Liquid lunge – Seen this Movie before
"The first of April is the day we remember what we are the other 364 days of the year." - Mark Twain
Bill Hwang’s mighty bills - The Archegos hedge fund blow-up came as no surprise, given that we wrote last month about how the same fervour that had driven FANGS and meme stocks such as Tesla, MicroStrategy and GameStop, before moving to the most liquidity-fuelled assets and particularly pseudo assets such as cryptocurrencies and the ARK range of ETF’s, remained just about intact but under severe pressure and in March we witnessed continued volatility but an increased divergence in the price of these various tickers. This makes more sense through the lens of March’s headline story – Archegos, the spectacular collapse of the family office of ex-hedge fund manager, born-again faith-in-finance evangelist, Sung Kook Hwang (better known as Bill Hwang, which is somewhat ironic in view of the huge ‘bill’ that it ran up at some well-known international banks recently).
Many stocks in which Archegos invested had benefitted to an even greater extent from the exposure by Archegos, with GSX Techedu still being roughly flat versus a year ago (following a 70% collapse in the share price) while another of the Chinese so-called disruptive tech ADR, iQyi is down to its level a year-ago (after a 40% drop) but the other 5 main Archegos’ targets still being between around 90%-220% higher:
How many more of them? This begs the question, as to whether any others were following Bill Hwang’s trades. If there are too many more of these hedge funds lurking in the woodwork, this could be enough to temporarily derail the current recovery in equity markets. How many of these are needed to create a lasting systemic risk is another issue, especially as things could spiral quickly with lenders likely to be increasingly nervous after the Archegos collapse. In such an environment, the need to protect themselves by requiring even more collateral could create a market crash, precisely because of the actions of the banks in seeking to de-risk in order to insulate themselves against such a possibility.
The Speculative Disruptive-tech Corner There are clearly other hedge funds who may have shared the same trades – although both of MBMG Investment Advisory’s most closely covered hedge funds, Point72 and Millennium, finished March slightly ahead for the month and seemingly little affected by the Archegos’ shenanigans and their highly speculative ‘disruptive tech’ stories. However other investors such as ETFs with exposure to Hwang’s chosen bubble stocks, could be affected. The jury certainly seems to be out on ARK Investments, whose fate seems inextricably tied to Hwang’s, even though the actual ETF holdings differed-
“That same Bill Hwang, it turns out, is also a backer of one of Wall Street’s hottest hands of late, 65 year old Cathie Wood of ARK Investments. Like Hwang, Wood is known to hold Bible study meetings and figures into the ‘faith in finance’ movement.”1
Is the ARK sinking? It isn’t just Archegos but the attempted stock-cornering and margin loan purchases in Gamestop, AMC, Bitcoin, and Tesla.
Margin Loans easy to come-by Maybe it reflects more a general tendency to load up the same kind of highly leveraged, bloated assets (and pseudo-assets), even if not exactly the same assets, during a period when capital market liquidity conditions have never been easier. Hence Hwang and Wood may simply have been doing what capital does best – finding the best places to seek out returns and until very recently that was in the stocks favoured by both Hwang’s family office and Wood’s family of ETFs.
Cornered positions? However, that tide may be at risk of turning – those same stocks may now offer more vulnerability than opportunity and they more also be more susceptible to exogenous risks such as the downgrades that hurt Viacom and Discovery or the threatened US de-listing that has taken the rug from underneath Chinese tech stocks. It’s not necessarily that Hwang or Wood have done anything wrong but Archegos certainly built a position that it wasn’t able to extricate itself from and it’s highly possible that Ark may very well have done the same. The extreme behaviours of parts of capital markets have created very specific conditions and challenges.
Gold may have bottomed out! Last month, when we wrote of “increasing volatility across asset classes and even currencies”, we were warning that conditions had given rise to an Archegos event. We also expected Dollar to start to form a bottom and gold to try to follow (this time, gold has weakened at the same time as the US dollar). We also thought that inflation expectations and interest rates had run ahead of themselves but now, as then, we don’t expect the bubbles in assets or currencies to necessarily unwind immediately or in a linear fashion (although we can’t completely discount that).We expect volatility to continue to dominate 2021.It’s worth repeating one observation from a month ago –
“One noticeable effect was that the charge for risk assets sucked the air out of safer or more anti-fragile assets, with some relatively weakly bid treasury auctions seen in the last couple of weeks. This makes us question just how much liquidity really is looking for a home right now.”
We suspect that the Biden stimulus plan will find its way to markets and if so, that might keep the Ark afloat a good while longer, but we also suspect that the Biden infrastructure plan is a damp squib, and it may be that the days of the almost everything bubble are coming towards an end and there will need to be much greater selectivity.
Ultimately, that’s almost certainly a good thing but in the short term, it is a new challenge to be met.
We aim to be ready.