Several global investment banks are facing huge losses after US hedge fund Archegos Capital defaulted on a margin call.

The margin call follows around a US$20bn ‘fire sale’ of individual stocks late on Friday, including block trades of ViacomCBS (NASDAQ:VIACA), Discovery (NASDAQ:DISCA), GSX Techedu (NYSE:GSX) and other Chinese tech companies, now thought to have been made by Archegos after it suffered significant losses.

Japanese bank Nomura said it faced a possible US$2bn loss due to transactions with a US client and Credit Suisse said “a significant US-based hedge fund defaulted on margin calls made last week” and this was likely to be “highly significant and material” to its first-quarter results.

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Following the failure of the unnamed fund to meet these margin commitments, “Credit Suisse and a number of other banks are in the process of exiting these positions”.

Sources named the US client as Archegos Capital Management, run by former Tiger Asia manager Bill Hwang. Tiger Asia parent Tiger Management, a hugely successful hedge fund, was liquidated during the bursting of the dotcom bubble in 2000.  

With investors concerned about who else had been caught out, shares in Deutsche Bank, UBS, Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS), some of which were reportedly part of the Hwang block trades, saw their shares fall, though Barclays (LON:BARC), which has a sizeable investment banking arm, was only down 0.5%.

“Bubbles everywhere are a sign of dysfunction and stress, but a fund blowing up is not itself a systemic risk, more of questionable internal risk management,” said Neil Wilson at Markets.com.

“Despite the stress this is causing among banking stocks, there is no sign of contagion in broader markets.”

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Eleanor Creagh at Saxo Bank agreed that from market perspective, contagion is looking limited.

“This looks at this stage to be a positioning driven sell off in US futures and various single stock names. Although there is still the risk of further forced deleveraging if prime brokers were to tighten margin requirements,” she said.

This issue seemed to contribute to US markets slumping at the opening bell, said Danni Hewson, financial analyst at AJ Bell.

“Rumours continue to swirl about exactly which companies have been caught up in the Archegos saga and how badly,” she said.

“There are already questions being asked about why so called ‘family offices’ are exempt from much of the scrutiny enjoyed by hedge funds and calls for the system to be tightened.  With the numbers quoted today suggesting as much as $6tn is currently under the management of such firms, there is the expectation change must come quickly.”

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