30 April 2022 |

The man who lost $20B in 2 days.

By Trung Phan

The rise and fall of Bill Hwang

This Bloomberg Businessweek headline from April 2021 is an all-timer: “Bill Hwang Had $20 Billion, Then Lost It All in Two Days.”

The implosion of Hwang’s hedge fund Archegos Capital shook Wall Street. Veteran traders called it the largest sum of money that had ever been lost in such a short amount of time.

Archegos Capital officially shut down on March 21st, 2021. More than a year later — on April 27th, 2022 — the United States government arrested the 59-year old Hwang and his firm’s CFO. The two are charged with fraud for manipulating the stock market.

The SEC’s 40-page complaint lays out the alleged crimes but falls short of providing a motive other than “he wanted more money.”

Through his life, Hwang spent a large sum of his fortune on Christian charitable projects. And the answer to “why he did it” almost certainly ties back to these religious beliefs.

Let’s break it down:

  • Hwang’s background
  • Archegos goes from $1B to $36B in one year
  • $20B evaporates in 2 days
  • What was the actual crime?
  • Why did he do it? (Bill Hwang and The Protestant Ethic)

Hwang’s Background

Bill Hwang was born Sung Kook Hwang in South Korea, a country where the dominant religion is Protestantism (20% of the population). Hwang grew up in a religious family that followed the faith: his father was a pastor and his mother was a missionary.

Per another Bloomberg piece, the family moved to America when Hwang was a teen and he was able to excel despite hardships:

Hwang has told friends that he arrived in the U.S. unable to speak or write in English and only picked up the language while working nights at McDonald’s. Soon after, his father died and his mother moved the family to Los Angeles. Hwang went on to study economics at the University of California, Los Angeles, and then picked up an MBA at Carnegie Mellon University in Pittsburgh.

After school, Hwang found a job as an equity salesman at Hyundai Securities. While there, he met (and impressed) investing legend Julian Robertson, who ran Tiger Management hedge fund. Robertson hired Hwang and taught him the ropes.

In 2001, Robertson staked Hwang with $1.2B to start Tiger Asia (an NY-based fund picking Asian stocks). Hwang was so good at his job that Robertson anointed him with a nickname that has probably never been uttered before or since: “the Michael Jordan of Asian investing.”

During the Tiger Asia years, Hwang used an aggressive investing style that later came back to haunt him:

  • owning only a handful of stocks
  • targeting “heavily shorted” names
  • using leverage to juice his stock returns

For years, Hwang delivered the goods: notching 40-80% gains per annum…but then:

  • 2008: Despite managing an Asia fund, Hwang got badly burnt short selling German-automaker Volkswagen (VW). It’s a truly insane story but the TDLR is that Porsche was trying to buy VW and, in October 2008, owned 43% of the company with the option to own much more. For short sellers of VW, this was bad: when you sell short, you need to borrow shares but Porsche had taken so many off the market. In the end, a massive short squeeze happened that saw VW’s shares rise ~4x in 2 days (VW actually became the world’s most valuable company with a $370B market cap before crashing back down). Hwang’s short position got crushed. Investors in Tiger Asia were furious that the “MJ of Asian investing” was putting speculative bets in Europe.
  • 2010-12: In 2010, Hwang was investigated for a Chinese insider trading scheme. Two years later, Hwang paid $44m to settle the Chinese insider trading case and closed his fund.

Archegos goes from $1B to $36B in one year

After the Chinese insider trading incident, Hwang returned money to investors and started a family office, Archegos Capital (Archegos is Greek for “leader” or “prince of Christ”). Like his childhood, Archegos was a very religious place with live Bible scripture reading every Friday.

Archegos began with $200m but grew quickly. To juice returns, Hwang deployed a financial instrument known as a total return swap (TRS).

Here’s how it worked: Hwang paid a bank a fee to let him bet on the direction of a stock (mostly up). He gained exposure to that stock without having to put up all the money to buy the underlying equity.

Hwang was effectively borrowing money from the banks and the TRS allowed him to build up 5x or more leverage on his portfolio. To hedge their positions, the banks bought the underlying stock.

By 2021, Hwang was leaning on 6 prime broker bank partners for his TRSs: Goldman, Morgan Stanley, Credit Suisse, Nomura, Deutsche, UBS. Despite the potential risks, the banks were happy to take fees from such a whale. Without realizing it, they created a financial time bomb.

