By Kate Kelly, Matthew Goldstein, Matt Phillips and Andrew Ross Sorkin
Until recently, Bill Hwang sat atop one of the biggest — and perhaps least-known — fortunes on Wall Street. Then his luck ran out.
Hwang, a 57-year-old veteran investor, managed $10 billion through his private investment firm, Archegos Capital Management. He borrowed billions of dollars from Wall Street banks to build enormous positions in a few American and Chinese stocks. By mid-March, Hwang was the financial force behind $20 billion in shares of ViacomCBS, effectively making him the media company’s single largest institutional shareholder. But few knew about his total exposure, since the shares were mostly held through complex financial instruments, called derivatives, created by the banks.
That changed in late March, after shares of ViacomCBS fell precipitously and the lenders demanded their money. When Archegos could not pay, they seized its assets and sold them off, leading to one of the biggest implosions of an investment firm since the 2008 financial crisis.
Almost overnight, Hwang’s personal wealth shriveled. It is a tale as old as Wall Street itself, where the right combination of ambition, savvy and timing can generate fantastic profits — only to crumble in an instant when conditions change.
“That whole affair is indicative of the loose regulatory environment over the last several years,” said Charles Geisst, a historian of Wall Street. “Archegos was able to hide its identity from regulators by leveraging through banks in what has to be the best example of shadow trading.”
The meltdown of Hwang’s firm had ripple effects. Two of his bank lenders have revealed billions of dollars in losses. ViacomCBS saw its share price halved in a week. The Securities and Exchange Commission opened a preliminary inquiry into Archegos, two people familiar with the matter said, and market watchers are calling for tougher oversight of family offices like Hwang’s — private investment vehicles of the wealthy that are estimated to control several trillion dollars in assets. Others are calling for more transparency in the market for the kind of derivatives sold to Archegos.
Hwang declined to comment for this article.
His is a proverbial American rags-to-riches story. Born in South Korea, Hwang moved to Las Vegas in 1982 as a high school student. He spoke little English, and his first job was as a cook at a McDonald’s on the Strip. Within a year, his father, a pastor, had died. He and his mother moved to Los Angeles, where he studied economics at UCLA, but he found himself distracted by the excitement of nearby Santa Monica, Hollywood and Beverly Hills.
“I always blame people who set up UCLA in such a nice neighborhood,” he told congregants at Promise International Fellowship, a church in Flushing, a neighborhood in the New York City borough of Queens, in a 2019 speech. “I couldn’t go to school that much, to be honest.”
He graduated — barely, he said — and pursued a master’s degree in business administration at Carnegie Mellon University, in Pittsburgh. He then worked for about six years at a South Korean financial services firm in New York, eventually landing a plum job as an investment adviser for Julian Robertson, a respected stock investor whose Tiger Management, founded in 1980, was considered a hedge fund pioneer.
After Robertson closed the New York fund to outside investors in 2000, he helped seed Hwang’s own hedge fund, Tiger Asia, which focused on Asian stocks and quickly grew, at one point managing $3 billion for outside investors.
Hwang was known for swinging big. He made large, concentrated bets on shares in South Korea, Japan, China and elsewhere, using ample amounts of borrowed money — or leverage — that could both supercharge his returns or, in turn, wipe out his positions.
He was more modest in his personal life. The house that he and his wife, Becky Hwang, bought in Tenafly, New Jersey, an upscale suburb, is valued at about $3 million, which is humble by Wall Street standards. A religious man, Hwang established the Grace and Mercy Foundation, a New York-based nonprofit that sponsors Bible readings and religious book clubs, growing it to $500 million in assets from $70 million in under a decade. The foundation has donated tens of millions of dollars to Christian organizations.
“He’s giving ridiculous amounts,” said John Bai, a co-founder and managing partner of the equity research firm Fundstrat Global Advisors, who has known Hwang for roughly three decades. “But he’s doing it in a very unassuming, humble, nonboastful way.”
But in his investing approach, he embraced risk, and his firm ran afoul of regulators. In 2008, Tiger Asia lost money when investment bank Lehman Brothers filed for bankruptcy at the peak of the financial crisis. The next year, Hong Kong regulators accused the fund of using confidential information it had received to trade some Chinese stocks.
