Family Office Fund Triggers Market Frenzy

A Surprising Sell-Off

This past week and into yesterday morning, one investor sent markets into a frenzy when his firm and a handful of banks began selling enormous positions in blue-chip companies.

Archegos Capital Management, a family office and private wealth firm, liquidated nearly $30 billion worth of stocks last week after facing margin obligations to brokers it couldn’t meet. As a result, shares of ViacomCBS (VIAC) and Discovery (DISCA) plummeted on Friday. The market value of other public companies declined by billions of dollars as well, surprising investors since there wasn’t any company specific or geopolitical news to spur the sell-off.

Investment banks specifically were caught in the crosshairs. Morgan Stanley (MS), Goldman Sachs (GS), and Deutsche Bank (DB) all initiated the stock sales for Archegos Capital. These sales helped liquidate the firm’s positions and shore up capital in order to meet the margin obligations. With that said, the massive block trades left the markets in an oddly fragile position. This somewhat obscure event took Wall Street by surprise. Here’s what investors need to know.

The Rise of Family Offices

Archegos Capital Management is a family office which manages money for the ultra-wealthy. It’s run by Bill Hwang, who worked at Tiger Management where he served as a fund manager during the dot.com boom in the 1990s. Hwang then founded Tiger Asia in 2001, helping it become one of the most prominent Asia-focused hedge funds in the mid 2000s.

Family offices in general are growing increasingly more powerful on Wall Street. According to a report this year from EY, there is more private family capital than private equity and venture capital combined. Across the world there are 10,000 single family offices which, along with investing, help families manage everything from tax and estate planning to philanthropic endeavors. At the end of 2019, family offices managed nearly $6 trillion in assets, which is why major players can move markets.

Archegos, for example, had about $10 billion under management. It was a long-short fund, meaning it bet both for and against certain companies. In order to amplify its exposure to certain stocks, Archegos used leverage. This strategy is risky and can be profitable if the fund’s bets pay off. It can also magnify losses if stocks don’t perform as planned.

A few weeks ago, the stock prices of Chinese internet companies Baidu (BIDU) and Farfetch (FTCH) began to tumble. Then last Monday, ViacomCBS announced a sale of common stock which put pressure on the stock. Archegos had significant exposure to all of these names and had to try to sell out of some of its positions.

Block Trades and Lasting Effects

When Archegos started selling it put even more pressure on these stocks from a price perspective. The banks facilitating the liquidation for Archegos began offloading chunks of shares through block trades. Block trades can help a fund sell a large number of shares quickly, but oftentimes have to be done at a discount because it’s hard to find a buyer that is willing to purchase an outsized number of shares.

The contagion risk, or chance this weakness spreads to other areas of the market, looks to be limited. But a few companies will be hit. Credit Suisse (CS) and Nomura signalled yesterday that they will likely be hurting from this one-off event. Deutsche Bank, on the other hand, announced it was able to unload its exposure and will emerge relatively okay.

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