The prime brokers built up massive long positions in Archegos-linked stocks to hedge their Hwang bets. The biggest positions were in media and Chinese tech stocks:

  • GSX Techedu (owned 70%+ of outstanding shares)
  • Discovery Class A (60%+)
  • IQIYI (50%+)
  • ViacomCBS (50%+)
  • Tencent Music Entertainment Group (45%+)

There’s one big catch: Hwang was concealing his positions from bank to bank. If a single bank knew his full exposure, it would almost certainly shut it down. But instead:

  • The banks lent Hwang money to bet on ~10 stocks
  • The banks had to buy the underlying stock to hedge
  • The price of Hwang’s stock went up as all the banks bought the underlying asset
  • Hwang’s rising portfolio allowed him to borrow even more money to bet the stocks would go up even more
  • Rinse and repeat

The SEC’s official statement on the scheme is quite something: “As a result of Hwang’s trading, Archegos allegedly underwent a period of rapid growth, increasing in value from approximately $1.5B with $10B in exposure in March 2020 to a value of more than $36B with $160B in exposure at its peak in March 2021.”

$20B evaporates in 2 days

ViacomCBS was the trigger for Archegos collapse.

Through his stock manipulation scheme, ViacomCBS had risen 8x between March 2020 and March 2021. In an absurd nugget from the SEC complaint, one of Hwang’s analyst asked him if the rise in ViacomCBS stock was a “sign of strength”. Hwang responded: “No it’s a sign of me buying 😂 ” (I didn’t put the laughing emoji face there, Hwang did!).

One March 22nd, 2021, Viacom announced a ~$3B secondary share sale, which led to a 20%+ selloff in the stock and put huge pressure on Hwang’s portfolio.

If a portfolio is levered 5x, it only takes a 15-20% sell-off to wipe an investor out. Hwang’s banks met and discovered the scale of the Archegos scheme. They could work together to unwind the swaps…or beat each other to the exits. Goldman peaced the F out:

On March 26th, 2022, the banks exited the trades by selling large blocks of Archegos-linked companies ($20-30B in total). ViacomCBS declined ~30% on the day. Similar block sales in Shopify, Farfetch, Discovery and Chinese tech firms hammered the stocks.

Goldman was able to unwind its position but Morgan Stanley, Credit Suisse and Nomura lost a combined $10B+.

Meanwhile, Hwang personally lost $20B in 2 days! TWO DAYS!!! I’m not great at math, but I think that works out to $10B a day.

Fortunately for financial markets, the damage was contained.

Archegos shut down on March 26th, 2021 and the suddenness of the collapse shined light on swap instruments. When you own 10%+ of a company, you’re an “insider” and have more regulatory disclosure requirements. However, swaps hid Hwang’s ownership and allowed him to fool the banks and manipulate the stocks.

Another part of the story that has seen more scrutiny: family offices. While large pools of money like hedge funds, pensions and endowments are accountable to external parties, family offices operate with much less disclosures.

Financial Times story on family offices revealed some interesting stats:

  • $6 trillion of assets under management (2x the amount that hedge funds hold)
  • 7k offices worldwide
  • Average family office size is $1.6B

Here’s the kicker: the disclosure requirements for these family offices are a complete joke. Per FT, the filing requirements can “fit on a post-it note” and only cost $28.50 a year to file (think about this every time TurboTax tricks you into doing one of its $300 “premium” filing plans).

What was the actual crime?

Per the SEC complaint, Hwang entered into the swaps with the banks “without any economic purpose other than to artificially and dramatically drive up the prices of the various companies’ securities.”

I’ve seen a lot of Twitter commentators say “well, I think a lot of people do this.” It’s true and the banks definitely deserve heat for such poor risk management. BUT, Hwang had one clear example of fraud: he lied to the banks about his exposure so he could keep the scheme going and borrow more money.

In terms of market manipulation, Hwang did a few things that “a lot of people do” but the SEC will likely stick him on the “without economic purpose” part:

  • He traded heavily at the end of the day to push his stocks up (why? because the banks lent him money based on end-of-day stock values…the higher it was, the more he could borrow)
  • He regularly traded 15% of the stock’s daily volume

There’s more in the full 40-page complaint if you’re bored.

Why did he do it? (Bill Hwang and The Protestant Ethic)

Matt Levine — who is (actually) the “Michael Jordan of finance writing” — has been trying to figure out why Hwang allowed the scheme to go so far.

Clearly, Hwang wanted to make money. But why didn’t he take his foot off the pedal as Archegos grew from $1B to $36B and the TSR scheme got riskier?

Here are a few theories:

  • A partner in crime: Hwang was pumping the stocks and someone else also owned them and benefitted. Levine says this is unlikely since Hwang owned so much of each individual name.
  • Short squeeze: If you recall, Hwang was the victim of a short squeeze in 2008 (with his VW bet). Hwang was invested in heavily shorted names and may have been trying to short squeeze them (this was similar timing to GameStop short squeeze mania). Levine is skeptical of this angle: “…the SEC and DOJ don’t cite any texts or emails or chats in which he talks about squeezing the shorts, which is uncharacteristic; usually people who want to squeeze shorts feel self-righteous and love to talk about it.”

