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Explainer-Why Archegos Capital was in U.S. regulators’ blind spot -Breaking


© Reuters. FILEPHOTO: An individual walks past the building at 888 7th Ave. The Manhattan borough in New York City is home to Archegos Capital. REUTERS/Carlo Allegri/File Photo

By Michelle Price

(Reuters) – U.S. authorities have charged Bill Hwang, Archegos Capital Management’s owner, with fraud, racketeering and market manipulation in connection to the New York office meltdown that left banks around the world suffering losses of approximately $10 billion.

Archegos had $36 billion invested capital. However, Archegos did not face any regulatory oversight because Archegos was a family office that used some types of swaps and avoided other reporting rules.


Families establish family offices in order to manage money, provide services for their loved ones, and to help them with tax and estate planning. They also handle philanthropic endeavors and other financial matters. According to Campden Research, global family offices had $6 trillion of assets in 2019, according the market research company.


Single-family offices are generally not subject to regulation. Because of the 1940 Investment Advisers Act which exempted clients with 15 or fewer, most family offices didn’t have to register at the U.S Securities and Exchange Commission.

After the 2008 financial crisis, the 2010 Dodd-Frank Act was passed to repeal this exemption. It required that advisers for private funds with less than 15 clients register with the agency. However, the act also created an exception for some family offices.

The Advisers Act exempts any company providing investment advice regarding securities to relatives and wholly or exclusively controlled by their families from being subject to the Advisers Law.

Archegos’ exclusion from investment adviser registration was confirmed by the SEC on Wednesday. Hwang was unable to see his aggregate positions and, in turn, his entire risk exposure to regulators. This did not apply to individual banks trading with him.


According to the SEC Archegos pursued a “long/short equity strategy”, taking long exposures only in certain stocks, and hedge them through short exposures using exchange-traded fund or custom baskets of stock. There were also limited exposures to particular stocks in some instances.

According to the SEC, “Its long position tended to both be highly leveraged as well as highly concentrated,” noting that his leverage sometimes reached 1000%.

Hwang did however have exposure to a form of equity derivative that his bank counterparts wrote. They bought the shares and promised Hwang a return based upon the shares’ performance.

Hwang had access to specific stocks via derivatives, without having to own them. He was also able to avoid an SEC rule that mandates individuals who purchase 5% or more stock in a company to disclose the ownership. Holders of these types of security-based securities “swaps” have not had to declare them.

The SEC said Hwang’s use of the swaps was “a deliberate strategy … to limit the visibility of market participants and Counterparties into the extent of Archegos’s aggregate holdings.”

SEC works to close this regulatory loophole.