, a few would act stupidly, but a few would allocate exceptionally, and the many would be somewhat average, giving a much better overall outcome for the same amount of capital. the more widely dispersed capital is, and the more dynamic an economy is, the more opportunities for capital to find its best use. it makes sense then why efforts along these lines (dispersion and dynamism) are vehemently opposed by the already wealthy. it's not because of capitalistic purity, but the threat it represents to their own power and influence.

manishsharan 5y ago

>> hyper lever up on high growth companies ViacomeCBS was a high growth company? wtf?

fractionalhare 5y ago
No, he wasn't exclusively concentrated in tech or growth.

lotsofpulp 5y ago

>What sucks is the leverage is going to be demonized here, when the actual problem is Hwang's lack of transparency (albeit legal) to his brokers and his frankly stupid risk management. Seems to me the onus is on CS and other prime brokers to require Hwang to disclose or otherwise do due diligence on his other bets.

fractionalhare 5y ago
They can wag their finger, but they don't legally have recourse for finding out this information ahead of time if Hwang and his existing lenders don't volunteer it. That's just the current state of play with margin lending.
- lotsofpulp 5y ago
  Then the onus is on CS to correctly price that risk, or not lend the funds.
  - fractionalhare 5y ago
    And that is why heads of risk lost their jobs this week!

dcolkitt 5y ago

> Big Short style doesn't always end in a lionizing outcome. That movie was the worse thing that ever happened for a generation of traders. It reinforces all the worse biases traders tend to have. The moral of the story was to make a single concentrated bet, to throw risk management to the wind, to double down as you lost money, and to completely ignore any expert that disagreed with your investment thesis. In reality for every Michael Burry, there's 100 stubborn overconfident idiots who YOLO everything into a bet that blows up in their face. First off, it's much better to make as many small independent bets than to have one big trade. It's also better to make trades with a fixed, ideally short, time horizon. Even if you're ultimately right, without a catalyst, the market can remain irrational longer than you can remain solvent. Finally the best traders tend to be extremely open minded and willing to change their views on a dime. The human mind is heavily biased towards overconfidence. Good traders should be flipping their views as evidence comes in. This has been empirically verified by Philip Tetlock. The best forecasters are those who are quickest to change their mind. If they hear some expert with an opposing opinion, they don't dig in their heels like the heroes of The Big Short. The problem is the qualities that make a great narrative hero are almost exactly the opposite of those that make a great trader or forecaster. We love a story about a bold contrarian, who goes all in on a single bet, and sticks to his guns no matter what obstacles come his way. The story practically writes itself. But it's precisely this mythologizing that causes this style of trading to be the least rewarded in the market. Everybody wants to be the hero of their own story. There's way too many Michael Burry wannabes, and not nearly enough George Soroses.

occamrazor 5y ago

Personally I don’t understand why so many people are blaming Hwang and Archegos. He lost his own money and the money of the banks who gave him leverage _without_ a proper risk assessment. I haven’t seen any claims that Hwang lied to the banks and it’s the banks’ job to do due diligence and apply sane risk management practices.

lordnacho 5y ago
I think it's more an awe for the scale of capital destruction. In the end this isn't a domino that topples the whole financial system, risk was taken by a guy who had money, and banks who are capitalized to lose money now and again.
fractionalhare 5y ago
I don't personally have any skin in the game, but of course I blame him for losing his money. It's his fault, who else would I blame? Pretty cut and dry case of terrible risk management here. What seems controversial? Nobody held a gun to his head and told him to load up crazy leverage on a highly concentrated basket of equities... And the banks that lent him money didn't have transparency as to his leverage elsewhere.