Chinese tech stocks sold off on Monday due to follow-on selling attributed to block sales by Archegos Capital Management, the family office of former Tiger Management manager Bill Hwang. The selling is likely to continue into the U.S. trading day.
Nomura and Credit Suisse warned on Monday that they face substantial losses after a U.S. hedge fund defaulted on margin calls. Neither investment bank named the fund in question.
Nomura saw its shares fall 16.3% in Tokyo trade on Monday, after it today issued a statement that "an event occurred that could subject one of its U.S. subsidiaries to a significant loss arising from transactions with a U.S. client." Nomura is reportedly one of the prime brokers for Archegos. The Japanese bank pulled a planned US$3.25 billion issuance of senior notes.
Credit Suisse said in a trading update that a "significant U.S.-based hedge fund" had "defaulted on margin calls" placed on it by Credit Suisse and other banks. As a result, Credit Suisse and other banks are exiting those positions in the stocks. The Swiss bank said it is "premature" to quantify the losses but they could be "highly significant and material" to its first-quarter results. Its shares are down 14.0% in European trade.
A fire sale, in other words. Morgan Stanley and Goldman Sachs got the ball rolling on Friday with huge block sales.
Morgan Stanley reportedly sold about US$13 billion in stock in companies such as Chinese Internet browser operator Baidu (BIDU) , as well as the Chinese online-tutoring company GSX Techedu (GSX) , the London-based luxury-goods e-commerce site Farfetch (FTCH) , and the TV-channel operator Discovery (DISCA) .
Goldman Sachs then reportedly sold US$6.6 billion in Baidu, the "Google of China," as well as the Chinese online-discount store VIPShop Holdings (VIPS) and streaming company Tencent Music Entertainment (TME) , a joint venture between Spotify (SPOT) and the Chinese game giant and WeChat superapp owner Tencent Holdings (TCTZF) .
The details of the sales are all according to an email to clients, and as reported by Bloomberg. The selling continued with an offloading of US$3.9 billion in the shares of ViacomCBS (VIAC) and the Chinese video site iQIYI (IQ) .
Archegos is thought to be highly leveraged, likely around a 5:1 ratio on its capital. The trading has infected many tech stocks in Hong Kong.
Baidu shares fell 5.0% in Hong Kong trade on Monday. Baidu conducted a secondary listing in the city last week, raising HK$23.7 billion (US$3.0 billion), and saw its shares trade flat. Although that suggests investment bankers in fact got the pricing exactly right, and left no money on the table, flat trading days on listing always seems to get construed as a failure.
Bilibili (BILI) , the Nasdaq-listed Chinese videogame maker, started trading in Hong Kong on Monday with a secondary offering that raised HK$20.2 billion (US$2.6 billion). Bilibili (HK:9626) shares lost 1.0% to close at HK$800, down from their "lucky" pricing at HK$808. It was an unlucky day to start trade.
Nomura says it is "evaluating the extent of the possible loss," but that the "estimated amount of the claim against the client is approximately US$2 billion based on market prices as of March 26." Unwinding the positions could result in further losses.
Nomura said it had a Common Equity Tier 1 ratio of more than 17%, substantially more than required, meaning there should be no threat to its overall financial soundness.
Hwang got his start as an equity analyst at Tiger Management, learning under the guidance of legendary hedge-fund investor Julian Robertson. Hwang then went on to set up and run the New York-based hedge fund Tiger Asia.
Hwang's fellow "Tiger cub" manager at Tiger Asia, Tao Li, has also been battered in the selloff, according to Institutional Investor, in his Teng Yue Partners fund. Teng Yue had more than US$10 billion in assets under management as of the end of 2020, including leverage.
An investor told Institutional Investor that Teng Yue was up more than 40% through February for 2020, but was "clearly down in the teens" in March. Teng Yue launched in 2011 and, like Archegos, has largely operated under the radar until now. Archegos has taken down its Web site as of Saturday, though there's an archived page here.
Tiger Asia managed as much as US$3 billion in assets after founding in 2001. But it returned US$2 billion to investors at the end of 2012 and stopped managing money for outside investors. At that point, it changed its name to Archegos Capital Management and became Hwang's family office.
The hedge fund was convicted in a case first brought in 2009 by the Hong Kong Securities and Futures Commission that it committed insider trades in the shares of the Chinese "Big Four" banks Bank of China (BACHF) and China Construction Bank (CICHF) in December 2008 and January 2009.
In three instances, an investment banks (UBS twice and Morgan Stanley once) contacted Tiger Asia head of trading Raymond Park about selling blocks of shares in one of the banks for big investors. Hwang then told Park that Tiger Asia should buy some of the shares it was being offered at a discount - while also shorting the shares of the banks.
Bill Hwang was given a "cold shoulder" order banning him from trading securities in Hong Kong for four years at a market misconduct tribunal. The tribunal findings, with a brief summary here, showed that "little trust can be placed in Bill Hwang's integrity," and that he was guilty of "serious misconduct."
Tiger Asia also got a Hong Kong trading ban of four years. Court administrators returned HK$43.7 million (US$5.6 million) to 1,591 investors affected by the insider trading.