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Lessons From the Archegos Collapse for Forex Traders

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Lessons From the Archegos Collapse for Forex Traders

Archegos Capital was a relatively unknown family office in 2020. Yet, the company became widely known in the first quarter of 2021 for almost crashing the market. It also put some well-known brands like Credit Suisse, Nomura, and UBS at risk. In this article, we will look at the Archegos fallout and some of the top lessons forex traders can get from it. 

What was Archegos?

The story of Archegos starts with Julian Robertson – the legendary Wall Street investor. Robertson was the founder of Tiger Global, a hedge fund that made billions of dollars in the 90s. After his retirement, he invested millions of dollars in some of his former employees, who went on to form their own hedge funds. Today, these employees are widely known as Tiger Cubs.

Bill Hwang was one of these cubs. He went on and established Tiger Asia – a hedge fund focused on the Asian market. Later on, he started Archegos Capital Management, a family office.

For starters, a family office is an investment company that is not regulated in a similar way that a hedge fund is. Since it manages funds owned by an individual or his family, it is not required to disclose its holdings to the public. In the United States, hedge funds are required to file Form 13F every quarter. 

For years, Bill Hwang built a fortune that was worth more than $30 billion. He achieved this by having a highly leveraged concentrated portfolio. As the stocks rose, his net worth surged to more than $10 billion.

To avoid detection, Hwang used products known as swaps. This is where he collaborates with Wall Street banks who initiated the trades for him. As such, while he owned the shares, they were listed as being owned by the banks. To implement these trades, he partnered with several banks like Nomura, Credit Suisse, Morgan Stanley, Goldman Sachs, and Morgan Stanley.

How Archegos collapsed

In the first quarter of 2021, ViacomCBS, one of Archegos holdings, announced that it was raising money by selling shares. The company did that to take advantage of its share price, which had more than doubled in the previous few months. Investors didn’t like the news, and the stock started to drop, putting pressure on Archegos funds. 

Unfortunately, other companies in the portfolio like Baidu, Tencent Music, and Vipshop Holdings started to decline, as shown below.

Archegos portfolio

Archegos portfolio

Sensing trouble, the banks mentioned above started to liquidate these holdings in what is known as a margin call. They did this by what is known as bloc sales, meaning that they started to dump shares. 

Lessons for traders from the Archegos collapse

There are several lessons that traders should learn from the collapse of Archegos fund. These are:

The danger of leverage

All forex brokers offer leverage to their traders. For starters, leverage is a fancy term for a loan. This is a loan that traders can use to buy currencies or other assets. 

A good example of how leverage works is to look at an asset like stock. Assume that you have $20,000, and the stock is going for $20. If you strongly believe in the stock, you can buy 1,000 shares. If the stock rises to $25, you will have made a profit of $5,000. A good deal, right?

Alternatively, you can go to a bank and borrow $10,000. In this, you will have a total of $30,000, meaning that you will buy 1,500 shares. If the stock rises to $25, your holdings will be worth $37,500. You return the borrowed $10,000 to the bank, and you will be left with $27,500. In this, your total profit will be $7,500. 

This is what Bill Hwang did. He borrowed heavily to buy his shares. When things were going on well, he made a lot of money. And since he owned his family office, his net worth soared. 

However, when things went south, he lost all his fortune. Therefore, as a forex trader, we recommend that you think well about leverage. You should always ensure that you are not highly leveraged since it could lead to bigger losses than your original capital.

Stop loss

A stop loss is a tool that automatically stops a trade when a certain loss threshold has been reached. For example, if you have bought a currency pair at 1.1200 and set a stop-loss at 1.1150, the trade will be stopped immediately after the pair dropped to 1.1150. 

Unfortunately, it seems like Bill Hwang did not have a stop loss for his holdings. This led to his portfolio being hit hard when the selling started. 

As such, we recommend that forex traders always have a stop loss or a trailing stop on all their trades. Doing this will help them preserve their profits in case of a major sell-off.

A human error

Another important lesson is that it is hard to be a flawless investor or trader. For one, Bill Hwang was a relatively unknown investor who had silently amassed a fortune in the market. Yet, he made a big mistake that wiped most of his funds. 

Similarly, banks like Credit Suisse and Nomura are often seen as flawless Wall Street firms that employ experts. Yet, in this case, they made a series of mistakes that pushed them to lose billions of dollars.

Always observe the law

Finally, as a forex trader, you should always observe the laws of your country. As it turned out, while Bill Hwang was highly successful, he also made some mistakes that were contrary to the law. The Securities and Exchange Commission (SEC) opened an investigation about whether he hid his transactions from the Wall Street banks he used. 

If he is found guilty, he could receive a major fine or even be sentenced to prison. As a forex trader, ensure that you stay within the law. For example, always pay and report your taxes. In the past, we have seen many people receive a major fine for not paying taxes.

Summary

The Archegos collapse was a bad event for the financial market. Besides, many retail traders lost billions of dollars as their shares dropped. But the collapse also brings many lessons to traders, such as those we have identified here.

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