In 2012, Hwang reached a civil settlement with U.S. securities regulators in a separate insider trading investigation and was fined $44 million. That same year, Tiger Asia pleaded guilty to federal insider trading charges in the same investigation and returned money to its investors. Hwang was barred from managing public money for at least five years. Regulators formally lifted the ban last year.
Shortly after shuttering Tiger Asia, Hwang in 2013 opened Archegos, which is Greek for leader or prince. The new firm, which also invested in both U.S. and Asian stocks, was similar to a hedge fund, but its assets were made up entirely of Hwang’s personal wealth and that of certain family members. The arrangement shielded Archegos from regulatory scrutiny because of its lack of public investors.
Goldman Sachs, which had lent to him at Tiger Asia, initially refused to deal with Archegos. JPMorgan Chase, another “prime broker,” or large lender to trading firms, also stayed away. But as the firm grew, eventually reaching more than $10 billion in assets, according to someone familiar with the size of its holdings, its lure became irresistible. Archegos was trading stocks on two continents, and banks could charge sizable fees on the trades they helped arrange.
Goldman later changed course and in 2020 became a prime broker to the firm alongside Credit Suisse and Morgan Stanley. Nomura also worked with him. JPMorgan refused.
By the beginning of this year, Hwang had grown fond of a handful of stocks: ViacomCBS, which had pinned high hopes on its nascent streaming service; Discovery, another media company; and Chinese stocks, including e-cigarette company RLX Technologies and education company GSX Techedu.
Trading at roughly $12 just over a year ago, ViacomCBS’ stock rose to about $50 by January. Hwang kept amassing his stake, people familiar with his trading said, through complex positions he arranged with banks called “swaps,” which gave him the economic exposure and returns — but not the actual ownership — of the stock.
By mid-March, as the stock moved toward $100, Hwang had become the single largest institutional investor in ViacomCBS, according to those people and a New York Times analysis of public filings. The people valued the position at $20 billion. But because Archegos’ stake was bolstered by borrowed money, if ViacomCBS shares unexpectedly reversed, he would have to pay the banks to cover the losses or be quickly wiped out.
On March 22, ViacomCBS announced plans to sell new shares to the public, a deal it hoped would generate $3 billion in new cash to fund its strategic plans. Morgan Stanley was running the deal. As bankers canvassed the investor community, they were counting on Hwang to be the anchor investor who would buy at least $300 million of the shares, four people involved with the offering said.
But sometime between the deal’s announcement and its completion the morning of March 24, Hwang changed plans. The reasons are not entirely clear, but RLX and GSX had both spiraled in Asian markets around the same time. His decision caused the ViacomCBS fundraising effort to end with $2.65 billion in new capital, significantly short of the original target.
ViacomCBS executives had not known of Hwang’s enormous influence on the company’s share price, nor that he had canceled plans to invest in the share offering, until after it was completed, two people close to ViacomCBS said. They were frustrated to hear of it, the people said. At the same time, investors who had received larger-than-expected stakes in the new share offering and had seen it fall short were selling the stock, driving its price down even further. (Morgan Stanley declined to comment.)
By March 25, Archegos was in critical condition. ViacomCBS’ plummeting stock price was setting off “margin calls,” or demands for additional cash or assets, from its prime brokers that the firm could not fully meet. Hoping to buy time, Archegos called a meeting with its lenders, asking for patience as it unloaded assets quietly, a person close to the firm said.
Those hopes were dashed. Sensing imminent failure, Goldman began selling Archegos’ assets the next morning, followed by Morgan Stanley, to recoup their money. Other banks soon followed.
As ViacomCBS shares flooded onto the market March 26 because of the banks’ enormous sales, Hwang’s wealth plummeted. Credit Suisse, which had acted too slowly to stanch the damage, announced the possibility of significant losses; Nomura announced as much as $2 billion in losses. Goldman finished unwinding its position but did not record a loss, a person familiar with the matter said. ViacomCBS shares are down more than 50% since hitting their peak March 22.
Hwang has lain low, issuing only a short statement calling this a “challenging time” for Archegos.
