Hedge Fund Archegos Capital Defaults — Significant Losses for Nomura and Credit Suisse

By Luigi Wewege Monday, March 29, 2021

Nomura and Credit Suisse, some of the world’s biggest investment banking businesses, both warned they are facing billions of dollars in losses after the US hedge fund Archegos Capital defaulted on margin calls last week.

A businessman holding a declining graph line.

US Media Stocks Hit Badly

Archegos Capital, a hedge fund founded by Bill Hwang, defaulted last week to prompt the selling of a large number of shares. It is estimated that losses exceeded $35 billion as big banks, including Goldman Sachs, Nomura, and Credit Suisse, started selling big blocks of several stocks to meet margin calls.

A margin call occurs when the trading account falls below the broker's required amount. At this stage, the broker starts closing positions. Shares of US media companies, such as Discovery and ViacomCBS, fell sharply last week as banks moved to close positions held by a hedge fund.

Shares of Discovery crashed over 45% last week while ViacomCBS share price closed the week over 50% lower.

In addition to Archegos Capital, it appears that the Asian hedge fund Teng Yue Partners, managed by Tao Li, was also impacted heavily and reportedly suffered losses measured in billions.

Following last week’s developments, the Swiss banking business titan Credit Suisse issued a trading update to warn its business will bear “significant” losses after a hedge fund defaulted on margin calls.

“While at this time it is premature to quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first quarter results, notwithstanding the positive trends announced in our trading statement earlier this month,” the Swiss business said in a trading update.

Similarly, Japanese bank Nomura is currently estimating damage of $2 billion following losses its US business arm suffered last week after a hedge fund defaulted. It is still early to tell whether this amount will increase or decrease as some other banks are also likely to report on their business relationship with Archegos Capital and other hedge funds impacted by margin calls.

“This estimate is subject to change depending on unwinding of the transactions and fluctuations in market prices,” the banking business said in a statement.

“Nomura will continue to take the appropriate steps to address this issue and make a further disclosure once the impact of the potential loss has been determined.”

Bloomberg reports that Archegos was a prime brokerage customer of Nomura, with most of the bank’s losses coming from Archegos’ trade. However, analysts believe that the Japanese business giant is more than able to absorb these losses.

“Nomura Holdings should be able to absorb losses of this size. It does raise a question of whether there are losses at other Japanese investment banks that just haven’t been revealed yet, but at this point it looks like this problem only affects Nomura. This is not something that will bring down the entire equity market,” an unnamed broker was cited by Reuters.

Similarly, analysts at Jefferies expect the impact on Nomura’s longer-term outlook to be “relatively limited as long as the hedge fund drama proves to be an isolated incident for Nomura.

Shares of Nomura closed 16.3% lower in Tokyo today, while Credit Suisse stock is down almost 14% in today’s European trading session.

Summary

Nomura and Credit Suisse issued a warning today they were facing significant losses after a US hedge fund defaulted last week to prompt selling of large blocks of several stocks.

About the Author


Headshot of Luigi Wewege

Luigi Wewege is the Senior Vice President and Head of Private Banking at Caye International Bank. Outside of the bank, he serves as an instructor at the FinTech School which provides online training courses on the latest technology and innovation developments within the financial services industry. Luigi is also the published author of "The Digital Banking Revolution."

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