Before his family office Archegos Capital LP imploded at the end of March, Bill Hwang was the definition of a Wall Street success story. He had earned the revered “Tiger Cub” title working under hedge fund mogul Julian Robertson’s Tiger Management. When Tiger Management shut down in 2000, Bill founded Tiger Asia Management. The fund boasted three billion U.S. dollars in assets before Hwang’s downfall as a result of being accused of insider trading in Chinese bank stocks, which led to the Securities and Exchange Commission fining him 44 million U.S. dollars. The settlement also prohibited him from managing publicly raised capital, shutting down his hedge fund. This did not stop Hwang from founding Archegos Capital in 2013 as a family office. A family office only manages an individual’s private wealth, which allowed Hwang to bypass the SEC’s prohibition. This time, Hwang was ready for redemption.

Hwang used a financial instrument called a Total Return Swap or TRS, rather than his own money, to directly invest in the stock market. In a TRS, the receiver does not directly invest in the stock in question. Instead, they invest through an intermediary payer which is usually an investment bank. In this case, the payers were Goldman Sachs, Morgan Stanley, Credit Suisse and Nomura. The payer buys the stock on behalf of the receiver and, in return, the receiver pays the payer a set fee plus interest. This is useful for receivers like Archegos Capital as they can own shares without having to publicly reveal their position. Moreover, they do not have to put up the equivalent amount of capital for their large volumes of shares. This is called a margin, where funds like Archegos can own 10 shares by only putting up money for two. When the time period of the TRS elapses and the payer and receiver exit the position, the payer duly transfers the capital gains — net difference between the initial and final price of the stock — and dividends to the receiver. However, if the stock depreciates in value during this time, the receiver pays the payer the amount of the loss. Therefore, the payer is at no risk in regard to the stock. The only risk comes in the form of defaults by the receiver, like what happened with Archegos.

So, how did Archegos default? Archegos had asked the investment banks to buy shares of ViacomCBS, Discovery, Baidu, Tencent and Vipshop. After reaching new heights in 2020, ViacomCBS was scheduled to offer three billion U.S. dollars worth of stock through Morgan Stanley and JP Morgan. This stock offering, however, fell apart and the share price of ViacomCBS began to fall. Investment banks who had engaged in a TRS through Archegos made a margin call, which occurs when the payer asks the receiver to put up more capital for every share owned. For example, instead of putting up money for two shares for every 10 shares owned, the receiver asks the payer to put up money for four. If the receiver fails to acknowledge the margin call, the payer can sell the shares owned. This is exactly what happened when the investment banks made a margin call to Archegos. Archegos lacked sufficient capital to honor the margin call, which made the investment banks sell ViacomCBS shares. The initial drop — caused by the failed stock offering and the forced sell-off due to the margin call — meant that ViacomCBS and Discovery shares fell by more than 27 percent, losing 30 billion U.S. dollars of their market value in a matter of days.

While Goldman Sachs, Morgan Stanley and Deutsche Bank sold their shares in time and exited their positions unscathed, Nomura and Credit Suisse were not as lucky. Nomura shares fell by 16.3 percent and Credit Suisse shares fell by 14 percent. This meant that Nomura faced a loss worth two billion U.S. dollars while Credit Suisse lost 4.7 billion U.S. dollars. Credit Suisse’s Chief Risk Officer and Investment Bank Chief resigned after the Archegos fiasco.

U.S. Senator Elizabeth Warren of Massachusetts was quick to Tweet, stating: “Regulators need more than luck to fend off risks to the financial system: we need transparency and strong oversight so the next hedge fund blowup doesn’t take the economy down with it.”

Meanwhile, a spokesperson for Archegos Capital, also made a statement: “This is a challenging time for the family office of Archegos Capital Management, our partners and employees.”

The fall of Archegos has raised questions about family offices and the important role they play in markets today. As of 2019, 10,000 family offices held over six trillion U.S. dollars in assets. Most family offices do not have to register with the SEC because the 1940 Investment Company Act exempts firms which advise 15 or fewer clients from filing financial returns. The 2010 Dodd-Frank Act repealed this exemption, but a nuance in the law meant that family offices could still bypass regulatory filings.

The fall of Archegos Capital, therefore, can be attributed to loopholes in investment regulation, excessive leveraging and the lack of foresight on the part of investment banks. We have had multiple spectacular collapses: first Greensill and now Archegos. How many more such debacles will we have before financial markets collectively tighten their grip?