Have a large amount of cash to invest? Here's how deploying it all at once compares with doing so over time – CNBC
If you have a big wad of cash to invest, you may wonder whether you should put all of it to work immediately or spread out over time.
Regardless of what the markets are doing, you’re more likely to end up with a higher balance down the road by making a lump-sum investment instead of deploying the money at set intervals (known as dollar-cost averaging), a study from Northwestern Mutual Wealth Management shows.
That outperformance holds true regardless of the mix of stocks and bonds you invest in.
“If you look at the probability that you’ll end up with a higher cumulative value, the study shows it’s overwhelmingly when you use a lump-sum investment [approach] versus dollar-cost averaging,” said Matt Stucky, senior portfolio manager of equities at Northwestern Mutual Wealth Management.
The study looked at rolling 10-year returns on $1 million starting in 1950, comparing results between an immediate lump-sum investment and dollar-cost averaging (which, in the study, assumes that $1 million is invested evenly over 12 months and then held for the remaining nine years).
Assuming a 100% stock portfolio, the return on lump-sum investing outperformed dollar-cost averaging 75% of the time, the study shows. For a portfolio composed of 60% stocks and 40% bonds, the outperformance rate was 80%. And a 100% fixed income portfolio outperformed dollar-cost averaging 90% of the time.
The average outperformance of lump-sum investing for the all-equity portfolio was 15.23%. For a 60-40 allocation, it was 10.68%, and for 100% fixed income, 4.3%.
Even when markets are hitting new highs, the data suggests that a better outcome down the road still means putting your money to work all at once, Stucky said. And, compared with investing the lump sum, choosing dollar-cost averaging instead can resemble market timing no matter how the markets are performing.
“There are a lot of other periods in history when the market has felt high,” Stucky said. “But market-timing is a very challenging strategy to implement successfully, whether by retail investors or professional investors.”
However, he said, dollar-cost averaging is not a bad strategy — generally speaking, 401(k) plan account holders are doing just that through their paycheck contributions throughout the year.
Additionally, before putting all your money in, say, stocks, all at once, you may want to be familiar with your risk tolerance. That’s basically a combination of how well you can sleep at night during periods of market volatility and how long until you need the money. Your portfolio construction — i.e., its mix of stocks and bonds — should reflect that risk tolerance, regardless of when you put your money to work.
“From our perspective, we’re looking at 10-year time horizons in the study … and market volatility during that time is going to be a constant, especially with a 100% equity portfolio,” Stucky said. “It’s better if we have expectations going into a strategy than afterwards discover our risk tolerance is very different.”
New rules for investing in China: Lessons from Beijing’s education crackdown – CNBC
BEIJING — As overseas investors reel from Beijing’s regulatory crackdown, the rapid fallout in an industry like after-school tutoring can be a guide to what went wrong, and where future opportunities lie in China.
Before China cracked down on tutoring schools this summer, major investment firms like SoftBank were pouring billions of dollars into Chinese education companies, many of which were publicly traded in the U.S. or on their way to listing there.
The strategy was one of burning cash to fund exponential user growth, with hopes of profit in the future. For the strategy to work, investors aimed for a “winner takes all” approach that they’d used with other Chinese start-ups such as coffee chain Luckin Coffee and ride-hailing company Didi.
Didi essentially paid Chinese consumers to take cheap rides through its app, beating out Uber to dominate about 90% of the mainland market, and went on to raise more than $4 billion in a New York IPO on June 30.
But it soon became clear that investment strategy might no longer work. Just days after Didi’s IPO, Chinese authorities ordered app stores to remove Didi’s app and began investigations into data security — effectively shutting down the business’s growth prospects in the near term.
By late July, the education sector was clearly Beijing’s next target.
Crackdown on after-school tutoring
In harsher-than-expected measures, regulators ordered tutoring companies in kindergarten to 12th grade academic subjects to restructure as non-profits, cut operating hours and remove foreign investment. Shares of industry leaders such as Tal Education, New Oriental Education & Technology Group and Gaotu Techedu plunged on that news. They have lost more than 75% each over the last three months.
Chinese tutoring start-ups that investment funds had placed their bets on months before suddenly lost their path to a public listing.
In October 2020, online tutoring start-up Yuanfudao said it raised a total of $2.2 billion from Tencent, Hillhouse Capital, Temasek and many other investors — for a valuation of $15.5 billion.
