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What Went Wrong with Archegos’ Capital Management Strategy? 

Archegos Capital Management is under tremendous debt after it miserably failed to pay its dues to lead international banks. Goldman Sachs, Nomura Holdings, Morgan Stanley remain in the league of lending banks.

The family office operated through total return swaps that helped it maintain a discreet asset status. It is otherwise obligatory for family offices to furnish report stock to the Securities Exchange Commission’s official site, EDGAR.These laws are valid when the stocks are over $100 million. However, capital management institutions operating through total return swaps do not fall in the bracket.In a scrupulous move, Archegos borrowed from leading capital investment firms to own stock baskets.

The agreement between Archegos and lending financial institutions underlined Archegos’ liability to pay a pre-approved fee at stipulated periods.Despite several agreements with banks on stock baskets that allowed Archegos to borrow huge capital, the family office institution offered the same swap arrangements for the exact stock sets to all the lending banks who were completely unaware of the move.

This strategy worked in favor of Archegos that eventually built credibility even without any stock reporting. Archegos experienced exemplary profits as long as the swap portfolio rose to its favor. However, with the share price dip, trouble began for Archegos as it had exhausted maximum capital.  This fraudulent investment footprint is therefore likely to invite stringent regulatory norms. As per the statement released by Janet Yellen, the Treasury Secretary, FSOC (Financial Stability Oversight Council) will set stringent measures to oversee all hedge funding investments to appropriately evaluate risks and vulnerabilities.

It is also likely that scrutiny groups who actively oversaw the hedge funding activities during President Obama’s reign would resume services. These groups were expelled by the Trump government. However, considering the seriousness of a pandemic-struck economy, it is crucial to professionally monitor hedge funding activities to avert all market instabilities, affirmed Yellen.

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