Derivatives that blew up Hwang family office were growing source of revenue for Wall Street
The Archegos Capital debacle has exposed the hidden risks of the lucrative but opaque equity derivatives business through which banks empower hedge funds to make outsize bets on stocks and related assets.
The soured wagers made by Bill Hwang’s family office have triggered significant losses at Credit Suisse and Nomura, underscoring how these tools can cause a chain reaction that cascades across financial markets.
Archegos was able to take on tens of billions of dollars of exposure to stocks including ViacomCBS through total return swaps, a type of “synthetic” financing that is popular with hedge funds since it allows them to make very large bets without buying the shares or disclosing their positions.
The lack of transparency means firms such as Archegos can enter into similar swaps with several lenders, which are not privy to the investor’s overall exposure, magnifying the risk to hedge funds and banks if the positions backfire.
Global banks earned an estimated $11bn in revenue from synthetic equity financing including total return swaps in 2019, double the level of 2012, according to Finadium, a consultancy.
The business, which has grown rapidly since the financial crisis, accounts for more than half of banks’ total equity financing revenue, Finadium calculates — more than traditional margin lending and lending out shares for shorting combined...
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