The night before Archegos Capital’s story burst into public view late last month, the fund’s top intermediary quietly unloaded some of its risky positions to hedge funds, people told CNBC with knowledge of the trades.
Morgan Stanley sold nearly $ 5 billion in shares of Archegos’ doomed bets to U.S. media and Chinese tech names to a small hedge fund group on the afternoon of Thursday, March 25, according to people who asked for anonymity to speak frankly about the transaction.
This is a detail that has not been reported so far that shows the extraordinary steps some banks have taken to protect themselves from losses resulting from the collapse of a customer. The moves benefited Morgan Stanley, the world’s largest equity trading store, and its shareholders. While the bank escaped the episode with no material losses, other companies were less fortunate. Credit Suisse said Tuesday it was a $ 4.7 billion hit after relaxing Archegos ’positions; the firm also cut the dividend and stopped share repurchases.
Morgan Stanley had the consent of Archegos, led by former analyst Bill Hwang, an analyst at Tiger Management, to buy its stock Thursday afternoon, those people said. The bank offered the shares at a discount, telling hedge funds that they were part of a margin call that could prevent the collapse of an unnamed customer.
But the investment bank had information it did not share with stock buyers: the stock basket it sold, consisting of about eight names, including Baidu and Tencent Music, was just the first opening of a wave without precedents of tens of billions of dollars in sales from Morgan Stanley and other investment banks as of the next day.
Some of the clients felt betrayed by Morgan Stanley because they did not receive this crucial context, according to one of the people familiar with the trades. Hedging funds later learned in press reports that Hwang and his main intermediaries were convened Thursday night to try to relax neatly from their positions, a difficult task given the risk of the word coming out. .
This means that at least some Morgan Stanley bankers knew how likely the sale was likely and that it is unlikely Hwang’s firm would be saved, according to these people. This knowledge helped Morgan Stanley and its rival Goldman Sachs avoid losses because the companies quickly had shares linked to Archegos. Morgan Stanley and Goldman declined to comment on this article.
Morgan Stanley was the top holder of the top ten shares traded by Archegos in late 2020 with about $ 18 billion in overall positions, according to an analysis of market participants ’presentations. These sources noted that Credit Suisse was the second most exposed with about $ 10 billion. That means Morgan Stanley could have faced losses of nearly $ 10 billion if it hadn’t acted quickly.
“I think it was a time ‘oh s —‘ when Morgan was thinking of losing ten billion dollars just for his book, and they had to move quickly to risk,” the knowledgeable person said.
Although Goldman’s $ 10.5 billion sale in Archegos-related shares on Friday, March 26 was widely reported after the bank launched emails to a wide list of customers, Morgan Stanley’s move the night before did not. was reported so far because the bank dealt with less than half – a dozen hedge funds, allowing transactions to remain hidden.
Clients, a subgenre of hedge funds sometimes referred to as “capital market strategies,” typically have no views on the merits of individual stocks. Instead, they will buy blocks of stocks from major major brokers like Morgan Stanley and others when the discount is deep enough, usually to relax trades over time.
After Morgan Stanley and Goldman sold the first blocks of stock with the consent of Archegos, the floodgates were opened. Leading brokers, including Morgan Stanley and Credit Suisse, exercised their default rights, seized the firm’s guarantees and sold positions on Friday, according to sources.
On Friday in late March, in a rampant stock session, another twist occurred: some of the hedge fund investors who had participated in Thursday’s sales also bought more shares of Goldman, which hit the market at prices 5% to 20% below Morgan Stanley sales. Although those positions were deeply underwater in those days, several names, including Baidu and Tencent, rose, allowing hedge funds to unload positions for profit.
“It was a giant group: five different banks trying to roll out billions of dollars at the same time, not talking to each other, negotiating anywhere that prices were advantageous to them,” an industry source said.
Morgan Stanley largely abandoned its Archegos positions on Friday, March 26, except for one stake: 45 million shares of ViacomCBS, which it bought from customers on Sunday, according to people. The bank’s late withdrawal of Viacom shares has sparked questions and speculation about its permanence in shares because it wanted to close a secondary bid led by Morgan Stanley the previous week.
While some of its hedge fund clients are left feeling less excited, Morgan Stanley is unlikely to miss them for the Archegos episode, according to people.
This is because the funds want to access initial public offering shares that Morgan Stanley, as the top banker in the U.S. technology industry, can hire, they said.