The night before Archegos Capital’s story went public late last month, the fund’s largest prime broker quietly discharged some of its risky positions to hedge funds, people with knowledge of the transactions told CNBC.
Morgan Stanley sold about $ 5 billion worth of shares of Archegos’ doomed bets on US media and Chinese tech names to a small group of hedge funds late Thursday, March 25, according to the people, who asked anonymity to speak candidly about the transaction.
It is an unreported detail that shows the extraordinary steps some banks have taken to protect themselves from losses due to a client’s collapse. The measures benefited Morgan Stanley, the world’s largest stock trading store, and its shareholders. While the bank escaped the episode with no material losses, other companies were less fortunate. Credit Suisse said on Tuesday it took a hit of $ 4.7 billion after unwinding Archegos’ lost positions; the company also lowered its dividend and halted share buybacks.
Morgan Stanley had the permission of Archegos, run by former Tiger Management analyst Bill Hwang, to shop around for its stock late Thursday, these people said. The bank offered the shares at a discount, telling the hedge funds that they were part of a margin call that could prevent the collapse of an unnamed client.
But the investment bank had information that it did not share with the stock buyers: The basket of shares it sold, consisting of about eight names, including Baidu and Tencent Music, was just the opening salvo of an unprecedented wave of tens of billions of dollars in sales by Morgan Stanley and other investment banks starting the next day.
Some customers felt betrayed by Morgan Stanley for not receiving that crucial context, said one of those familiar with the trade. The hedge funds later learned in press reports that Hwang and his key brokers met on Thursday evening to try to wind down his positions in an orderly fashion, a difficult task given the risk of that word getting out.
That means that at least some bankers at Morgan Stanley knew how big the sale was likely to be and that it was unlikely that Hwang’s business would be saved, these people claim. That knowledge helped Morgan Stanley and rival Goldman Sachs avoid losses as the firms quickly got rid of the Archegos-tied stock. Morgan Stanley and Goldman declined to comment on this article.
Morgan Stanley was the largest holder of the top ten stocks traded by Archegos at the end of 2020, with a total of approximately $ 18 billion in positions, according to an analysis of the filings by market participants. Credit Suisse was the second most vulnerable group at about $ 10 billion, these sources noted. That means Morgan Stanley could have suffered about $ 10 billion in losses had it not acted quickly.
“I think it was an ‘oh s —‘ moment when Morgan looked at potential $ 10 billion in losses on their booklet alone, and they had to take risks quickly,” said the knowledgeable person.
While Goldman’s $ 10.5 billion sale of Archegos-related stock was widely reported on Friday, March 26 after the bank sent emails to a wide list of clients, Morgan Stanley’s move the night before was not reported so far. because the bank handled less than half. boxes of hedge funds, keeping the transactions hidden.
The clients, a sub-genre of hedge funds, sometimes referred to as “equity capital market strategies”, typically have no opinion of the merits of individual stocks. Instead, they buy blocks of stock from major prime brokers such as Morgan Stanley and others when the discount is deep enough, usually to settle the trades over time.
After Morgan Stanley and Goldman sold the first blocks of shares with Archegos’ permission, the floodgates opened. Prime brokers, including Morgan Stanley and Credit Suisse, then exercised their rights in the event of default, seized the company’s collateral and sold positions on Friday, the sources said.
In a wild session for stocks on that Friday in late March, another turn took place: some of the hedge fund investors who participated in the Thursday sales also bought more shares of Goldman, which later hit the market at prices ranging from 5% to 20%. under the sale of Morgan Stanley. Although these positions were deeply submerged that day, several names, including Baidu and Tencent, recovered, allowing hedge funds to offload positions for a profit.
“It was a gigantic cluster of five different banks trying to settle billions of dollars at the same time, without talking to each other, trading at where prices were favorable to themselves,” said an industry source.
Morgan Stanley largely left its Archegos holdings on Friday, March 26, except for one stake: 45 million shares of ViacomCBS, which people say it bought to customers on Sunday. The bank’s delayed sale of Viacom stock has sparked questions and speculation that the bank was holding onto the stock because it wanted to close a Morgan Stanley secondary offering the week before.
Despite some of its hedge fund clients feeling less than excited, Morgan Stanley probably won’t lose them on the Archegos episode, people said.
That’s because the funds want to access shares of hot IPOs that Morgan Stanley, as the top banker of the US tech industry, can cash out, they said.