Banks Are Making It Harder for Hedge Funds to Leverage Their Bets After Archegos

(Bloomberg) — The dust hadn’t yet settled on Archegos Capital Management’s implosion, when hedge funds started shifting their bets toward banks that avoided getting hurt, hoping to keep leveraging up just like before. Good luck with that.

For weeks behind the scenes, Wall Street’s giants have been autopsying failures at rivals including Credit Suisse Group AG and Nomura Holdings Inc., identifying risks that they plan to address by more thoroughly vetting hedge funds or imposing more onerous terms on their trades, according to people close to the discussions. No one wants to be the next to tell shareholders and regulators how they failed to heed the lessons of Archegos.

Inside Bank of America Corp., which refused to do business with Archegos, Chief Executive Officer Brian Moynihan has been quizzing subordinates on what more is needed to protect the firm. The episode has hardened the resolve of Wells Fargo & Co. executives that low-risk margin lending is wiser, even if less profitable. UBS Group AG CEO Ralph Hamers has signaled that clients will have to hand over more information when borrowing.

And in New York, managers of small hedge funds who lack the negotiating clout of trading whales are grousing. For the little guy especially, the saga will make it harder to borrow money from banks to finance bets.

While specific measures will vary by bank and client — and in many cases are still being ironed out — the talks and tensions point to greater pressure on clients to reveal their biggest wagers, stricter margin limits on those positions, more frequent collateral adjustments and more rigorous audits. The deliberations were described by executives close to prime brokerage desks and money managers.

“There will be more calories expended, both in terms of those desks doing due diligence in the market as well as in some cases they may outright ask clients about that,” Mike Edwards, deputy chief investment officer at Weiss Multi-Strategy Advisers, a $3 billion hedge fund. Previously, it was “not a requirement at most places that you would disclose to a swap counterparty that you have the same position on at multiple places.”

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Such concerns have risen to the top of the regulatory world. Fed Governor Lael Brainard, the head of the Board’s financial stability committee, called for “more granular, higher-frequency disclosures” on Thursday.

“The Archegos event illustrates the limited visibility into hedge-fund exposures and serves as a reminder that available measures of hedge-fund leverage may not be capturing important risks,” she said.

The Securities and Exchange Commission will consider adjusting some of its rules that require investors to publicly report large stock holdings so they will also cover swaps, Gary Gensler, the regulator’s new chairman, told lawmakers on Thursday.

Two Sigma’s Move

The thirst from banks to boost business with clients like Bill Hwang’s Archegos allowed him to shop for the most generous terms and amplify his wagers. He was able to parlay over $20 billion of his fortune into total bets that exceeded $100 billion, built on the back of banks tripping over each other to fuel his leveraged empire. Hwang used that to to make aggressive asks, demanding strikingly off-market margin terms — such as $8.50 in leverage for every $1 he put in — for building his book in Chinese stocks. Some banks demurred, others played ball.

In the wake of his fund’s collapse, it’s less likely that other hedge funds will be able to win such terms. Bank officials declined to be interviewed.

No bank got hit harder than Credit Suisse when Archegos was unable to meet margin calls from prime brokers in March. The Swiss bank lost more than $5.5 billion after losing a race with peers to sell off the family office’s unusually concentrated and leveraged bets on stocks, in a portfolio that swelled to more than $100 billion.

Not too long after, Two Sigma heard from contacts at Credit Suisse,…