In 2013, Bill Hwang was determined to pick up the pieces of a once promising hedge fund career that had collapsed. Trading losses during the financial crisis had humbled him and the U.S. criminal conviction of his firm for insider trading had knocked Hwang out of the hedge fund game completely. He closed his Tiger Asia hedge fund, which specialized in Asian internet and media stocks, and lost all his clients.
At age 48, Hwang opened a family office in Manhattan, Archegos Capital Management, with the $500 million or so he had left after paying $60 million to settle an assortment of federal regulatory and prosecutorial charges, and tried to figure out what to do next. He would soon be banned from trading in his favorite market, Hong Kong, and the other Asian markets in which he specialized, Japan and Korea, did not hold the same opportunity.
So Hwang turned his attention to the U.S. stock market. After years of focusing mostly on Asia, Hwang started to pay close attention to internet and media companies based in places like Silicon Valley. His research style was exhaustive and one company caught his eye: a DVD-by-mail rental service that was trying to pull off a difficult transition to video streaming. Hwang bet big on Netflix, investing a huge chunk of his net worth in the company’s shares around the same time as legendary investor Carl Icahn became one of Netflix’s biggest shareholders. Icahn sold his Netflix shares within two years, but Hwang held onto the position—for years.
One of the biggest mysteries in financial markets this week has been, how did Sung Kook “Bill” Hwang manage to become one of the biggest traders on Wall Street after closing his hedge fund in 2012? Hwang’s Archegos Capital was the subject of margin calls that reverberated through financial markets in recent days and cost investment banks like Credit Suisse and Nomura Holdings between $5 billion to $10 billion, JPMorgan analysts estimate.
The prime brokerage units of major investment banks, including Goldman Sachs and Morgan Stanley, had arranged for Hwang to invest enormous amounts, as much as $50 billion, in stocks using derivatives instruments known as total return swaps. The banks initiated margin calls on Archegos late last week that resulted in the abrupt unwinding of its stock positions.
But how did Hwang amass a $10 billion fortune that he could use as collateral for his total return swap positions in the first place? The answer is that in the years after he closed his hedge fund, Hwang went on an incredibly successful trading run. He compounded his personal wealth at enormously high rates of return by investing in a few high-flying U.S. internet stocks, like Netflix, LinkedIn and Amazon, and holding onto them, a person familiar with Archegos’ operations says. Hwang constructed a concentrated portfolio of internet stocks, which would eventually include Chinese stocks listed in the U.S., and he kept the portfolio hedged, making Archegos an attractive client to banks as the value of its assets exploded. Netflix’s stock has increased tenfold since 2013. Had Icahn held onto his stake in the company, for example, it would be worth some $20 billion today.
“Bill is not afraid of leverage. He does so much work on the companies he invests in and is always hedged, and the companies he invests in are generally high quality,” says a person familiar with Hwang's investment operations. “He truly is one of the world’s best investors.”
More than a decade ago, after Bill Hwang’s Tiger Asia hedge fund had a particularly good year, legendary trader Julian Robertson decided to hold a party for Hwang at his house. Robertson’s Tiger Management had been a pioneering force in the hedge fund industry and he had supported many of his traders, including Hwang, as they started their own hedge fund firms, known as Tiger Cubs. At its peak, Hwang’s Tiger Asia Management oversaw $8 billion of assets and Hwang had made a lot of money for Robertson, who was a big investor in the firm and shared in its economics. The party was Robertson’s way of saying “thank you.” Due to Hwang’s passionate Christian beliefs, a preacher was even brought to the party to deliver a religiously-inspired talk to the guests as they sipped white wine.
Hwang’s strong religious beliefs are reflected in the activities of the Grace and Mercy Foundation, a non-profit grant-making organization he founded in 2006 that is based in Archegos’ office in a midtown Manhattan office building. Publicly available tax records of the foundation show it has contributed $79 million to theological seminaries, Christian humanitarian charities and other religious institutions.
But the Grace and Mercy Foundation tax records also provide a window into what Bill Hwang has been up to in his family office. In 2017 and 2016, Hwang contributed $210 million of Netflix stock to the foundation, and between 2015 and 2018 he contributed $236 million of Amazon stock, tax records show. He also donated another $48 million of Expedia and Facebook stock. The acquisition date of some of the Amazon stock Hwang contributed to the foundation was as early as the start of 2011, foundation tax filings show, when Amzaon’s stock changed hands for $186. A day after the shares Hwang acquired in 2011 were donated in December 2018, the foundation sold the Amazon stock for around $1,478 per share. The foundation has typically sold stock contributed by Hwang in the days after receiving them, tax records show.
The fact that Hwang had $500 million of stock in a few select U.S. companies to contribute to his foundation between 2015 and 2018 is revealing. He also had good tax reasons to contribute those shares to his foundation. If Hwang sold the stocks, he would need to pay capital gains taxes on the realized winnings. Tax expert Robert Willens says a person who donates stock to a private foundation receives a tax deduction for the fair market value of the donated stock, up to 20% of adjusted gross income, and is not required to report as a capital gain the amount by which the fair market value of the stock exceeds its adjusted basis. The carryover for the tax deduction is five years.
