The night before Archegos Capital’s story broke out in public at the end of last month, the fund’s main broker quietly relinquished some of its risky positions to hedge funds, people familiar with the deal told CNBC.
Morgan Stanley sold about $ 5 billion in shares of Archegos’ doomed games on US media and Chinese tech names to a small group of hedge funds at the end of Thursday, March 25, according to people who requested anonymity to speak honestly about the transaction.
It is a previously unreported detail that shows the extraordinary steps that some banks took to protect themselves from incurring losses from a customer’s meltdown. The move benefited Morgan Stanley, the world̵
Morgan Stanley had the consent of Archegos, led by former Tiger Management analyst Bill Hwang, to shop around the warehouse late Thursday, these people said. The bank offered the shares at a discount and told the hedge funds that they were part of a margin call that could prevent the collapse of an unnamed client.
But the investment bank had information it did not share with stock buyers: The stock basket it sold, consisting of eight or so names including Baidu and Tencent Music, was just the opening salute to an unprecedented wave of tens of billions of dollars in sales from Morgan Stanley and other investment banks started the next day.
Some of the clients felt betrayed by Morgan Stanley because they did not receive the crucial context, according to one of the people who know the industry. The hedge funds later learned in press releases that Hwang and his primary brokers convened Thursday night to attempt an orderly settlement of his positions, a difficult task given the risk that the word would come out.
This means that at least some bankers at Morgan Stanley knew the extent of the sale that was likely and that Hwang’s company was probably not rescued, these people claim. This knowledge helped Morgan Stanley and rival Goldman Sachs avoid losses because the companies quickly disposed of shares tied to Archegos. Morgan Stanley and Goldman declined to comment for this article.
Morgan Stanley was the largest holder of the ten largest shares traded by Archegos at the end of 2020 with approx. 18 billion $ In positions in general, according to an analysis of market participants’ archiving. Credit Suisse was the second best exposed with about $ 10 billion, these sources noted. That means Morgan Stanley could have had about $ 10 billion. $ In loss if it had not acted quickly.
“I think it was an ‘oh s —‘ moment where Morgan saw potentially $ 10 billion in losses on their book alone and they had to move fast,” the knowledgeable person said.
While Goldman’s $ 10.5 billion sale in Archegos-related stock on Friday, March 26 was widely reported after the bank blew up emails to a wide list of clients, Morgan Stanley’s move the night before was not reported until now because the bank processed fewer than half-a-dozen hedge funds that allow transactions to remain hidden.
Clients, a subgenre of hedge funds sometimes called “stock market strategies”, typically do not have views on the benefits of individual stocks. Instead, they buy blocks of shares from major prime brokers like Morgan Stanley and others when the discount is deep enough, usually to relax traders over time.
After Morgan Stanley and Goldman sold the first blocks of shares with Archego’s consent, the lock gates opened. Brokers, including Morgan Stanley and Credit Suisse, then exercised their rights in default, seizing the firm’s security and selling positions on Friday, according to sources.
In a wild share session on Friday at the end of March, another twist came: Some of the hedge fund investors who had participated in the Thursday sale also bought more shares from Goldman, which later came on the market at prices that were 5% to 20% during Morgan Stanley sales. While these positions were deep under water that day, several names, including Baidu and Tencent, came back and allowed hedge funds to relieve positions of profits.
“It was a gigantic cluster — of five different banks trying to liquidate billions of dollars at the same time without talking to each other and trading to all places where prices were advantageous to themselves,” said one industry source.
Morgan Stanley largely left its Archegos positions by Friday, March 26, with the exception of one holding: 45 million shares in ViacomCBS, which they traded to customers on Sunday, according to the people. The bank’s delayed divestment of Viacom shares has given rise to questions and speculation that it owned the stock because it wanted a secondary offer run by Morgan Stanley the week before to close.
Despite some of its hedge fund clients leaving less than enthusiastic, Morgan Stanley is unlikely to lose them over the Archegos episode, people said.
This is because the funds want access to shares in hot public offerings that Morgan Stanley, as the top banker in the U.S. technology industry, can distribute, they said.