Wake up call for the supervisory authorities

The collapse of asset manager Archegos raises questions: Why do banks lend Bill Hwang billions that he can gamble away on the markets? The call for regulation is getting louder. By Thomas Spinnler, tagesschau.de Bill Hwang, the founder and co-head of Archegos Capital, whose fall caused immense financial damage to some of the world’s major banks, regularly emphasized how inspiring he is to believe and how to act. “Where can I invest to please God?” Is the question the professing Christian regularly asked himself before making investment decisions. The answers that Hwang gave himself so far have made the native South Korean a fortune. According to estimates, his family office Archegos Capital is said to have managed between ten and 20 billion dollars.

Family offices: practically unregulated

The advantage of a so-called family office in which investors manage their own assets is that they are practically not subject to any regulatory or disclosure requirements. This is different with other constructions such as hedge funds that do business with other people’s assets: They must be registered with the US Securities and Exchange Commission and report quarterly on the investments in their portfolio. They are also obliged to disclose data on the ownership structure, assets under management and contacts with banks. For wealthy private individuals, a family office is therefore an ideal opportunity to move billions away from the public and regulatory authorities and to do business that should not necessarily be known. Which super-rich would like their investments to be discussed in detail by a broader public? This is also the reason why very few details are known about Hwang’s bets. The trigger for the problems at Archegos was apparently the price development of the share of the US media company ViacomCBS. Credit Suisse and the Japanese bank Nomura were particularly hard hit. Competitors such as Morgan Stanley, Goldman Sachs, JP Morgan or Deutsche Bank, who also had business relationships with Archegos, were able to get themselves to safety in good time.

The warning ignored

For Hwang, the secretive nature of a family office is likely to have been a major factor, as he has repeatedly come into conflict with laws in his investor life. In 2012, the US Securities and Exchange Commission accused him of insider trading. Hwang had to pay $ 44 million to get this done. Hwang has learned a painful lesson, he would be well advised to heed this warning, SEC Director Robert Khuzami advised him in the Securities and Exchange Commission notice. Khuzami’s warning went unheeded: In 2014, a court in Hong Kong banned him from trading stocks there for four years after Hwang admitted using inside information when trading Chinese bank stocks. In 2013 he founded his family initiative Archegos Capital.

Family offices are becoming increasingly popular

Family offices are playing a growing role as actors in the financial markets. Of course, many wealthy families do not want to increase their capital in extremely risky ways – and in the process get shipwrecked like Hwang. The aim is to manage the capital for years to come and generate returns. Most family offices are interested in long-term investments, as a study by the Insead business school found. A 2019 study by analyst firm Campden Research said they managed roughly $ 6 trillion in assets worldwide. In 2020, the family office of the Walton family, the founding family of retailer Walmart, was at the top with more than $ 160 billion in assets under management. According to estimates by the consulting firm EY, there are currently around 10,000 family offices around the world. The trend has been increasing for years. Most family offices have been created in the past 20 years, according to Insead. According to the experts at the consulting firm KPMG, one reason for the popularity is simply the fact that there are more and more wealthy families.

Where were the regulators?

The collapse of Archegos could now bring the issue of regulation of family offices on the agenda: The massive transactions and losses would raise questions that affect the banks and their relationship with Archegos, commented the Democratic US Senator Sherrod Brown on the incidents. The treatment of family offices should also be questioned. The “Financial Times” quotes Mark Sobel, chairman of the US think tank OMFIF, a longstanding and high-ranking employee in the US Treasury. He agrees with Brown: Archegos raise fundamental questions about the suitability of banks’ risk management. The regulatory perspective on the interactions between banks and non-banks should also be examined – to which, as we have seen, family offices have long belonged as powerful players in the financial markets. ECB director Isabel Schnabel told “Spiegel” that the collapse shows that there are significant regulatory gaps in funds. “Fortunately, it has only been a single fund so far. Nevertheless, this is a warning signal that there are considerable systemic risks here that need to be better regulated.” So why do banks provide at least a seedy figure like Hwang with credit billions that he can gamble away on dubious bets? And why doesn’t a supervisory authority know anything about it? Questions that should be answered quickly.