Goldman Sachs’ Risk Controls, How Archegos Vanished

Updated on

Whitney Tilson’s email to investors discussing that individual investors retreat from markets after show-stopping start to 2021; Matt Levine on Archegos; Goldman Sachs’ risk controls; NYS Excelsior Pass vaccine passport.

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Q1 2021 hedge fund letters, conferences and more

Individual Investors Retreat From Markets After Show-Stopping Start to 2021

1) I don't think it's because they've been listening to my repeated appeals, but nevertheless it's good that retail investors appear to be coming to their senses – as this Wall Street Journal article notes: Individual Investors Retreat From Markets After Show-Stopping Start to 2021. Excerpt:

Individual investors kicked off 2021 at a sprinter's pace. Now, they are finally showing signs of fatigue.

Trading activity among nonprofessional investors has slowed in recent weeks after a blockbuster start to the year, with the group plowing less money into everything from U.S. stocks to bullish call options. Daily average trades for at least two online brokerages have edged down from their 2021 highs. Across the industry, traffic to brokerage websites, as well as the amount of time spent on them, has fallen.

Sadly, however, the primary reason for the sharp decline in trading is almost certainly that these investors have gotten hammered, as I warned...

Consider my "Short Squeeze Bubble Basket." When I named these 25 stocks and called their top (almost to the hour) in my January 27 e-mail, they had a combined market capitalization of $159 billion. As of yesterday's close, a mere 10 weeks later, the basket is down by an average of 40%... meaning the shareholders of these companies have lost a staggering $63 billion (worse yet, the actual number is surely higher due to leverage/options)!

There's no way to know for sure, but I'd bet my last dollar that the vast majority of these losses weren't borne by hedge funds, institutions, or other professional investors, but rather naïve newbies who (as is always the case) got sucked into a gigantic bubble right at the top.

No wonder they're trading less after such a shellacking!

Archegos Appeared, Then Vanished

2) One of my favorite columnists, Bloomberg's Matt Levine, did a nice job in his newsletter yesterday, Archegos Appeared, Then Vanished, of tying together all the loose threads in the mind-boggling implosion of Bill Hwang and his Archegos Capital Management. He concluded:

But I suspect it mostly matters because it makes the story more exciting. This is not a story of a big famous hedge fund getting blown out of its giant positions. It's a story of a big totally unknown hedge fund (fine, family office) getting blown out of its giant positions. You got the pleasure of discovering that Bill Hwang exists, and "was worth more than well-known industry figures like Ray Dalio, Steve Cohen and David Tepper," at the exact moment you got the further excitement of learning that he lost all of it on wild levered bets. Because he did everything on swap, as far as most people are concerned Bill Hwang went from nothing to $20 billion and back to nothing in a single news cycle.

It reminds me of something Warren Buffett once said about margin/leverage: "If you're smart, you don't need it, and if you're dumb, you shouldn't be using it."

Goldman Sachs' Risk Controls

3) This part of Levine's column caught my eye because it captures one of the main reasons why we recommended investment bank Goldman Sachs (GS) rather than one of its peers to Empire Stock Investor subscribers in December 2019 (since then, the stock is up 44% versus 26% for the S&P 500 Index) – Goldman is ruthless about managing risk:

The basic dynamic of Archegos' margin liquidation is that Goldman Sachs Group and Morgan Stanley (MS) blew out Hwang's position in a series of big block trades on Friday, March 26. Those trades got a lot of attention, spooked the market, brought down the prices of Archegos' holdings, put pressure on its other banks, and ultimately led everyone to blow Archegos out.

But Goldman and perhaps Morgan Stanley were fine. The blocks were done at discounted prices, but prices that seem to have been above (or at least near) the amounts that Goldman and Morgan Stanley had advanced to Archegos. Goldman has said that the Archegos unwind "will likely have an immaterial impact on its financial results."

That's not to say Goldman always gets it right. The company had a total failure of risk control in the 1MDB scandal (deliciously documented in the book, Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World). And Goldman made one of the worst stock sales ever, as this tweet notes:


But I can say as a long-time observer and client of more than a decade (Goldman was my prime broker for more than half of my hedge fund's 18-year existence) that the firm consistently attracts more than its share of the smartest people on Wall Street and is tightly managed, with a particular focus on risk control. This is important to understand if you're going to invest in an investment bank, which is essentially a black box to outsiders (and even, often, insiders)!

NYS Excelsior Pass Vaccine Passport

4) There's a lot of controversy about "vaccine passports" (for example, see this article: Israel's "green pass" is an early vision of how we leave lockdown), but like the idea or not, I think they're coming, as this article notes: COVID-19 Vaccine Passports Are Coming. What Will That Mean?

I just signed up for a New York state Excelsior Pass. Here's what it looks like in the app I just downloaded on my phone:


(I assume it expires roughly six months from when I got my second shot because it's uncertain how long the protection lasts – we may need booster shots. If it turns out that the protection lasts longer, they can just adjust the expiration date...)

You can learn more and, if you're a New York resident, register on the New York state website here. Excerpt:

Get Back to Your Favorite Businesses and Venues with Digital Proof of Your COVID-19 Vaccination or Negative Test Results

Attend sporting events, arts performances and more! Excelsior Pass supports a safe reopening of New York by providing a free, fast and secure way to present digital proof of COVID-19 vaccination or negative test results. Think of it as a mobile airline boarding pass, but for proving you received a COVID-19 vaccination or negative test.

Lastly, here's an article about it: New York Debuts Nation's First Vaccine Passport – Here's What You Need to Know.

Best regards,


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