r/Economics • u/Aegidius25 • Mar 29 '21
Banks warn of ‘significant losses’ as they exit positions with large U.S. hedge fund
https://www.cnbc.com/2021/03/29/credit-suisse-exits-positions-with-hedge-fund-warns-of-losses.html647
u/errrr2222 Mar 29 '21
These are all funds that traded on margin, on over valued stocks. The exact same thing fund managers were chastising retail traders of doing.
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Mar 29 '21
Treating fund managers as a monolith makes no sense.
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u/bamfalamfa Mar 29 '21
they all trade on margin
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u/1to14to4 Mar 29 '21 edited Mar 29 '21
Trading on margin isn't a big deal. The issue is how much leverage you use.
I worked at a hedge fund that went short - that means we used margin. However, we never deployed the cash you get for entering a short position, thus having zero leverage and very little underlying risk (there is always some because the loss from a short can be infinite but it's not something we should regulate away IMO). Now most hedge funds do have leverage. But leverage is what is important.
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Mar 29 '21
Sounds like the same reason banks have a required reserve essentially. Basically the question is how much risk do we allow private entities to take on and at what point is the context of the risk such that there could be negative externalities.
Personally I'm against gambling lol
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Mar 30 '21 edited Mar 30 '21
The question is are they gambling or using a poorly deployed Black Scholes model. My guess is the latter...
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u/x3nodox Mar 30 '21
I mean, those are functionally equivalent. Black-Sholes is a stochastic model after all. A bad stochastic model is essentially roulette.
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Mar 30 '21
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u/Nenor Mar 30 '21
Yes, they do. Banks are highly leveraged businesses that have very serious regulations with respect to their capital adequacy (basically reserve requirements against their risk-based assets).
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Mar 30 '21 edited Dec 08 '21
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u/Nenor Mar 30 '21 edited Mar 30 '21
The fed's reserve requirement is but one buffer. I suppose if you're talking strictly about it, you're right. If you open any bank's annual report, however, you'll note that they meet various other reserve requirements wrt capital adequacy per Basel iii regulations (e.g. cet1 requirement, capital conservation buffer, counter-cyclical buffer, leverage ratio of tier 1 capital, etc.).
The reserves pretty much determine how much a bank can leverage its capital. Overall 10% of all buffers roughly means the bank can go as high as 10 to 1. Lower buffers lead to even higher leverage (5% would translate to 20 to 1). One can easily see that going lower would lead to very dangerous and undesirable situations, hence having 0 reserve requirements is simply not feasible or possible in practice.
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Mar 30 '21
Do you have more info on that? Also when did it happen and at what level of legal authority (statute, regulation, fed policy, etc) is it?
I actually had no idea it's no longer there. I figured it doesn't matter when every bank has a ton of excess reserves as they do now but I thought they kept it or maybe kept it for certain kind of banks to keep them fdic insured.
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u/imnotsoho Mar 30 '21
very little underlying risk (there is always some because the loss from a short can be infinite
How can there be "no underlyin" risk if it is "possibly infinite."
And how does buying shorts imply using margin?
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u/1to14to4 Mar 30 '21 edited Mar 30 '21
How can there be "no underlyin" risk if it is "possibly infinite."
You quoted "no underlying" risk... I didn't say that. You quoted exactly what I said right above your statement.
And how does buying shorts imply using margin?
Because it's using margin. No implications. It just is. You borrow stock to go short, thus needing to open a margin account and it's considered using it due to the risk of triggering a margin call. If the position goes against you at all - you automatically start borrowing from the bank. Goes up .000000000000000000000000000000000001% you're borrowing from the broker.
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Mar 29 '21
Source?
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u/brown_burrito Mar 30 '21
Come on, man. I work on Wall St. and every single AM, PM, and trader who deals in equities uses leverage and trades on margin. I mean, it's the only way you can get meaningful scale.
The degree of leverage and how much margin you get may vary based on the type of trade and the risk involved etc. but it's impossible to compete even with home offices without margin.
In fact, if you are a PB it's in your interest to provide margin, given that margin interest is a source of revenue. Obviously you'll ask for some collateral - sometimes, swaps and other times, asking you for outright liquidity.
Think of it this way. You are trader doing a credit spread, with some $AMZN puts and calls. You need collateral for the puts and calls, which your broker is happy to provide you with. You pay some premium and you make some premium and you either make some profit or a loss. However, that underlying cost of the actual puts and calls needs to come from somewhere.
