HEI: Sometimes, you blow up

Man's hand facing up holding dynamite bundle with time bomb on blackboard background with chalk words 'tick tock'.

29/03/2021

THE HEISENBERG writes:

There’s more to worry about than the (latest) trials and tribulations of Tiger Cub Bill Hwang, although you wouldn’t know it to read the headlines plastered across financial media outlets on Monday.

As one reader pointed out, Hwang actually doesn’t come across as having been all that reckless on the leverage front, or at least not if estimates of Archegos’s capital are accurate and you define “reckless” in the context of infamous cases of leverage gone awry.

“Archegos looks positively conservative next to, say, Long Term Capital Management,” Reuters wrote Monday, on the way to reminding anyone younger than 30 that in the lead-up to the financial crisis, investment banks “routinely” carried leverage that makes Hwang’s positions seem pedestrian — at least on that score. Issues around concentration and transparency are another story, though.

One problem with this discussions is that it’s difficult to know how to frame the issue, because when it comes to these sorts of debacles, reader perception is highly subjective. Depending on what kind of market participant you happen to be, events like this can be funny, distressing and everything in-between.

For veterans who’ve “seen it all” (so to speak), this kind of thing generally falls into the “stuff happens” category (and I’m omitting the expletive), or at least until the “contagion” headlines aren’t just headlines anymore and the dominoes start to tip.

While the GameStop saga served as a stark reminder that nobody has ever truly “seen it all,” margin calls and flameouts are things that happen. Colloquially, it’s risky to run around gambling billions using leverage, even if the leverage you employ falls well short of that associated with history’s most spectacular implosions.

Over the last 72 hours, myriad outlets and web portals have engaged in the usual hair-on-fire media race to pen the definitive take, but as ever, that’s impossible because the story isn’t over yet. Even if you fancy yourself the fastest, smartest “gun in the west,” you can’t tell the whole story because it’s still unfolding….

In all likelihood, this will end up being amenable to the following short summary: Sometimes, you blow up. It’s just a matter of whether you take a few people with you or not. Usually, it’s not systemic…

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Now read this: “A Tiger Cub’s $20 billion margin call means more hedge fund pain ahead” (sub may be required).