Two months later, competitor Zuoyebang raised $1.6 billion from investors including SoftBank’s Vision Fund 1, Sequoia China, Tiger Global and Alibaba.
“They were hoping to create another oligopoly like Didi” with market pricing power, said an investor and co-founder of one of the largest U.S.-listed Chinese education companies, according to a CNBC translation of his Mandarin-language interview. He requested anonymity because of the sensitivity of the matter.
However, the education industry already had several major market players, he pointed out, and “it turned out that no business could really beat the other before the crackdown.”
Building a dominant market leader in after-school tutoring was a lucrative prospect. The opportunity was enormous given China’s population of 1.4 billion people and a culture in which parents prize their children’s education.
Early industry players like New Oriental got their start with physically leased locations and in-person classrooms. But the coronavirus pandemic in 2020 accelerated the tutoring industry’s shift online, and the cash-burning fights of China’s internet world was in full play.
Chinese after-school tutoring companies began to spend heavily last year on advertising to attract new students.
U.S.-listed Gaotu spent more than 50 million yuan ($7.75 million) in one week this past winter for ads on short-video platform Kuaishou, a person familiar with the matter told CNBC.
“In China, Kuaishou is a smaller platform than [ByteDance’s] Douyin/TikTok, so the total spend on traffic by all of K to 12 education companies would be much more than that,” the source said in Mandarin, according to a CNBC translation.
Gaotu did not respond to a request for comment. In its earnings report for the first three months of the year, the company said its selling and marketing expenses of 2.29 billion yuan were three times more than a year ago.
Tal Education disclosed that its spending in the same category surged by 172% from a year ago to 660.5 million yuan for the three months that ended Feb. 28.
Both companies reported a net loss in the quarter, as did another industry player, OneSmart International Education Group, which disclosed a 47% year-on-year surge in selling and marketing expenses to 288.8 million yuan.
OneSmart listed in the U.S. in 2018 in an IPO underwritten by Morgan Stanley, Deutsche Bank and UBS. Later that year, the education company acquired Juren, one of the oldest businesses in China’s tutoring industry.
But the new after-school regulations struck a fatal blow to the 27-year-old company. About a month after the new rules were released, Juren collapsed, just one day before public schools opened on Sept. 1.
OneSmart could be delisted from the New York Stock Exchange since its shares have remained below $1 since July.
Other U.S.-listed Chinese stocks are also struggling. New Oriental did not report a net loss for the quarter ended Feb. 28, but disclosed it spent $156.1 million on selling and marketing in that time, 32% more than a year ago.
The surge in advertising spend to grow student enrollment came as investors piled into the industry, and increased competition sent customer acquisition costs soaring.
With new capital, start-ups Zuoyebang and Yuanfudao, along with Tal Education, reportedly went on to sponsor state broadcaster CCTV’s annual Spring Festival Gala in February. That’s the market equivalent in China of buying a U.S. Super Bowl ad, which costs of about $5.5 million for a 30 second spot.
But regulators were watching. In the months before the harsh crackdown, Chinese authorities fined 15 education companies a total of 36.5 million yuan, primarily for false advertising.
Then in July, harsher regulations on after-school tutoring essentially banned advertising, prohibited public offerings of shares, and investment from foreign capital.
‘Common prosperity’ in China
The new policy marks Beijing’s latest effort to restrict the education industry’s sprawling growth and its burden on parents — a concern for authorities trying to boost births in the face of a rapidly aging population and shrinking workforce.
Investors need to recognize that tackling the population problem, slowing economic growth and tensions with the U.S., have become top concerns for the Chinese government, said Ming Liao, founding partner of Beijing-based Prospect Avenue Capital, which manages $500 million in assets.
“The landscape has significantly changed,” he said, noting that investors now need to consider national policies far more than just industry developments.
In addition to the crackdown on internet companies and after-school tutoring centers, authorities have ordered online video game companies to restrict children to playing three hours a week.
Speeches by President Xi Jinping have emphasized the goal is “common prosperity,” or moderate wealth for all, rather than some.
