THE WONDERFUL THING ABOUT TIGGERS Having never been a mega wealthy hedge fund manager, what motivates their excessive risk-taking to become mega-mega wealthy is all Greek to me. So, when Archegos Capital Management blew up in March , as billionaire Bill Hwang wiped out his entire fortune leaving Wall Street to clean billions of dollars of nest-egg off their faces, I really could not believe what had just happened. And Archegos Capital wasn’t even a hedge fund. Over a thin, crispy pizza, Peter, an old friend and colleague who is far smarter than me, asked if I had looked deeply into the Archegos story. I must admit, I had not and just rolled my eyes like everyone else at the ludicrous position Wall Street had put itself in again. But Peter’s point was that Archegos was loaded up with investments in Chinese companies that have been accused of fraud. This triggered a memory of watching a documentary called The China Hustle and raised the question: is this the conclusion to its unfinished story, which implied another financial crisis was in the making? And if so, are we about to be hit again? But first, a little background. Bill Hwang was a product of Tiger Management, one of the largest hedge funds in New York in the late 1990s and one of the highest commission paying clients any broker could wish for. Unfortunately, Hwang went bad and pleaded guilty to insider trading of Chinese bank stocks in 2012. Both he and Tiger Asia were charged separately and the defendants settled with a US$44 million fine. Hwang bounced off with his US$10 billion fortune to create his “family office” called Archegos, and a four-year ban from trading in Hong Kong tagged along with him. There it sat, a delicately balanced bomb; as long as there wasn’t a big shock to share prices it wouldn’t go off Neil Newman HONEY HUNT Archegos had large leveraged positions in ViacomCBS, Baidu , Vipshop, Farfetch, Discovery Inc, Tencent Music Entertainment, iQiyi , GSX Techedu and Shopify across five or six brokers who ramped up Hwang’s US$20 billion fortune into something approaching US$100 billion of investments through loans on his positions. Hedge funds can remain anonymous investors by hiding positions on the balance sheets of prime brokers, who then settle up the net profits and losses on a daily basis. There is nothing illegal about this, they are called “swaps”. With Archegos having multiple prime brokers, it did not obviously appear as a concentrated holder of anything to anyone. And there it sat, a delicately balanced bomb; as long as there wasn’t a big shock to share prices it wouldn’t go off – perhaps an odd strategy for a “family office”, which are typically expected to preserve capital, not risk it. One of Hwang’s positions, ViacomCBS, had been on a tear, rising by 600 per cent in less than a year, topping out at US$101.97 on March 22, when suddenly it announced a US$3 billion share sale, taking advantage of what was considered by analysts to be an illogical price. The share price more than halved in a matter of days. Bill’s bomb went off. OH, BOTHER! Archegos’ prime brokers had a problem: they needed more cash to offset losses. When Hwang couldn’t come up with it, they liquidated large blocks of his other positions, sending his Chinese stocks into a tailspin and triggering a fear-driven market sell-off, including banking stocks. Bill’s bomb directly hurt America’s small investors and their 401Ks. The debacle cost a few jobs at Credit Suisse, which quickly fired those asleep at the wheel who had been ignoring Hwang’s history of margin calls, fines and bans by regulators. The bonus pools on the street will be smaller now, and prime brokerage will get a shake up, but after the speed bump it will be all back to normal in two shakes of a Tiger’s tail won’t it? Well, maybe not. 100 years on, I’m wondering if the Twenties could roar again The revelation of Hwang’s portfolio has international investors getting out their bomb detectors and these have already been pointed at China Huarong Asset Management, which has portfolios of distressed assets monetised in its US$22 billion bonds, that are being leveraged by US investors. Fitch helpfully downgraded its credit rating on the bonds from ‘A’ to ‘B’ – one notch above junk – after a panic sell-off. Of course, that has nothing to do with Bill Hwang. But both tie into The China Hustle and the problem US regulators face with opaque Chinese investments being sold to Americans, which may force companies to delist from US stock exchanges and look to raise capital in mainland China or Hong Kong. FUN FUN FUN FUN FUN Described as “the most important movie of 2018” by Forbes, The China Hustle detailed systematic fraud by Chinese companies, orchestrated by US brokers looking for the next big earner after subprime mortgages . The scam, as it is described, showed how the demand from US investors keen to participate in the “China growth story” was fed by getting little-known firms in China , a country not well understood, to do reverse mergers with defunct US companies that had New York Stock Exchange listings, which could then be pitched to US investors’ 401Ks. The prices of these stocks soared as Chinese firms’ inflated earnings numbers gave brokers a reason to ramp up investment in the stocks – until the true values of the companies came to light and the stocks crashed, wiping out nest eggs. Not missing a beat, this led to the establishment of US short-selling firms such as Muddy Waters and Citron Research, who investigate for fraud, take a short position, and then tell everyone the bad news. In Hwang’s portfolio, or at least the positions we know about, Muddy Waters have accused GSX Techedu of cooking the books and Citron Research have called it a blatant stock fraud. iQiyi, in which Baidu has a 56.2 per cent stake, has been accused of inflating its numbers and attracted an investigation by the US Securities and Exchange Commission – as did Luckin Coffee, which the Nasdaq delisted over a similar scandal. Vipshop has also been a target of Citron in the past. Pineapple wars may show Beijing’s real motives in the South China Sea US government and regulator patience with opaque Chinese-listed firms had already been wearing thin, but with the revelation that this type of personal wealth vehicle – family offices – can leverage up on such investment with ease, the regulator may lose patience. I am not saying Hwang is a bad guy. By all accounts he is intelligent, not flashy, a devout Christian – he is reported to have said God plays a large part in his investment decisions – who spends a lot of his time studying the Bible, and his philanthropic pursuits include generously giving to several charities. But why would anyone with a vast fortune, who is driven to do good, gamble in such an irresponsible way and cause so much damage? I’M THE ONLY ONE Perhaps he is not so smart and brokers latched onto a nice easy earner. Perhaps the number of zeros made him giddy, or he built concentrated portfolios because he was convinced he was right and that everyone else was wrong, like so other many other fund managers until they are sideswiped and blown up. To me, it remains a mystery why any investment manager would get themselves in this position. Archegos’ collapse has cost Credit Suisse US$5.5 billion so far, Nomura US$2.9 billion, Morgan Stanley US$911 million while UBS in a surprise announcement last week lost US$774million. MUFJ were also in the mix losing US$87 million. Wells Fargo and Goldman Sachs appear to have nimbly dodged it. I agree with Peter. These events will likely accelerate the forced exodus of Chinese securities from the United States . Speculation will come to an abrupt halt as the toys are taken away by the regulator. Where will the conclusion of The China Hustle be screened? Well, it’s coming to a stock exchange near you. Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets