The financial world was shaken this week with the blow up of Archegos Capital Management, an until now, obscure family office that stealthily hid the fortune of former hedge fund manager Bill Hwang. Banks could lose as much as $10 billion in the fiasco and it has already made Credit Suisse issue a profit warning for investors for this quarter and analysts are already saying the firm could lose as much as $4 billion in the fiasco.
The media is just now looking into Bill Hwang and has already teased out enough information to publish an entire short form biopic of him on Bloomberg. The picture they paint is much more interesting and deeper than the headlines would convey. Rather than being a greedy hedge fund titan thirsty to rule the world, Archegos seems to be a small, tightly need gathering of 50 deeply devout Christian financial professionals. These professionals worked with Hwang in a family office setup, a name for an accredited private fund that is able to make large bets like a hedge fund but does not have to register with the SEC because it doesn’t employ any outside capital.
Estimates are that Hwang had amassed as much as $100 billion from starting capital of $200 million in 2012, most of that coming in the last 12-24 months as some investments shot up in the pandemic rally. Rather than just being hungry for money and power however, Hwang seems to live an austere life by hedge fund standards. He rides public transportation, lives in suburban New Jersey and takes long walks in Central Park while listening to bible verses on audio according to Bloomberg.
Hwang is part of a small and growing, yet significant faction of managers in the financial world that are devout Christians. His contemporaries in this respect include fund manager Cathie Wood and Truist CEO Kelly King. Why is it that Christians are gaining so much clout all the sudden on Wall St. and what lessons can those of us who are less devout or not religious at all still learn from them? Beyond that, what does their management style and philosophy have to do with why some big banks lose?
God and Man Collide
This is not Hwang’s first rodeo. He was a disciple of legendary hedge fund manager Julian Robertson and went on to found his own fund Tiger Asia Management, which operated from 2001 to 2012. At that time, Hwang reached a settlement with the Hong Kong financial regulator as well as the SEC on one count of wire fraud that eventually saw him barred from the financial industry in the US and from Hong Kong markets for 4 years. Hwang reportedly returned 40% annually to investors from 2001 to 2007 yet saw his fund take steep losses when it was caught up in the last huge short squeeze before GameStop: the infamous Volkswagen short squeeze of 2008 where the stock rallied as much as 348% after Porsche announced that it would be upping its stake in Volkswagen, causing the shorts to run for cover.
According to Valuewalk.com, Hwang turned Tiger Asia into Archegos in 2012 and returned all outside money to investors at that time. Since then, the site reports that the fund has returned 15% annually, handily beating many of the best benchmark performances over the same period.
This was seemingly done with leverage through derivatives like equity swaps, which allow for the return of an underlying stock in exchange for fixed payments of cash. Funds like this usually enter contracts for these derivatives with banks. Banks then cover their risk with the underlying shares and by the fund pledging shares as collateral in case they default. It is estimated that this allowed Hwang to control as much as $100 billion, an amount large enough to move the market in stocks like ViacomCBS, which saw its stock rally from a low of $14.01 during the start of the pandemic to a high of $100.31 as recently as March 22nd.
Losing billions not once but twice is enough to make any manager throw in the towel, but what may be at the heart of Hwang’s so called “diamond hands” or fearlessness in the face of massive volatility may we’ll be his faith. Ironically, the adherence to an austere lifestyle and belief in something greater than money may propel managers like these to be able to continually stare adversity in the face, adjust and move on, nimble qualities required of any manager but especially a fund manager.
Cathie Wood also falls in this category. Her Ark Invest ETF’s are well known at the moment for their aggressive bets on technology but what is less known is that Wood is also a devout Christian that named named her fund after the Ark of the Covenant in the Bible. She has been featured on religious podcasts such as Jesus Calling, where she describes that her fund was founded on faith. She maintains that she got the idea for a disruptive company that was “fighting a war” to upend the industry, and named it Ark after she read that the Israelites would carry the Ark into battle for inspiration.
Her fund does indeed do things different. Wood was an equities research analyst at Jennison Associates early in her career and had to cover the shares others didn’t want such as emerging internet and wireless stocks in the 80’s and 90’s. Turning this negative into a positive, she used this background to become an expert in technology investing. She publishes Ark research for free and regularly shares her opinions on social media. Here again though, what really makes Wood stand out is her stomach for making massive bets on volatile stocks like Tesla that she thinks have the capacity to disrupt global markets.
Philosophy Matters
Is it something in Christian teachings that produces this kind of vision and perseverance in the face of hardship in the form of huge volatility? I would argue that it’s not but rather having a core philosophy greater than money guiding each of these people that allows them to be bold and most importantly, have the courage to fail.
In contrast, it’s not much of a surprise that both Credit Suisse and Nomura are bearing the brunt of the losses in the Archegos affair. Each of these investment banks has seen a shuffling of management in the past year and lack a focused philosophy and message from management. That is not to say that Goldman Sachs or Morgan Stanley are any better philosophically at their core but at least acknowledgment of mistakes and acting quickly on them can likely mean the difference between losing millions and losing billions.
What I mean by this is that in organizations that are nimble, take risks and yet don’t have managers blow up when things go wrong, are better able to shift and adapt to situations like that of Archegos. For investors in the financial space and especially the bank space, this is a very important qualitative judgement about management that should be made before investing in any bank. Warren Buffet emphasized this when he first invested in US Bank. He noted in his reasons for investing that they recognized loan losses faster than many of their peers in addition to being in the boring business of retail and mortgage loans, ditching the high flying investment banking revenue of some of their peers.
When too many managers are just focused on the short term and there is a leadership vacuum at the top of many of these organizations, fear can dominate over risk mitigation. Not wanting to tell the boss bad news and trying to cover for oneself before anyone else, are tactics directly derived from a fear based and perfectionist culture which is set by management at the top.
Speaker and writer Brené Brown talks about these issues and why some companies fail to innovate in her speaking engagements based on her book called The Power of Vulnerability. She explains that not allowing people to be vulnerable cuts off any space for expression and creativity. No creativity means no innovation and no innovation means falling behind. She also maintains that if you have no tolerance for failure you also can’t innovate. Innovation by nature is a try and fail endeavor, if managers want a home run every try, they are going to be quickly disappointed. She describes that vulnerability is the feeling we get from being at risk, uncertain and emotionally exposed. She claims that brave leaders are never silent around hard things. Having worked in environments very similar to that of Nomura and Credit Suisse I can tell, even from the outside, that fear and perfectionism likely dominate in these firms and now management has seen the consequences of where that leads.
Despite the fact that Mr. Hwang is at the center of this blow up, he has charities and vocal supporters are making their support of him known. Few if any, are sticking their necks out for Credit Suisse and Nomura. The irony is that a fear based culture not only stifles innovation but also risk mitigation. Perfectionism ends up blowing up worse in the long run than all the small fixes it produces in the short run. I have a feeling that the Christian values of forgiveness and redemption may mean we haven’t see the last of Mr. Hwang.
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