This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

The Archegos Lesson – If You Fail, Fail Spectacularly?

By:

Chief Strategist at Interactive Brokers

As markets continue to dust themselves off from the fallout of the Archegos blowup, traders and pundits alike will do their best to assess the risks, opportunities and lessons that the incident will impart.  There are many serious questions that will be raised.  Some are fairly obvious – should banks be a bit more judicious in the way they offer leverage to their biggest prime brokerage clients; are there chances to go bargain-hunting in stocks that bore the brunt of the margin-related selloffs; do we need to reform the amount of disclosure of equity holdings?  Others are a bit more subtle – if banks are concerned about offering too much leverage to key customers, how do they reduce it without causing further disruption; is there any honor among banks who pledged to cooperate but then saw some appear to front-run the others?  We discussed many of these ideas yesterday, and I have little doubt that they will remain in the investment conversation for weeks to come.  Yet there is one idea that didn’t occur to me until this morning: on global Wall Street, is it better to fail spectacularly than not at all?

I was intrigued by a Bloomberg report that said that Julian Robertson would still invest with Bill Hwang, the man behind Archegos.  They have a history together.  Mr. Robertson ran Tiger Management for decades, and he was known for seeding the investments of proteges who became known as “Tiger Cubs”.   Mr. Hwang rose to investment prominence as a Tiger Cub, earning money for himself and Mr. Robertson.  Obviously, Mr. Robertson still has faith in the prowess of his former student.  Could it be possible that Mr. Hwang will eventually be able to dig himself out of his hole and return to investment prominence?

Clearly he has some advantages that an ordinary failure would not.  If a mid-level employee at a large bank makes a trading error grievous enough to get fired, he would be likely to disappear without much of a trace.  Yet investing history is rife with examples of high-level money managers coming back after significant setbacks.  Boaz Weinstein and Bill Ackman are two of the most prominent hedge fund managers with excellent track records, yet each has faced losses that would have ended the careers of ordinary people.  (The former lost $1.8 billion for Deutsche Bank in 2008, the latter has interspersed multi-million dollar losses among his significant gains.)  A money manager operating at the highest levels of finance has a range of contacts and potential backers that even a normally well-connected financier does not.  If he is able to retain the confidence of at least some of them, a comeback is possible – if not inevitable.

Remember that Mr. Hwang had already pleaded guilty to wire fraud in 2012.  Normal people don’t get to make a comeback after something like that, and in fact Goldman Sachs was said to have cut him off after that incident – only to resume a prime brokerage relationship in recent years.  It appears that the bank was unable to resist the lure of the large commissions and fee income that could accrue from a relationship with a major financial player.  Until last week, Mr. Hwang seemed to be fully redeemed.

Unfortunately, I doubt that anyone reading this piece would fall into the realm of people who would get to recover after a spectacular blowup.  Those that do have a reputation that proceeds them.  They tend to possess a swagger and self-confidence (an “arch ego”, dare I say) that goes beyond those of average investors.  If you fall into that realm, I expect you to swing for the fences, occasionally fail spectacularly, and then mount a comeback.  For the rest of you – the vast majority, if not all of this readership – learn the lessons about risk management that a blowup like this teaches and avoid the pitfalls.  You can’t expect someone important to back your subsequent efforts.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Hedge Funds

Hedge Funds are highly speculative, and investors may lose their entire investment.

Disclosure: Margin Trading

Trading on margin is only for sophisticated investors with high risk tolerance. You may lose more than your initial investment.

For additional information regarding margin loan rates, see ibkr.com/interest

trading top