Is Archegos a Warning Sign? - The NEST Edge
The NEST Edge: April 2021
The NEST Edge is a monthly webinar hosted by NEST Financial Founder, Dan Dillard, with CIO and Partner, Sean McDougle.
Together, they discuss current market conditions, economic trends, and share their outlook on portfolio management. You can watch this month’s NEST Edge on our YouTube channel.
This Month's Highlights
What Archegos Capital is and why it's making headlines
How the actions of one person can impact the markets
The continuing problem of over-borrowing
Regulatory concerns around leverage
Why NEST exited China
NEST's leverage strategy and the importance of de-leveraging
A Letter from Sean
Recent front-page news about Archegos Capital and Bill Hwang has Wall Street uneasy, fearing this could be the first domino or tip of the iceberg. There are echoes of 2008 here—when whispers of systemic risk quickly turned into something much larger.
Let’s begin with two important points.
First, hedge funds fail regularly. According to Goldman Sachs Prime Brokerage, as of 3/12/21, 84% of hedge funds trading with them were already down 3–5% in 2021.
Second, Archegos Capital was not a hedge fund. It was a family office—a firm managing money for one person or family. In this case, that person was Bill Hwang, who acted as the portfolio manager and just lost over $10 billion of his own money.
Bill’s background is impressive. He started with Tiger Management under Julian Robertson and earned 40%+ returns annually until 2008. Alumni of Tiger are known as "Tiger Cubs" and are typically highly regarded.
In 2012, Hwang pleaded guilty to insider trading, which, while serious, is unfortunately not uncommon at the highest levels of finance. He launched Archegos in 2013 with his own capital.
Where things turned problematic was in his use of leverage and complex financial instruments. He made concentrated bets on a handful of stocks, didn’t actually own many of them, and used massive amounts of borrowed money to amplify his positions—similar to going to a casino and gambling with money you don’t have.
Imagine someone walking into a casino with $1,000, borrowing $10,000 more, and playing high-stakes games. If they lose, they still owe that $10,000 plus interest. This is essentially what Hwang did, with big banks like Goldman Sachs and Credit Suisse acting as the lenders. When his bets went south, the banks demanded repayment—but the losses were too great. Now, they’re writing it off.
On the surface, this seems isolated—just one person losing billions. But it matters because Wall Street firms often crowd into the same trades, and Hwang’s positions were heavily tied to China’s tech sector. With China six months ahead of us in both COVID and economic recovery, there's concern that similar overleveraged trades could be exposed in the U.S. if we hit a slowdown.
Let’s not forget: we already had a debt problem before 2020, and we handled the pandemic by layering on even more debt.
At NEST, we exited Chinese exposure months ago. While we do use leverage in our most aggressive portfolios, we limit it to no more than 3x and never hold it long-term. What sets us apart is our discipline—we follow a data-driven process, stay emotionally grounded, and most importantly, de-leverage when appropriate.
Hogs get fat, but pigs get slaughtered.
— Sean McDougle, CFP®
Chief Investment Officer & Partner, NEST Financial
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Disclaimer: The content shared in webinars and recordings is for educational purposes only and does not constitute investment advice. For personalized guidance, contact us at info@nestfinancial.net to schedule a consultation.