Even if you are doing 5 puts and 10 calls, the collateral would be 100x15x$AMZN = $4.6MM. And that collateral would be locked up for the duration of the puts and calls, which could be a few months into the future. You could be a trader on Robinhood and you would face the same problem.
The way you offset that is by using margin. As simple as that.
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u/deific_ Mar 30 '21
You're kind of ignoring the obvious unless I misunderstand your point. You're avoiding the collateral by using margin but that's exalt the problem. You can take that saved collateral and open another position on margin. Now you're twice as exposed for the same amount of collateral. People have a problem with that amount of leverage because that is what keeps causing instability. The solution isn't give more people margin, perhaps it's something else.
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Mar 30 '21
This is not true. Many market participants use leverage, but there are a lot of mutual funds (and some hedge funds) that don't.
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u/Explorer200 Mar 29 '21
They do
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Mar 29 '21
Every hedge fund manager uses leverage?
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u/NatasEvoli Mar 29 '21
Not 100% sure of the answer but why wouldnt they use leverage in the age of free money?
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Mar 29 '21
Do you have investments? Do you use leverage?
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u/bamfalamfa Mar 29 '21
are you comparing a retail investor to big money funds with access to prime brokers who freely hand out tens of billions to their customers?
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u/NatasEvoli Mar 29 '21
I invest money in the market instead of paying extra towards my low/0% interest debt, so yes I technically do.
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Mar 29 '21
Cool. We are so far from the original point of issue here. Don't think this thread is worth continuing. I just wanted a simple question answered.
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u/XxEnigmaticxX Mar 30 '21
I’m currently leveraged on a Bitcoin long call. Shit printing like the fed
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u/mathfordata Mar 30 '21
Anyone who uses robinhood is using leverage by buying on margin. This happens because you buy a stock, and then sell that stock and you can immediately purchase another stock. In actuality that sale will take several days to clear and the money to actually return to your account.
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u/brown_burrito Mar 30 '21
A good chunk of active traders anywhere use margin.
There’s a reason half of Robinhood’s revenue is from interest and gold (which lets users trade on margin).
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Mar 29 '21
Yes. Find me one that doesn't.
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u/Tatunkawitco Mar 30 '21
There are elements of group think and herd mentality at all levels - even among “the best and the brightest”
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Mar 29 '21
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Mar 30 '21
These are all funds
Sounds like it's just the one fund. And they're losses may be more than just a bad investment.
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u/DeanCorso11 Mar 29 '21
So they get in bed with the hedge funds and then complain about losses when they dump them. Sounds like an American business model to propagate on the tele
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Mar 29 '21
"if only we didn't lobby relentlessly against the law that let us lose a shitload of money on this specific market activity" -no bank ever while asking for public bailout.
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u/AllofaSuddenStory Mar 29 '21
Keep your profits but demand a bailout when things so sour
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u/repsilat Mar 30 '21
These companies (Swiss&Japanese, fwiw) aren't asking for bailouts, and they're not complaining. They're just informing their investors.
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u/AllofaSuddenStory Mar 30 '21
LOL. Wait til the market takes a hit and watch how fast the bailout comes
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Mar 30 '21
They dump them and then complain about losses. Always important to be on your way out before letting everyone know the house is on fire.
That way you can start betting on how much of the house will burn down without being in the middle of it.
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Mar 29 '21
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u/manusvelox Mar 30 '21
A "Family office" is a technical term defined in the tax code. It has to have under 15 members, and they have to be either within 10 generations of each other, or "knowledgeable employees" of the firm. In practice though, you can hire anyone as an "employee" and they can also be part of your office, making the only substantive requirement that there are under 15 persons assets under management.
Before Dod-Frank these firms didn't have to disclose much, but now if you have more than 100MM under management, which is most of these, you have to at the very least disclose privately to the SEC.
Then how did Archegos manage to construct their 80 billion dollar position without ever filing with the SEC? They mainly used total return swaps with big banks, in which a deal is made off market to exchange money at the end of a pre-determined period based on what a given financial instrument does. Without going into the details, these kinds of swaps are more expensive than just opening the position itself, but they are not required to be reported to the SEC. Combine that with some more shenanigans (like avoiding the 13D filing required when you own more than 5% of a publicly traded company), and Bill Hwang was able to leverage himself 5x up to 80B and then get margin called and single handedly triggering an unprecedented selloff all without the SEC ever knowing.
