InvestorQ : Can you tell me about the Total Return Swaps that led to the fall of Archegos Capital?
sara Kunju made post

Can you tell me about the Total Return Swaps that led to the fall of Archegos Capital?

Answer
image
Mary Joseph answered.
3 weeks ago
Follow

Total Return Swaps or TRS is a bet on price movement. It is not about buying and holding the stock but essentially trading on stock futures where even the margin money is funded. Archegos extensively used TRS to take positions in stocks like Viacom CBS and Baidu. When the prices fell, Archegos could not pull in the margins and the prime brokers had no choice but to dump positions in the market. That is what eventually led to implosion of Archegos.

The second aspect was too much leverage. TRS was OK, if you were not awfully leveraged. That is where greed got the better of Archegos and the prime brokers, who also wanted to make a quick buck. The problems started when prime brokers started accepting progressively lower collateral to attract more business from Archegos. When the fall happened, the leverage risk got magnified.

In short, Archegos and the prime brokers were always running a high risk shop. Leverage was the last straw that exposed the hollowness of such a high-risk strategy!

2 Views