Is Tiger-cub Bill Hwang's mauling an omen of a financial crisis for Hong Kong?
THE WONDERFUL THING ABOUT TIGGERS
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But first, a little background. Bill Hwang was a product of Tiger Management, one of the largest hedge funds in New York in the late 1990s and one of the highest commission paying clients any broker could wish for.
HONEY HUNT
Hedge funds can remain anonymous investors by hiding positions on the balance sheets of prime brokers, who then settle up the net profits and losses on a daily basis. There is nothing illegal about this, they are called "swaps". With Archegos having multiple prime brokers, it did not obviously appear as a concentrated holder of anything to anyone.
And there it sat, a delicately balanced bomb; as long as there wasn't a big shock to share prices it wouldn't go off - perhaps an odd strategy for a "family office", which are typically expected to preserve capital, not risk it.
One of Hwang's positions, ViacomCBS, had been on a tear, rising by 600 per cent in less than a year, topping out at US$101.97 on March 22, when suddenly it announced a US$3 billion share sale, taking advantage of what was considered by analysts to be an illogical price. The share price more than halved in a matter of days.
Bill's bomb went off.
OH, BOTHER!
The revelation of Hwang's portfolio has international investors getting out their bomb detectors and these have already been pointed at China Huarong Asset Management, which has portfolios of distressed assets monetised in its US$22 billion bonds, that are being leveraged by US investors. Fitch helpfully downgraded its credit rating on the bonds from 'A' to 'B' - one notch above junk - after a panic sell-off.
Of course, that has nothing to do with Bill Hwang. But both tie into The China Hustle and the problem US regulators face with opaque Chinese investments being sold to Americans, which may force companies to delist from US stock exchanges and look to raise capital in mainland China or Hong Kong.
FUN FUN FUN FUN FUN
The prices of these stocks soared as Chinese firms' inflated earnings numbers gave brokers a reason to ramp up investment in the stocks - until the true values of the companies came to light and the stocks crashed, wiping out nest eggs.
Not missing a beat, this led to the establishment of US short-selling firms such as Muddy Waters and Citron Research, who investigate for fraud, take a short position, and then tell everyone the bad news.
In Hwang's portfolio, or at least the positions we know about, Muddy Waters have accused GSX Techedu of cooking the books and Citron Research have called it a blatant stock fraud. iQiyi, in which Baidu has a 56.2 per cent stake, has been accused of inflating its numbers and attracted an investigation by the US Securities and Exchange Commission - as did Luckin Coffee, which the Nasdaq delisted over a similar scandal. Vipshop has also been a target of Citron in the past.
US government and regulator patience with opaque Chinese-listed firms had already been wearing thin, but with the revelation that this type of personal wealth vehicle - family offices - can leverage up on such investment with ease, the regulator may lose patience.
I am not saying Hwang is a bad guy. By all accounts he is intelligent, not flashy, a devout Christian - he is reported to have said God plays a large part in his investment decisions - who spends a lot of his time studying the Bible, and his philanthropic pursuits include generously giving to several charities. But why would anyone with a vast fortune, who is driven to do good, gamble in such an irresponsible way and cause so much damage?
I'M THE ONLY ONE
Perhaps he is not so smart and brokers latched onto a nice easy earner. Perhaps the number of zeros made him giddy, or he built concentrated portfolios because he was convinced he was right and that everyone else was wrong, like so other many other fund managers until they are sideswiped and blown up. To me, it remains a mystery why any investment manager would get themselves in this position.
Archegos' collapse has cost Credit Suisse US$5.5 billion so far, Nomura US$2.9 billion, Morgan Stanley US$911 million while UBS in a surprise announcement last week lost US$774million. MUFJ were also in the mix losing US$87 million. Wells Fargo and Goldman Sachs appear to have nimbly dodged it.
Where will the conclusion of The China Hustle be screened? Well, it's coming to a stock exchange near you.
Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets
This article originally appeared on the South China Morning Post (SCMP).
Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.
