Margin Call!
Hedge Funds finding itself in some sort of mess is nothing new on Wallstreet, from the infamous CDO’s of 2008 driven by greed to the public takedown of Melvin Capital by Reddit’s Wallstreet Bets, the big money on Wall Street has had some big losses. The most recent Hedge Fund slipping up was Archegos Capital Management, who took up swaps (a type of derivative) on equities that tanked. Derivatives are complex financial instruments that are often used to create leverage on an equity, meaning any movement made by an equity is magnified. Archegos was holding swaps in ViacomCBS, Discovery and other media stocks which crashed Friday as Wall Street banks that lent to Archegos forced the firm to take the loss when their lender, Goldman Sachs, sent in a Margin Call – which Archegos couldn’t cover – making Goldman liquidate Archegos’s collateral. When Archegos forcibly closed their billion-dollar position on these media stocks, the stocks crashed 25%, losses large enough to impact everyday Americans’ retirement accounts.
The loss sheds light on a major issue in Wall Street that has remained for so long and caused so many retail investors such as those on Wall Street Bets to feel angry. With greed largely fueling nebulous trading of derivatives off borrowed money, Hedge Funds enter murky waters when things go south. Experts in the industry also share this sentiment, with co-head of trading at Themis Trading Joe Saluzzi explaining: “Anytime a derivative is involved, you don’t really know how deep the tentacles go.”
What do you think about how hedge funds use derivatives? And do they do more harm than good?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.
