Was curious to hear any perspectives on buying swaps vs. vanilla equity for long positions. We had a hedge fund pitch us an activist deal using swaps to mask ownership, but it sounds like Archegos used these instruments primarily as a way to accumulate massive leverage. Is this kind of thing typical? What are the pros/cons of buying swaps?
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I have no experience with single-name total return swaps so I cannot add a ton of perspective aside from what you highlighted.
One of the uses for total return equity index swaps in the macro space tends to be in countries with cross-border capital rules (Bovespa) or relatively strict exchange limits on futures (Kospi). These use cases come down to avoiding regulatory restrictions and are similar in nature to avoiding regulatory ownership reporting that is probably attractive in the single-name space.
Do you know why the banks rushed to liquidate their positions? Was it simply to avoid having exposure or was there a way to extract more value from Archegos by selling these positions?
when Archegos couldn't make the magrin call, the banks were handed the equity positions...with the knowledge that other banks would also be getting similar positions....and at that point its like yelling fire in a crowded theatre....only the 1st one out the door gets out alive. this is repeat game theory....its happened before, and so the traders with experience (Goldman, MorganStanley) know exactly what to do .
Typically, I've seen this done in securities with special issues, or when a pm needs to quickly catch up to an allocation. Managing a portfolio of swaps where you're betting on direction is pure leverage. This might work if you are clever and are able to build something with very low correlations (e.g. eigenvector portfolio/risk parity/etc.). However, if correlations are high, you get blown up quickly.
They are useful for specific situations. Ie building a position that you don’t want to file in a 13d or 13f. Also useful for 144 issues when you want to own more than 10% of the float and not become an insider. But don’t use em with leverage in a concentrated portfolio.
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