The Archegos fiasco shows there are two types of family offices – but the regulator doesn’t care

Every family office is different, they say. But some family offices are more different than others

Out in the nether darkness, you can still sense the smoking hull of Bill Hwang’s US-based Archegos Capital Management, a family office that imploded on Friday 26 March after failing to meet margin calls on its debt.

Hedge funds that converted into family offices take care to disclose their holdings, as needed.  But Hwang’s family office appeared to get around this stipulation by using swaps…

Global markets were rocked that day by its $20 billion fire sale of US and Chinese stocks. Hwang’s Grace and Mercy Foundation, a trading partner bailing out the poor and oppressed, has found charity needs to begin at home.

The news rocked the capital markets and triggered massive losses for prime brokers Credit Suisse and Nomura. 

None of this is good news for the reputation of hedge funds and banks like Goldman Sachs and Morgan Stanley which did business with Hwang. Family offices could even face a regulatory clampdown for reasons not of their making.

Fact is Archegos Capital Management has continued to use its leveraged hedge fund strategies, ever since Hwang turned it into a family office in 2013.

The SEC has let hedge funds convert since 2010 when Dodd-Frank regulations were introduced to regulate the financial system after the crisis of 2008.  

Wealthy families never deserved to be hit by Dodd-Frank when it was the banks that triggered the crisis. 

SEC let them retain this status, updated in 2020, where they were large enough, professionally managed, and run for the benefit of a single family. 

It was at that point that hedge funds chafing under Dodd-Frank restrictions realised they could become family offices, as long as they got shot of their clients.

The hedgies who managed the transition included George Soros, Leon Cooperman, John Paulson and Louis Bacon. 

Hwang, a former manager for hedge fund legend Julian Robertson, converted his hedge fund to Archegos less than a year after paying a $44 million fine for alleged illegal trading at his former firm Tiger Asia Management. He neither confirmed nor denied fault.

Hedge funds that converted into family offices take care to disclose their holdings, as needed.  But Hwang’s family office appeared to get around this stipulation by using swaps issued by a range of investment banks.  

Banks, rather than Archegos, were disclosed as owners of its shares in companies like ViacomCBS, Baidu, Discovery Communications, and GSX Techedu of China, where it traded against hedge funds shorting the stock.  

However, Archegos needed to comply with margin calls whenever the value of its underlying securities took a hit. This state of affairs came to pass prior to 26 March, it had no choice but to embark on a fire sale, which pushed some of its big holdings down a quarter.

The affair could well lead to questions as to why global investment banks were inspired to put their tarnished reputations at risk, yet again. Incoming SEC chairman Gary Gensler will be asking some tough questions: it’s the kind of thing he does. 

Adviser Stephen Martiros believes the affair will add to the challenges faced by family offices in trying to comprehend the risk, and fees embedded in hedge fund structures.

Closer to home, family offices could be facing tougher regulations because of a hedge fund that had no business being called a family office in the first place. 

But a tightening of the definition of family offices by the SEC, to exclude hedgies, wouldn’t be a bad idea.