Education is just one of the so-called three mountains that Chinese authorities are tackling. The other two are real estate and health care, all areas in which hundreds of millions of people in the country have complained of excessively high costs.
In the last 20 years, corporate profits have largely gone to property developers and companies based on internet platforms, Liao said.
In light of new policy priorities, he said, it’s important for investors to distinguish between internet-based businesses and those developing more tangible kinds of technology like hardware — even if both kinds of companies are loosely referred to as “tech” businesses in English.
With the U.S. now under President Joe Biden and bent on competing with China, Beijing is increasing investing in an ambitious multi-year plan to build up its domestic technology ranging from semiconductors to quantum computing.
The “China market can still offer attractive investment returns for global investors, and the challenge lies in identifying the potential future winners amid China’s rebalancing,” Bank of America Securities analysts wrote in a Sept. 10 report.
They pointed to a shift over the last two decades in the largest Chinese companies by market capitalization — from telecommunications, to banks, to internet stocks. Going forward, they expect greater regulation on internet and property industries, “while advanced manufacturing, technology, and green energy related sectors will be promoted.”
The bank listed a few contenders for “future winners.”
- Sportswear: Anta
- Health care: Wuxi Bio
- Electric vehicles and and EV battery: BYD
- Lithium in new materials: Ganfeng
- Renewable energy: Long Yuan
- Tech hardware: Flat Glass
“Certain industrials sectors that we currently do not cover could also have promising opportunities,” the analysts said.
Future of investing in China
For Chinese after-school tutoring companies that once attracted billions of dollars, they’re now trying to survive by building up courses in non-academic areas like art or adult education. Those in the industry say it’s an uncertain path that has a market only a fraction of what the companies used to operate in.
SoftBank is waiting for clarity on the regulatory front before resuming “active investment in China,” its Chief Executive Masayoshi Son said in an earnings call on Aug. 10.
“We don’t have any doubt about future potential of China … In one year or two years under the new rules and under the new orders, I think things will be much clearer,” Son said, according to a FactSet transcript.
When contacted by CNBC last week about its investment plans for China, Softbank pointed to how it led investment rounds in the last few weeks in Agile Robots, a Chinese-German industrial robotics company, and Ekuaibao, a Beijing-based enterprise reimbursement software company.
“Our commitment to China is unchanged. We continue to invest in this dynamic market and help entrepreneurs drive a wave of innovation,” SoftBank said in a statement.
But when it comes to bets on the education industry, some investors have decided to look elsewhere in Asia.
In June, Bangalore-based online education company Byju became the most valuable start-up in India after raising $350 million from UBS, Zoom founder Eric Yuan, Blackstone and others. Byju is valued at $16.5 billion, according to CB Insights.
Canadian dollar notches biggest gain in a month as stocks rally
The Canadian dollar strengthened to a one-week high against its U.S. counterpart on Thursday as investor sentiment picked up and domestic data showed that retail sales fell less than expected in July.
World stock markets rallied and the safe-haven U.S. dollar retreated from one-month highs as worries about contagion from property developer China Evergrande eased and investors digested the Federal Reserve’s plans for reining in the stimulus.
Canada is a major exporter of commodities, including oil, so the loonie tends to be particularly sensitive to investor appetite for risk.
“The assumption here is that (Fed interest) rate hikes are still a long way out and so equities markets can still perform with accommodative financial conditions,” said Mazen Issa, senior FX strategist at TD Securities in New York.
“Consequently, currencies that have a higher beta to the equity market, like the CAD, can do alright.”
U.S. crude oil futures settled 1.5% higher at $73.30 a barrel, while the Canadian dollar was trading up 0.9% at 1.2653 to the greenback, or 79.03 U.S. cents.
It was the currency’s biggest advance since Aug. 23. It touched its strongest level since last Thursday at 1.2628.
Canadian retail sales dipped 0.6% in July, compared with expectations for a decline of 1.2%, while a preliminary estimate showed sales rebounding 2.1% in August.
Canadian government bond yields were higher across a steeper curve, tracking the move in U.S. Treasuries.
The 10-year touched its highest level since July 14 at 1.335% before dipping to 1.330%, up 11.6 basis points on the day.
(Reporting by Fergal Smith; Editing by Nick Zieminski and Peter Cooney)
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