Lesson 19 of 25 · 6 min

A family office, 2021: what the position was

Ten names of exposure can be five times a balance sheet when the exposure is rented rather than owned.

Archegos Capital Management was a family office, meaning it managed one household's money and was therefore outside much of the public position reporting that applies to funds managing other people's. In March 2021 its capital was reported at roughly ten billion dollars, supporting economic exposure reported at fifty billion dollars or more.

The exposure was concentrated in fewer than ten listed shares, chiefly media and technology names, and in several of them the position was reported to represent a large share of the company's outstanding stock. It was held mostly as total return swaps and contracts for difference with a number of prime brokers rather than as shares registered in its own name.

A total return swap pays the holder the price return and dividends of a reference share against a financing charge, with collateral posted as a percentage of the notional. That percentage is the leverage: a fifteen percent requirement means each dollar of capital carries about six dollars and seventy cents of exposure, with no borrowing recorded anywhere that a shareholder register would show.

Two forms of concentration compounded. The book held few names, and those names were correlated, so Track 7 lesson 10 applies: correlated positions are one position for collateral purposes. The consequence is arithmetic — a single-digit percentage fall in one holding removed a fifth of the capital, and the holdings tended to move together.

Leverage does not require a loan. A margin percentage on a swap is a leverage multiple, and it appears on no balance sheet the public can read.

Key terms

Family office: An entity managing a single household's wealth. Because it has no outside investors, much of the public reporting required of funds does not apply to it.
Total return swap: A contract paying one party the full return of a reference share against a financing charge. The economic owner and the registered holder are different parties.
Initial margin: Collateral posted as a percentage of notional exposure. Its reciprocal is the leverage multiple: 15 percent margin is roughly 6.7 times exposure.

Worked example

From a margin percentage to a concentration risk

Illustrative figures scaled down so the arithmetic is followable; they are not the reported amounts. Capital of $480,000 supporting swap exposure at a 14 percent margin requirement, spread across six names with the largest at 31 percent of the book.

Total exposure supportable: $3,428,571
Leverage multiple: 7.14x
Largest single position: $1,062,857
Loss on a 9 percent fall in that name: $95,657
That loss against capital: 19.9%

One ordinary down day in one holding costs a fifth of the capital. If the six names are correlated, the same day happens six times at once.

Check yourself

Capital of $360,000 supports swap exposure at a 16 percent margin requirement. The largest position is 28 percent of the book and falls 11 percent. What share of capital is lost?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.