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 Legendary hedge fund manager Bill Hwang is like no other hedge fund managers. He is in the middle of a trial for losing in 2 days close to $20 billion but now it’s being revealed at $35billion.

This caused a rippled affected in big bulge bracket investment banks such as UBS, Goldman, Morgan, CS and more.

Unlike Ken Griffin or Steve Cohen, Bill Whang somewhat unknown and managed to stay under the radar. He is a Korean American hedge fund manager that have had great success over the years a massing up to $20bn in net worth if not more. However, he wasn’t always wealthy. He comes from a slightly lower middle class where he’s father was a Christian pastor. So the Christianity blood runs through him.

He started his career in Korea at a tiny brokerage firm back then called Seoul Securities (no longer around) as an equity salesman. The difference between a retail stockbroker and an equity salesman is the clients. While retail brokers pitch stocks to individuals they know little about, institutional equity sales clients are experts themselves like portfolio managers at famous mutual funds, and hedge fund managers. Hence, this division of investment banks is made up of sector analysts, strategists, economists, and salesmen. They also facilitate block deals, distribute IPO and M&A. They really have to know all the parts of the investment bank’s business.

Not only your stakes are bigger, but you also have to be on top of news, corporate earnings, research and many other ideas for the clients so that they out-perform the benchmark index. However, recently hedge funds have changed. Some are now quants like recently passed like Ren-Tech founded by recently passed Jim Simmons, some have a CIO and sector analysts feeding L/S ideas, and pod system where the hedge fund allocates you money and you invest usually short-term building a long/short stock position. Most are market neutral or with a slight bias. They also use derivatives to hedge in the case of a sudden move in the market.

Lately, most investment banks have focused on hedge funds because they are a lot more profitable vs a long mutual fund. Mutual funds will buy a chunk of a stock providing commission and hold on to the stock long-term and sell later. Commission is the main driver for the investment bank, which has been coming down gradually.

However, a hedge fund pays multiple fees to the investment bank. 1) trading more frequently 2) leverage: most hedge funds borrow 200%-300% of their notional value where they pay a fee. 3) Short interest – like cash, hedge funds borrow stocks and sell it in the market, paying interest rate for borrowing a stock. Sometimes, these interest rates are as high as 20%. Having said that, more and more investment banks are focused on hedge funds. A hedge fund that manages AUM of$500mn vs a long only mutual fund that manages $8bn, could be more profitable for the investment bank. ETF’s like Blackrock makes billions on stock lending. Investment banks at times go to the market and buy a bunch of stocks, just to lend to hedge funds.

Back to Bill Hwang:
while I do not know him personally my connection with him was my intern worked for him and we have mutual friends.  

1) First of all, the man is very religious. He prays before everyday has a Christian Foundation. He has donated close to $600mn. Some say for tax reasons, but you can’t write all that off.

2) He started his career in a small brokerage firm called “Seoul Securities” as a broker covering the legendary Julian Robertson of Tiger Fund. While at Tiger, Robertson really liked Hwang and even threw a party for him at his house. Roberton also funded Hwang when so called “Tiger Cubs”, which is few hedge funds that emerged from Tiger Fund. Bill’s fund was called Tiger Asia.

3) In 2013, he had to pay a $60mn fine and was banned from investing in Asia and lost all his clients.

Getting Back Up:

One thing Bill is not afraid of is leverage. He does so much work on the companies he invests in, and they are usually thematic in the media and internet space. He is a great investor. Picking himself up, he started Archegos Capital. He started with some of his personal money of $1.5bn which grew to $35bn. He was so successful, he’s probably worth more than Julian Robertson by now. He’s also invested in Cathy Woods and seeded ARK ETFs.

4) Some of his big winners in the early on was Netflix, he was fascinated with the Dvdmail in company that is now trying to stream content. While Carl Icon’s invest in it was widely known, Bill had a big position and not many knew. Also, he held it for longer gaining more. Secondly, it was Amazon. He had a huge position in Amazon that turned out well. Linkedin is another name. He has been hitting home runs after home runs. Some years, his book’s performance was over 100%.

5) Last year, when tech started to fall, he was highly levered in a number of internet stocks like Tencent, and a few others. Archegos had GS, CS, UBS, Nomura and a few others as prime brokersbut UBS was his main. When the market was falling alarms rang due to his highly leveled positions, he started get margin calls. By this time Archegos had $160bn in market exposure. In the hedge fund world where fund that size, other hedge fund managers get a sense of what stock who is holding and like vultures, when the stock falls it’s most likely others will short. Being highly leveraged, Archegos lost big in a few days and the banks wouldn’t be able to recoup the losses.

6) Archechos was juggling to hold their position asking the banks especially UBS hoping stocks bounce back, it didn’t not. Hence, the hedge fund went belly up and the banks recorded huge losses.

It’s no doubt that Bill Hwang is a great investor,however his conviction in these stocks led him to dry. The courts are looking to put people in jail for fraud and market manipulation. In addition, the banks probably let him on to stock borrow and leverage as much as they can because that’s revenues to them until they realized his net exposure could be dangerous.

Disclaimer: This note is not a buy or sell rating or has information about the case in any way or form. It’s an opinion of the writer and should be considered as a blog.

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