Archegos shakes the market; managers are being pushed to meet margin calls

Archegos Capital’s portfolio liquidation triggered over $20 billion worth of selling last Friday.

This net effect on its counterparties should be a clear message to all investors. Due diligence is important. You need to understand the amount of leverage your managers are employing, and their level of relationship with counterparties.

Understanding these risks is part of the due diligence process and needs to be reviewed regularly. Markets move and times change and with those, so does the risk that every manager is putting on. The news about Archegos should not come to the surprise — this sort of fire sale was bound to happen — not with Archegos — I had never heard of them before — but with an investment firm — hedge fund or the like. 

Leverage can and is a dangerous thing when it goes unchecked. Clearly, the prime brokers did not have their eyes on the ball until it was too late. Once the market moved and the positions created, the only thing left to do was sell in hopes of putting the genie back in the bottle. Well, we all know how that works out. The news today that the banks tried and failed to work together to get out of the sinking position should come as no surprise to anyone. The Street looks out for itself. The failure to come to an agreement between the big banks should also come as no surprise to anyone. It is everyone for themselves and unlike musical chairs where you want to be in a seat when the music stops — this is a game of getting out of the room before the music stops.

As investors, the IMDDA implores you to continually ask questions about how managers are using leverage and who they are doing business with to manage risk and their portfolio positions. You don’t want to find out too late that the leverage is out of control and the music has stopped. By the way, we believe that there are more of these margin call issues out there and Archegos is the first of a few if not many chips to fall.

Stay tuned. The ride is just getting started.

Daniel Strachman

Daniel Strachman is the co-Founder and managing director of the Investment Management Due Diligence Association.

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