The dramas put banks' risk management systems under scrutiny and also raise questions about whether hedge funds that morph into family office structures - thereby avoiding certain regulatory oversight - have been running more risk than a more conventional family office would ever tolerate.
The story also sheds light on whether, in a world of ultra-low interest rates and a hunger for yields, some banks’ risk controls may have been insufficient.
“I am surprised if the banks did not have a handle on their exposures”, Sam Sudame, senior investment manager at WE Family Offices, told this publication. He said it was hard to say whether the saga pointed to systemic issues. It appears that such episodes happen every 10 years when some lessons of previous problems are forgotten, Sudame added.
This news service has contacted a number of law firms and hedge fund specialists about the case, and may update in due course. It also contacted the SEC for comment, which did not respond to requests for a comment by the time of going to press.
The saga has already prompted media speculation about the risk management systems at the affected banks.
Policy moves since the market blow-up of 2008 may have built up more, not fewer, problems. A period of ultra-low interest rates and tighter capital requirements means that banks which are large enough to bear the risk have sought to bolster revenues by serving hedge funds.
It is important to distinguish between family office types, Michael Wagner, co-founder and COO at Omnia Family Wealth, told FWR. His firm oversees about $2 billion in assets.
There needs to be a distinction between a family office and what goes on at Archegos, which is more of a hedge fund in nature, he said. "There is some regulatory navigation going on,” Wagner said.
He endorsed the notion that family offices/fiduciary-model advisors must show at such times that they are “adults in the room” in terms of managing clients’ wealth. “We are the cooler heads and take an institutional approach to asset management and match it against family dynamics. We take our fiduciary responsibility very seriously.”
Hwang’s track record
Hwang, meanwhile, has a turbulent business history. He previously ran Tiger Asia Management LLC in 2001, a business based in New York, becoming one of the biggest Asia-focused hedge funds, running more than $5 billion at one point. In the summer of 2012, Tiger Asia said that it planned to wind down and return outside capital to investors. Later that year, the firm pleaded guilty to a criminal fraud charge and agreed to pay $44 million to settle civil allegations by US securities regulators that it engaged in insider trading of Chinese bank stocks. (Wall Street Journal, March 29.) “Tiger Asia regrets the actions for which it accepts responsibility today and is grateful that this matter is now resolved and behind it in the United States,” Hwang said in a statement at the time. The Tiger Asia business was rebranded as Archegos.
At this stage, it is unclear whether central banks regard the issue as systemically important, as arguably was the case when hedge fund Long Term Capital Management imploded in 1998.
A report in the Financial Times (March 31) said that Credit Suisse “still does not know how much it will lose from the Archegos sell-off,” although the publication said “early estimates” put the loss between $3 and $4 billion.
The FT said that Credit Suisse’s board is investigating which members of its executive team were chiefly responsible for the Greensill and Archegos crises. It said the bank has written down $450 million on its investment in hedge fund York Capital. It said that the bank’s clients could lose up to $3 billion from the frozen funds linked to collapsed specialist finance firm Greensill Capital, an amount equivalent to the lender’s entire net income last year. Meanwhile, Credit Suisse is being sued in London for its alleged role in bilking Mozambique’s taxpayers out of $200 million in the so-called “$2 billion tuna bond” scandal. The publication said the run of losses puts Thomas Gottstein, who has been CEO for more than a year, under pressure.