What Is a Total Return Swap and How Did Archegos Capital Use It?

Over-levered. With the news over the weekend that Bill Hwang’s Archegos Capital Management investments in Baidu, Discovery, Fartech, Shopify, Tencent Music Entertainment, GSX Techedu, iQiyi Inc, VIPShop and ViacomCBS were liquidated by their prime brokers all eyes are how this happened.

JPMorgan’s Kian Abouhossein wrote that the losses may range between $5billion and $10billion for the banks trading with Archegos.

In the coming weeks, we will no doubt see more information presented to the broader investment community, however, so much leverage could be extended to one institution and what triggered the fire-sale process to de-risk will be the focus of intense scrutiny. We suspect regulation is coming down the pipe, we hope this is driven by transparency and not outlawing products per se. Expect to see a re-pricing of risk from the prime brokers in the coming weeks and months as they reassess how they price, trade and risk manage this previously perceived low-risk business.

Our CEO, Stephen Howard, was interviewed by the Wall St Journal online overnight on the topic of Total Return Equity Swaps. To read the full article, visit The Wall Street Journal:


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