By Jon Caplis, Founder and CEO, PivotalPath
So far, 2021 has had its fair share of high-profile hedge fund stories, from the GameStop and Reddit saga in January to the Archegos meltdown later in Q1. However, other than the word “hedge fund,” different factors were at play across each high-profile story. Here, we’re going to focus on the most recent – Archegos.
To quickly summarize, Archegos was the family investment vehicle owned by Bill Hwang, a former protégé of hedge-fund titan Julian Robertson, and was said to manage $10B at peak. However, through total return swaps, Archegos reached approximately $30B in market exposure, taking big, concentrated positions in companies before dramatically unraveling in March of this year.
As CEO of PivotalPath, a hedge fund consultant with a view into $2.3T of hedge fund capital and $150bn in client hedge fund investments, I received countless media inquiries when the Archegos story broke. First came asks about who knew what and when. Then those inquiries morphed into questions about regulation and whether they could prevent a repeat occurrence.
It’s important to recognize that there are risks at both the manager and peer group level that can be monitored and those that cannot. Access to robust and meaningful data marks that delineation – this is true both for broad-based investment portfolios as well as hedge fund-specific allocations. It’s vital to know the difference and to manage accordingly.
So, what can’t you know?
Specific Hedge Fund Positions – As an investor or regulator, you are not able to view specific positions on a day-to-day basis unless you have a managed account. While 13Fs provides a quarterly snapshot of meaningful equity holdings, Archegos was able to avoid even that level of transparency by using total return swaps spread across multiple bank balance sheets instead of buying the underlying companies’ stock.
What can you know?
Thematic Risk Factors – You can analyze a fund’s sensitivity to a group of securities by creating custom baskets. For example, to identify whether other managers had exposure to the Archegos unwind, we created an index (e.g., a basket of stocks) including names such as ViacomCBS Inc, Discover Inc, and Baidu. We then systematically analyzed exposures across ~2,000 institutional quality hedge funds to determine the extent of the damage, which proved to be quite contained. More interestingly, we continued to run this analysis to determine whether funds scooped up those stocks because of the Archegos led selloff.
Fundamental Risk Factors – You can analyze fund and strategy exposures across meaningful global risk factors. In practice, this means curating the most relevant factors for each strategy. For instance, global macro managers typically include factors such as the Barclays HY Credit Index, the Dow Jones Commodity Index, MSCI Emerging Markets, the S&P 500 as well as the U.S. Dollar. From there, we are able to identify and monitor risks at the manager, strategy and portfolio level.
Straight From The Horse’s Mouth – You can also identify trends, both risks, and opportunities, by speaking to a large number of them on a regular basis. Manager feedback is always important to serve as a check on any model.
In short, it’s often not possible to know exactly what a specific hedge fund’s risk level is at any given moment – even monthly fact sheets may only reflect portfolio holdings on a single day, but there’s a lot around the edges you can infer. And as it turns out, Archegos was a sensational story but one we anticipate will have few implications for the industry at large without the passage of new regulation.
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