But the Grace and Mercy Foundation tax records raise as many questions as they help answer. The Wall Street bank margin calls in recent days relate to the fact that Hwang had made investments using total return swaps, contracts that gave Hwang the upside associated with a stock investment without actually owning the securities. The swaps were attractive to a trader like Hwang because they allowed him to increase his positions without having to put up too much of the funding required to buy them. He agreed to be on the hook for any losses. In such a way, Hwang leveraged up his concentrated portfolio.
The other result of using swaps was that Hwang built a concentrated portfolio without any other traders knowing what he was doing. Institutional investors, including family offices, must file quarterly 13F reports of their U.S. stock holdings if they total more than $100 million. But there is no sign of Archegos filing any 13Fs with the Securities & Exchange Commission. This partly explains how Hwang could grow a $10 billion personal net worth without Forbes having any idea he was one of the richest people on Wall Street. Inside the close-knit and secretive group of Tiger Cubs, it was well-known Hwang had become extremely wealthy, but word of Hwang’s success never leaked out. “All the alumni, we keep in touch and talk to each other,” says a former Tiger Cub investor. “It was well known within Tiger that Bill was worth more than Julian. He had multiple 100% years.”
Forbes estimates Julian Robertson’s wealth at $4.5 billion and he has continued to file 13Fs years after closing his hedge fund operation. Other hedge fund managers who closed their client-facing operations, like Michael Platt, have seen their wealth soar in recent years. Platt’s family office also files 13Fs and Forbes has been documenting his wealth increase from $3.6 billion in 2014 to $13 billion today.
The Grace and Mercy Foundation tax filings, however, show Hwang transferring $500 million of stock—not total return swaps, but the actual shares—to the foundation. While there are situations where a family office with $100 million of U.S.-listed stock might not be required to make 13F filings, those situations are extremely limited, especially for a relatively large family office that has multiple employees in investment functions.
Nevertheless, it is possible Hwang was entering into total return swap transactions or some other derivatives contracts and ultimately taking delivery of stock. The cost basis of some of the stock Hwang contributed to his foundation was materially higher than the underlying stock price at the time of purchase, suggesting an expensive premium might have been paid. The use of derivatives contracts would explain the lack of 13F filings.
What is certain, people familiar with Archegos’ trading say, is that Hwang was not using large amounts of leverage in the early years of the family office’s operation. Some banks were reluctant to touch Hwang. In 2012, Hwang’s Tiger Asia firm pleaded guilty to one count of federal wire fraud in connection with its trading in two Hong Kong stocks using confidential information. Hwang also settled civil SEC charges that he illegally traded in the stocks.
But as Archegos grew in size, it became a very lucrative client for investment banks and they decided to make Hwang a client again. They even vied for his business. He paid them fees for the total return swaps and continued to further leverage his positions, which expanded to include Chinese technology stocks listed in the U.S. Hwang’s stock picks were incredibly accurate and right over the last nine years.
Hwang’s family office was an even more attractive client because he hedged his concentrated long positions. For a while, Hwang hedged the portfolio by shorting individual stocks. Some of those short positions, like Under Armour, performed exceptionally well. But others, particularly Tesla, did not. So Hwang retreated from the individual shorts and emphasized broadly shorting the market. This diversified short position made Hwang’s concentrated stock portfolio less risky for the banks, but not riskless. Hwang was able to tap the banks and fuel his trading strategies, catapulting his net worth higher.
This year, Hwang appears to have dialed up the leverage and risk dramatically. He was involved in momentum trades and the stocks seemed to soar, almost irrationally. Hwang had exposure to the stocks of New York-based media companies ViacomCBS and Discovery, which saw their shares increase by 169% and 157%, respectively, in the first 11 weeks of 2021. He was long GSX Techedu, a Chinese online tutoring service with a stock that tripled over two weeks in January.
The risks the banks and Hwang were taking became clear in recent days as the shares of some of Archegos’ concentrated positions, like GSX Techedu, declined almost simultaneously. The stock of ViacomCBS crashed abruptly last week after the company issued $2.6 billion of shares. Another stock associated with Hwang’s portfolio that tumbled last week was Chinese e-cigarette company RLX Technologies. At the same time as some of his concentrated longs were suffering, the broader stock market was reaching all-time highs, which would have hurt Archegos’ broad short hedges. It remains unclear how much of Hwang’s net worth will be left when the dust settles.
Through a spokesperson, Karen Kessler, Archegos issued a statement saying, “This is a challenging time for the family office of Archegos Capital Management, our partners and employees. All plans are being discussed as Mr. Hwang and the team determine the best path forward.”
— With reporting from Hank Tucker
"how" - Google News
April 02, 2021 at 05:30PM
https://ift.tt/3rKCwjt
How Troubled Trader Bill Hwang Quietly Amassed $10 Billion - Forbes
"how" - Google News
https://ift.tt/2MfXd3I
https://ift.tt/3d8uZUG
Bagikan Berita Ini
0 Response to "How Troubled Trader Bill Hwang Quietly Amassed $10 Billion - Forbes"
Post a Comment