Archegos 2.0? Multi-Billion-Dollar “Mr. China” Fund Suffers Huge Loss After Xi Crackdown
Remember Bill Hwang, the otherwise omnipotent guru of stock investing that founded Archegos, who suffered stunning (personal and fund) losses earlier in the year and made headlines in the ‘methods’ he used to amass vast leveraged positions without alerting regulators (or bank risk managers), and raising systemic financial system questions.
Well Bill had a close friend.
Meet Tao Li, the 41-year-old New York-based hedge fund manager is less known by the world than his buddy, but as Bloomberg reports, is known by a select group of investors as Mr. China for his expertise in that nation’s stocks. Beijing-born Li has deserved that reputation, as his fund has posted annualized returns of almost 30% for the past decade, according to people close to the firm. But that all went pear-shaped this year.
Hwang and Li were longtime former colleagues (Li joined Hwang’s Tiger Asia in 2004 to cover Chinese companies, and left Tiger Asia in 2011, opening Teng Yue, which means leap or soar, the same year) and, at least before Archegos’s collapse, chatted periodically about investing ideas, according to people with knowledge of their relationship.
And, as it turns out, Bloomberg reports that Hwang and Li had both piled into the same Chinese online-education company, GSX Techedu Inc., amassing stakes that market participants estimate amounted to a total of about 40% of the shares.
When Archegos’s portfolio racked up margin calls in March, banks rushed to liquidate its bets, sending GSX tumbling.
Then it got worse as Chinese Premier Xi unleashed his “common prosperity” plan, cracking down on online-education companies (among many other industries) in an attempt to quell any social unrest and perhaps bring to heel many of the richest people in China.
That sent GSX Techedu down to record lows.
Li’s Teng Yue Partners hedge fund, which manages $10 billion including leverage, took a hit and by the end of August was down about 32% for the year, according to people with knowledge of its performance.
Many are rightfully wondering how exactly Hwang and Li came to pile so heavily into the same stock and whether the pair should have disclosed the massive stakes they were building. Some are questioning whether the overlapping bets might have somehow run afoul of securities laws.
“I really, really hope the SEC looks at the trading in GSX,” Carson Block, famous for his bearish bets against Chinese companies, said in an interview with accounting firm Marcum BP, adding “just can’t see that these guys went long GSX on such large size because they believed the fundamentals were so good.”
The question is – what don’t we know? Has Li unwound the positions (he reportedly used total-return-swaps like Hwang)? Which banks are exposed? Are they exposed in the same way as Credit Suisse etc were exposed to Archegos?
Fri, 10/01/2021 – 18:00