Will a raucous first quarter of 2021 give way to more bubbliciousness in segments of the U.S. stock-market after blocked trade canals, surges in borrowing costs fueled by spiking bonds yields, and an unmitigated hunger to get rich quick in the coming three months of the year?
No one seems to know, but investors were unruffled by the warning signs sounded by the flameout of Archegos Capital Management last week. The ripple effects of the implosion of the family office of Bill Hwang, a protégé of famed investor Julian Robertson, could deliver a $10 billion hit to the banks that were part of a series of complex bets using heaps of borrowed money made by the family office, according to a report by JPMorgan Chase & Co.
have said that they expect to incur losses due to market volatility believed to be associated with Archegos. Even Wells Fargo
wrestling with its own reputational dings, was involved in the complex trades but has stated that it doesn’t foresee losses due to the $30 billion unwind of Archegos wagers.
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Hwang, a professionally trained, veteran investor, is hardly one to be likened to the collective of individual investors who congregated on Reddit and Discord chat boards to propel shares of so-called meme stocks like GameStop Corp.
and AMC Entertainment Holdings
to breathtaking heights in the first quarter. Yet Hwang reportedly applied a similar playbook to that employed by the retail raiders.
The Wall Street Journal reported that the Archegos founder routinely made concentrated bets within his portfolio that made his returns volatile and that he “liked to focus on stocks that were heavily ‘shorted,’ or had a high level of bearish positions,” citing a person familiar with the investment manager’s trades.
If that strategy sounds familiar, that is Reddit investing 101.
And it turns out that otherwise staid family offices have become a much riskier part of the market, embracing “investment strategies used in previous decades by the most aggressive hedge funds,” WSJ’s Gregory Zuckerman reports, with 69% of these offices established over the past two decades perhaps as regulatory scrutiny on hedge funds intensified.
To be sure, the Archegos story doesn’t appear to be a redux of Long Term Capital Management, which suffered seismic losses in 1998 that sent shock waves throughout global markets, but the event does come at a precarious time for investors and continues to point to froth building up in the financial system amid interest rates that remain historically low and liquidity that is nearly unceasing.
A separate JPMorgan report dated March 30 said the Archegos blowup does raise eyebrows. “The Archegos events raise questions about leverage in the financial system,” wrote analysts including Nikolaos Panigirtzoglou.
JPMorgan’s conclusion is that hedge fund leverage, in particular, has risen again since 2017 “and currently stands at the highest level since 2007,” but notes that the levels of borrowed funds remain significantly below the historic high levels around the Long Term Capital Management crisis.
Still, MarketWatch also has been curious about investors’ knack for dismissing calamities like Archegos and turbulence fueled by Redditors.
“The market is well positioned to handle things like this with all the liqudiuty being provided by the Fed,” Jeff Buchbinder, equity Strategist at LPL Financial, told MarketWatch in a Friday interview.
Buchbinder said that the market didn’t perceive either GameStop nor Archegos as systemic risks, and grave concerns about the integrity of financial markets would have been perceived in widening credit spreads, reflecting the differential between what businesses pay to borrow money compared against the government.
Bond yields also maintained an upward trend in the first quarter, as investors continued to rotate out of risk-free debt and into assets that could perform better as the economy recovers from COVID. The 10-year Treasury note yield
ended the week at 1.714%, with the bond market closing early at…