Are we looking at another Lehman rerun with the Archegos capital sell-off? – Money Bites Newsletter 02 Apr
Short bites to keep you informed of matters that impact your wallet and wealth
What’s up, everyone?
We enter a new financial year this week. And the Govt decided to give us a shocker by cutting interest rates of small savings schemes like PPF, NSC, Sukanya Samruddhi Yojana, etc but thankfully withdrew the order. The earlier rates stand good.
Top bite this week
Are we looking at another Lehman rerun with the Archegos Capital debacle?
What’s going on here?
Last week, Archegos Capital, the family office fund was faced with a fire sale of some of its assets – $ 20 billion at a loss to meet margin requirements
What triggered the massive sale? Is it another Lehman rerun?
Archegos, used derivatives like Swaps and Contract for Difference (CFD). Incidentally, derivative instruments like these were the cause of the financial crisis of 2008. These instruments allowed Archegos to use leverage (buying stocks on credit) to build up positions in various stocks in arrangement with Wall Street banks like Credit Suisse, Nomura, UBS, Morgan Stanley, and Goldman Sachs.
The use of derivative instruments, also allowed Hwang, the man behind Archegos, who is an ex-hedge fund manager to build up huge positions in stocks of companies without the regulator getting aware of the same. Usually, anyone picking up more than 5% in a listed company should reveal their positions to the regulator.
As the prices of some of the companies like RLX Technology, GSX Techedu (both are Chinese companies), and Viacom CBS that he invested in, through these arrangements, went down, the banks demanded more collateral which Archegos couldn’t come up with.
Faced with this situation, banks had to sell investments of Archegos, take huge losses and trigger price drops of major companies like Tencent Music, Baidu & Discovery. Nomura has admitted losses of $2 billion( without clearly specifying that it was due to Archegos), Credit Suisse said the losses were substantial, while others are said to have lower losses.
Is there an impact expected on the Indian markets?
Experts say that this is an issue pertaining to a single hedge fund and a particular theme ( media & entertainment stocks) so it may not have a wide impact. Also, Indian markets are more conservative and adequate checks and balances are in place from SEBI’s end.
However, hedge funds with exposure to Indian and Asian stocks are getting demands for higher margins which if not met could trigger sell-offs elsewhere as well.
You Ask- We answer
Which large-cap mutual fund should I invest in currently? – Ramesh M
You would know that one way of categorising equity mutual funds is based on the market capitalisation of the companies they invest in. It could be large-cap, mid-cap, or small-cap funds.
Individuals look at investing in large-cap funds as they are less riskier. A few pointers about large-cap funds
- They have to invest at least 80% of their assets in the equities and other related securities of the top 100 companies in terms of market cap.
- Large caps are actively managed funds. They look at beating their benchmark index, so end up spending extra on research, fund managers, etc, and have higher expense ratios(average expense ratio being 2.24%)
- Not many funds are able to beat the index even after charging these expense ratios.
On the other hand, if you are looking to invest in large cap funds, you could try investing in Index funds. These funds invest in indices like Nifty 50 or Sensex and just mirror the index. They do not look at beating the index, hence come with a lower expense ratio( average 0.19%). Index funds are diversified, transparent, and easier to understand even for a new investor.
💡 Do you have questions on personal finance & investing? Go ahead and ask away in the comments below. Get featured in our upcoming issues.
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