The collapse of Archegos Capital Management sends a stark warning to financial markets and regulators about the dangers of hidden leveraged risk-taking and the power of family offices.
The story, in a nutshell, is that of an investment management company that purchased stocks of some well-known companies in the hope to sell them later at a higher price.
Such a situation is seen repeatedly in our very own Bursa Malaysia and there is nothing exceptional about it – except that Archegos took on a high-leveraged position by borrowing from investment banks and utilised financial derivatives to execute its views.
Most regular Bursa punters use their own funds and typically buy and sell stocks without engaging in complicated derivative transactions.
I have seen day traders at Starbucks, at petrol stations and even at a museum café. You can usually tell them apart as they will be the ones excitedly pointing at candlestick charts on laptops and anxiously waiting for the second-by-second market movements.
I have seen them early in the morning before the local market opens, early afternoon waiting for the London markets to open and late at night watching the US markets in action.
We usually exchange friendly greetings and I always wish them luck. After all, you cannot begrudge anybody who is willing to put in the work and commitment.
But lately, I have also encountered those who are a bit more reckless and blinkered in their enthusiasm. And most of them are relatively new in the industry.
Archegos is a family office that was started by notorious former hedge fund manager Bill Hwang. Family offices are used by the wealthy to manage fortunes and wealth from generation to generation.
But, it is not only the wealthy that are keen on waging bets in the financial markets. Thanks to technology and financial market infrastructure development, the cost and access to buying and selling stocks, bonds, commodities, currencies and many other financial assets are now within the reach of many in the working class. Middle and low-income families too can form family offices and leverage like the Archegos.
Borrowing from your spouse, parents, siblings and other relatives to fund your day trading in stocks or foreign exchange is like setting up your own family office except when you lose, you may not be able to recover financially.
If you borrow and pledge your house, or some other assets as collateral, and use that borrowing to bet on stocks, oil or the Australian Dollar, you have leveraged yourself like Hwang.
If you are struggling during this pandemic but use your i-Sinar withdrawal in hope that it will give you multiple returns, you have also leveraged your bets.
And if in the future your child may need that savings for his or her education or plan to take a family member to perform the Haj, you have also converted your financial market bets into a family office affair.
I don’t know what will happen to Hwang or the parties involved in his family office. But they will likely not be entirely destroyed or may have other ring-fenced corporate vehicles that will ensure their financial survival.
I always wish our local day traders good luck but some of them need to pause and ask themselves if they know they are running their own leveraged family office, and if so, whether they can afford to do so.
This is the personal opinion of the writer and does not necessarily represent the views of Twentytwo13.