So, why would Hwang take so much risk?

I listened to a few hours of his Bible scripture readings on YouTube and the first thing that came to mind is Max Weber’s famous sociology work from 1905: “The Protestant Ethic and the Spirit of Capitalism.”

It’s basically the only book I remember reading in University.

TLDR: The rise of Protestant values was the catalyst for the rise of capitalism in Northern Europe. How? Protestant (and Calvinist) values motivate hard work. One idea stands out:

  • Predestination: In the Catholic Church, you were assured salvation if you accepted the “Church’s sacraments and submitted to the clerical authority”. Conversely, Protestants did not have “assurances from a religious authority”; in their belief, God had already chosen who was saved and who was damned. Working hard and attaining worldy success (including wealth) was one way of “proving” that you were a chosen one. This work ethic — again, to “prove” that you were already chosen — laid the groundwork for capitalism.

In one of the YouTube lectures, Hwang says “Jesus said ‘doing God’s will is my food…sometimes when we do a lot of work — especially if it’s good work — we feel energized.”

As far as billionaires go, Hwang lives a fairly modest life. He settled in New Jersey, drives a regular car and eats $7 sandwiches for lunch.

Hwang’s big expenditures were on religious projects: live scripture reading classes, a small Christian school in New York and a non-profit he started called the Grace and Mercy Foundation (Hwang gave $500m+ to it). He is also one of the first backers for Ark Invest’s Cathie Wood, who is a devout Christian.

Certainly the money itself helped him spread the word of God. But, if it was just the money, he could have cut the swap scheme short and actually walked away with some of it. The margin for error kept shrinking the larger the Archegos exposure got.

When you consider the Protestant Ethic, though, his desire to keep pushing the number up looks like someone that wanted to “prove” he was already chosen (to be clear, I’m not saying God told him to do illegal stuff…if his fate has already been decided in his mind, he pursued a vocation which had a scorecard and he spent most of his life trying to run it up).

That’s the only thing that explains the Archegos $165B exposure to me. But I also got a C+ in that sociology class, so take this theory with a grain of salt (translation: feel free to send me an email saying “you’re so wrong bruh”).Subscribe Here

Links and Memes 

From the readers: Last week’s email was a breakdown of CNN+ vs. Quibi. I wrote that “between [the two companies], nearly $2B was eviscerated on content no one wants to watch”.

This was an insightful response from a reader: “I would argue that $2 billion was not wasted, as it was spent on suppliers and creatives who benefitted over the short-term. I’ve worked on media projects that failed, but pocketed my fees nevertheless. As a free-lancer for 30 years, I have no problem with projects ending early; I just bounce to the next one. (One of my sayings is, ‘Many fingers in many pies’)”. Get them pies, fam! 

REAL funny subreddit: A few weeks ago, I wrote that r/TrippinThroughTime is the funniest subreddit. Now, I may have found the most absurd one: the r/NeverBrokeABone subreddit is just people that have (obvi) never broken bones. However, once you break a bone, you get kicked out of the subreddit and roasted by other members (eg. “Get lost cracker elbows”…so so savage).

Tom Cruise don’t mess around: Bonkers 3-minute video of the prep Tom Cruise did for the new Top Gun movie (coming out end May). Cruise got all the main actors to do proper Navy training so they’d each be able to fly F-18 Hornets. AND, also be able to film themselves flying said planes (can’t really have a “camera crew” in the jet with you).

Actual good life advice: People on the internet *love* giving life advice. Here is some actual solid life advice from tech legend Kevin Kelly. The founding editor of Wired (and publisher of the Whole Earth Review) just turned 70 and dropped “103 bits of advice”. Here are a few good ones

  • About 99% of the time, the right time is right now.
  • Anything you say before the word “but” does not count
  • When you forgive others, they may not notice, but you will heal. Forgiveness is not something we do for others; it is a gift to ourselves.
  • To rapidly reveal the true character of a person you just met, move them onto an abysmally slow internet connection. Observe.
  • The best way to get a correct answer on the internet is to post an obviously wrong answer and wait for someone to correct you.
  • Making art is not selfish; it’s for the rest of us. If you don’t do your thing, you are cheating us.

As a quasi-new parent, this advice bit put me in stitches: “To keep young kids behaving on a car road trip, have a bag of their favorite candy and throw a piece out the window each time they misbehave.”

And here are some other memes (see y’all next week):