Highly leveraged Archegos Capital Management LLC’s downfall is the latest signal of investors’ hunger for risk-taking being far from satiated even after a run that has lifted the S&P 500 index about 80 percent in a year.
The impact of the hedge fund’s troubles seems to have been limited so far to a handful of stocks — from ViacomCBS Inc and Discovery Inc to the shares of investment banks who dealt with the fund, such as Credit Suisse Group AG — without rippling out into broader markets.
Yet, there are other signs that the mood has turned exuberant in the past few months, leading to potentially excessive risk-taking across asset classes.
Photo: Carlo Allegri, Reuters
Among those are the market’s robust appetite for special-purpose acquisition companies (SPACs) and the popularity of cryptocurrencies such as bitcoin, as well as an 850 percent rally in the shares of GameStop Corp, fueled by retail investors with the help of options on sites such as Reddit Inc’s WallStreetBets.
“My guess is we are going to see a whole series of these examples and we will be looking back on this in several years and saying this was a period of phenomenal widespread risk-taking where standards were lowered,” Dynamic Beta Investments managing member Andrew Beer said.
Equities account for 50 percent of all assets held by households, mutual funds, pension funds and foreign investors, the highest level since the tech bubble of two decades ago, research from Goldman Sachs Group Inc showed.
Many investors are leveraging that stock exposure through options, with equity options trading volume up 85 percent last year from 2017, according to data from Trade Alert.
After a stretch of bearishness following the COVID-19 pandemic’s initial outbreak last year, both institutional and individual investors see better times ahead.
Fund managers in a Bank of America Global Research survey have ratcheted up their exposure to commodities to record highs — a bet on a global recovery — while cash levels stand near eight-year lows.
Meanwhile, nearly 51 percent of individual investors believe stocks will rise in the short term, compared with a historical average of 38 percent, according to the latest American Association of Individual Investors Sentiment Survey.
Plenty of investors have justified the optimism by pointing to the unprecedented amounts of stimulus doled out by the US Federal Reserve and US lawmakers, as well as a countrywide rollout of vaccines against COVID-19.
US Federal Reserve officials earlier signaled they expect growth of 6.5 percent this year, which if achieved would mark the fastest expansion since the 1980s, compared with a 3.5 percent contraction last year, the steepest annual downturn in more than seven decades.
While “the path higher for US stocks will be complicated and filled with fresh risks, US stocks will likely finish the year much higher,” Oanda Corp senior market analyst Edward Moya said.
However, confidence that markets would continue to rise can lead some investors to take risks such as overusing leverage, which helps magnify gains, but can also result in mushrooming losses if a trade goes the wrong way.
Archegos Capital’s troubles might have been one example of leverage gone awry.
The fund bought derivatives known as total return swaps, which allow investors to bet on stock price moves without owning the underlying securities, one source familiar with the trades said.
Archegos had assets of about US$10 billion, but held positions worth more than US$50 billion, said the source, who declined to be identified.
“Sentiment has definitely shifted to very bullish in 2021,” WallachBeth Capital senior strategist Ilya Feygin said. “When people become very confident, you know what happens — they take more risk.”
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