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Credit Suisse to Cut Back Hedge Fund Lending After Archegos Meltdown

The decision comes even as hedge funds overall report strong performance for the year-to-date.

After the Archegos Capital meltdown in March, Credit Suisse is pulling back its leverage exposure by $35 billion by the end of 2021, according to its quarterly earnings published on Thursday.

The move means Credit Suisse will cut back on lending to hedge funds and highly-leveraged family offices such as Archegos. A fund creates leverage when it borrows capital to increase its asset base.

Credit Suisse said the decision was driven by a “U.S.-based hedge fund matter,” referring to the Archegos Capital meltdown that cost the bank $5.5 billion. On March 26, Archegos Capital, the family office of former hedge fund manager Bill Hwang, reportedly sparked a stock meltdown when Hwang was unable to meet his margin calls. The implosion impacted six banks, including Goldman Sachs, Morgan Stanley, Nomura, and Credit Suisse.

Despite the Archegos blow-up, hedge funds have performed well overall in 2021. In its March 2021 hedge fund performance monitor, Preqin said its all-strategies hedge fund index gained 2.3 percent, marking its sixth consecutive month of positive performance and pushing the 12-month return to 41.5 percent. Event-driven strategies yielded the highest performance, followed by multi-strategy funds.  

In the report, Preqin noted the impact of the forced liquidation of positions held by Archegos Capital, saying that the event “has shaken the market.”

“This event has unnerved the hedge fund industry, and as a result, fund managers are being more cautious as they allocate capital to growth names with shaky earning potential,” Preqin said in the report. “Industry participants are now re-evaluating their prime brokerage relationships to see if they need to change lenders. This pressure is mostly being handed down to managers by investors that are now nervous about fund relationships with different banks. The event highlighted the importance of [operational due diligence], a factor that is ignored by some allocators.” 

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As a result of the incident, Credit Suisse expects CHF 4,430 million (USD $4.8 million) in credit losses for the first quarter of 2021, according to Thursday’s earnings report. In the second quarter, the bank predicts additional losses of $655 million as it closes out of the positions it held with Archegos. Overall, Credit Suisse shareholders experienced a net loss of $275 million. 

Going forward, Credit Suisse plans to “resize” its prime brokerage and prime financing businesses, the bank said in a deck from its analyst and investor call. The bank also plans to reevaluate and increase risk management practices, starting with former senior advisor Joachim Oechslin’s appointment as interim chief risk officer. 

“That $35 billion leverage reduction is about a third of what we have deployed in prime,” David Mathers, Credit Suisse’s chief financial officer, said in a call with analysts and investors. He said the bank would focus its prime business on clients that are “important across our businesses,” while “defocusing on clients that have much less connection across the banks.”  

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