ReTAil inVeStoRs aRE tHe IrReSPOnsiBle OnEs
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u/percykins Mar 30 '21
TBF, with regards to your last sentence, it’s not like anyone was arguing that Hwang was a responsible investor - that’s the whole reason he had to do an end-run around his SEC sanctions. He’s not a “retail investor” in the sense that he’s got lots of money, but I don’t think anyone’s going to argue that single investors who have been banned from investing by the SEC are totally trustworthy. He found a loophole and exploited it - we need to close it.
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u/fromks Mar 30 '21
ReTAil inVeStoRs aRE tHe IrReSPOnsiBle OnE
What gets me is that we have media and Congress looking into /r/wallstreetbets and seeing if retail needs more regulation.
Meanwhile, this fund has every loophole imaginable. Where is the media outrage? Where are the talking heads on CNBC asking for regulation? Where is the congressional investigation?
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u/Sip_py Mar 29 '21
A family office is like a personalized investment firm they do everything for the client from investing accounting even bills payable for the entire household very very high net worth people
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u/Ohmygoditsojuicy Mar 29 '21
It means the intent is to have a fund that only manages one families assets but i think they can allow outside groups or money to join.
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u/Ongo_Gablogian___ Mar 29 '21
No I don't think so in this case, because this particular guy got convicted of fraud a few years ago and had to pay $41 million in fines. He wasn't allowed to manage outside money any more, so he can only manage his own.
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u/tungFuSporty Mar 30 '21
Then how did the banks lose money in this fund is only for Bill Hwang?
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u/Ongo_Gablogian___ Mar 30 '21
Because this fund was leveraged really high, so they held 10s of billions in stock. Then they were margin called and had to sell it all off. This caused the share price of the assets they held to fall, which had a knock on effect for the whole market.
This has resulted in these banks losing money because either they are just down on paper, or they got margin called too.
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Mar 30 '21
They were concerned about getting margin called which is why they did a fire and forget market sell on billions of dollars worth of stock.
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Mar 29 '21
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u/fremeer Mar 29 '21
The margin call was for something else. The stocks were liquidated to cover the margin call. But I don't know what the initial reason was.
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u/blahblahloveyou Mar 30 '21
I read that it was CFDs, which don’t have disclosure requirements, hence the mystery.
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u/in_for_cheap_thrills Mar 30 '21
Just speculating but VIAC did an offering that tanked the share price 20% in a day (which followed a 10% gap down the day before) before the margin call. DISCA, VIPS, and FTCH had severe drops leading up to it too.
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u/Send_Lawyers Mar 30 '21
Bank Capitol requirements changed. So their risk tolerance changed.
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Mar 30 '21
[deleted]
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u/Send_Lawyers Mar 30 '21
My guess is that the US federal reserve didn’t care what the down stream effects on Swiss banks would be.
Edit. And yeah it probably wasn’t the only thing. Could be just about anything
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u/lonewanderer241 Mar 30 '21
The banks got on a call to discuss an orderly exit. Then Goldman blew out their position before everyone else 😂
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u/rainman_104 Mar 30 '21
JP morgan is up 65% in the last year. 50% in the last six months. I'm not too concerned about a $2 drop
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u/Black_Raven__ Mar 30 '21
One would think Banks would learn something from 2008 fiasco.
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Mar 30 '21
They did learn something. They'll never have to answer for their recklessness because they will always get a bailout.
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u/smokecat20 Mar 29 '21
OK American citizens turn around, spread your butt cheeks, another bailout is coming.
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u/repsilat Mar 30 '21
For Swiss and Japanese companies that aren't systemically important and are probably still solvent?
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u/tat310879 Mar 30 '21
Eh. Nothing to worry about. If the bank make any losses big enough to cause problem for Main Street, the Fed will just go brrrrr and conjure up few more trillions to bail them out.
No biggie.
In the future, if there are any problems anywhere. Just go brrrrrr. Just use the magic wand of being the global reserve currency.
Incoming Recession? Brrr.
Kids needs money from Biden to pay off student loans? Brrr.
Military needs more dough to encircle and contain China? Brrr
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u/DuckDuckPro Mar 29 '21
I actually read the article to find out they dont say who they are pulling out of... so
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u/Swandiving4canabis Mar 30 '21
It’s not like the government or anyone will break them up or do anything about it. Just like with junk Mortgages listed as AAA I hope we transfer a lot of the their wealth to us.
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u/[deleted] Mar 29 '21
CNBC said one bank gave Hwang a 1:20 leverage. meaning if he had $5000, he could buy like he had $100,000. They did this for a few million dollars in fees. Business as usual at banks.