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In the months leading up to March 2021, Archegos Capital Management took synthetic positions on margin on a handful of comparatively illiquid stocks — ViacomCBS, Tencent Music, Baidu and Vipshop — in sizes that, across multiple prime brokers, were big enough to move the market sharply up. As the stocks appreciated, so did Archegos’ profit, and thus the net equity it held with its prime brokers. Archegos used that net equity to double down, buying the same stocks, pushing them up yet further. The higher they went, the thinner their trading volume, and the more of the market Archegos represented.
Now, hindsight is a wonderful thing, but really there was only one way this was ever going to turn out.
On 22 March, Archegos’ position in Viacom had a gross market value of US$5.1bn.[1] In a cruel irony, Viacom interpreted this to mean market sentiment was so strong that it should take the opportunity to raise capital.[2] Alas, no one was buying. Not even Archegos, since it was tapped out of equity with its prime brokers.
Viacom’s capital raising therefore failed, and all hell broke loose.
- ↑ Report on Archegos Capital Management
- ↑ As it was a synthetic position, Viacom may not have realised that Archegos was the only buyer in town: if it had, it may never have tried to raise capital in the first place.