and listed on the Amsterdam stock exchange in September. The SPAC’s investors were offered early exposure to an attractive business at a low valuation.
WSJ Investing Challenge
A five-part course from WSJ columnists to introduce you to the basics of investing, delivered to your email inbox.
The deal’s complexity has been part of its undoing. After spending 72% of the SPAC’s cash on the Universal stake, $1.6 billion would be left over for another acquisition. Investors also would get warrants to buy into an additional blank-check deal. The Securities and Exchange Commission, which is scrutinizing SPAC deals more closely these days, said that as more than 40% of its assets would be in a minority stake, Pershing Square Tontine risked becoming an unregistered investment company.
The SPAC’s workaround caused a headache for investors. The Universal shares were to be locked up in a trust for four months, which would trigger a fall in Pershing Square Tontine’s share price—bad news for a sizable chunk of the SPAC’s shareholders who bought the stock on margin. The final nail in the coffin was the SEC’s opinion that the Universal stock purchase wouldn’t meet the New York Stock Exchange’s SPAC rules.
Mr. Ackman still gets his hands on the record label because the
hedge fund will buy the stake instead. This way, though, he will tie up a lot more capital in Universal than initially planned. Under the original deal, his fund would have owned a 3% stake but that number could now be closer to 10%.
More pressing is the need to pacify institutional investors and family offices that liked the idea of a stake in Universal and missed out. The deal also was supposed to showcase what the hedge-fund billionaire could accomplish with future blank-check vehicles. It hasn’t been a good start.
Pershing Square Tontine Holdings’ shares are down almost one-fifth since the Universal deal was announced and now trade just in line with their net asset value. Its founder has learned the lesson to keep things simple; the SPAC will do a conventional deal next, according to an investor letter Monday. Investors will be harder to impress the second time around.
SE—Universal’s majority owner—said it approved Pershing Square Tontine’s request to assign its rights and obligations under a June 20 agreement to investment funds with significant economic interests or management positions held by Mr. Ackman.
The French media company said the equity interest eventually acquired in Universal Music will now be between 5% and 10%. If it falls below 10%, Vivendi said it would still sell the additional interest to other investors before the planned spinoff of Universal Music into an Amsterdam-listed company in September.
On June 20, Pershing Square Tontine agreed to buy 10% of the ordinary shares of Universal Music in a deal valuing the world’s largest music company—home to stars including Taylor Swift, Billie Eilish, Queen and the Beatles—at about $40 billion.
Pershing Square Tontine said its decision to withdraw from the deal was prompted by issues raised by the U.S. Securities and Exchange Commission. The company said its board didn’t believe the deal could have been completed given the SEC’s position.
The blank-check company said its board concluded that assigning its Universal Music stock-purchase deal to Pershing Square was in the best interest of shareholders. Pershing Square Tontine said Pershing Square intends to be a long-term Universal Music shareholder.
Pershing Square Tontine said it would seek a new transaction, which will be structured as a conventional special purpose acquisition company merger. The company said it has 18 months remaining to close a deal.
B de CV raised money from bond funds and the U.S. government in recent years, using its status as a lender to Mexico’s poor to tap into the booming trend of socially conscious investing. Hedge funds including Millennium Management LLC and Bybrook Capital LLP have questioned the company’s accounting and wagered that prices of its roughly $2 billion of bonds will tumble, according to people familiar with the matter. Millennium and Bybrook declined to comment
The company has made great progress in reassuring investors, a spokeswoman for Credito Real said. Management is employing a strategy with “a much clearer focus on payroll loans now and a renewed emphasis on transparency,” she said.
Environmental, social and governance investing took off in recent years, allowing companies that claim ESG attributes to raise capital with ease. The controversy over Credito Real’s finances shows that such credentials don’t insulate investors from market losses.
Credito Real was “a very popular name but that doesn’t mean people were spending the time to assess them,” said a Swiss bank trader who bought Credito Real bonds for years before selling out this spring. “There was a chase for yield and they got on the investment-bank recommendation lists and people just kept on buying.”
Credito Real was founded by Mexico’s wealthy Berrondo family, which controls a 25% stake, according to the company’s 2020 annual report. It makes personal loans to low-income government employees, pensioners and small businesses that traditional banks don’t serve. Credit ratings firms gave the company relatively high scores because government employers withdraw payroll loan repayments directly from paychecks, which is meant to ensure steady cash flows to the lender.
Portfolio managers bought Credito Real’s bonds based on those ratings, interest rates as high as 9.5% and the company’s ESG credentials, analysts said.
U.S. fund company DoubleLine Capital and European banks Credit Agricole SA and
were among Credito Real’s biggest bondholders early this year, according to data from Bloomberg LP. A spokeswoman for UBS declined to comment. DoubleLine and Crédit Agricole didn’t respond to requests for comment.
The U.S. International Development Finance Corporation, or DFC, also bought in, lending the firm $100 million in January citing the investment’s “positive developmental impact in Mexico,” especially for women-owned businesses.
But in April, Credito Real disclosed a delinquent small-business loan of $33 million that Mexican press reported the company had made to the family of a wealthy financier, Carlos Cabal Peniche. The loan was about 200 times as large as the average small-business loans the company makes.
The lender also disclosed that about46% of the assets it reported as loans consisted of accrued interest, an unusually high ratio. Despite reporting a 12% increase in average loansheld during 2020, Credito Real took in less interest income than it had the year before.
took the changes as evidence that state agencies were holding back payments owed on Credito Real payroll loans, squeezing the company’s finances. Some of the company’s bonds dropped as low as 68 cents on the dollar. Bearish investors believe they will fall further if it struggles to borrow new funds to repay a bond due in February.
“Bad business decisions [were] made on a recurrent basis,” Credito Real Chief Executive
Carlos Ochoa Valdes
said on an April conference call the company held with analysts. “So what we are now aiming [for] is to strengthen all the origination procedures.” The company is focused on refinancing the February bond, he said.
The new disclosure “implies there were almost zero collections,”
an investment manager for Millennium, said on the April call. A hedge-fund analyst who made similar comments on a conference call organized for Credito Real by
in June was ejected, people familiar with the matter said.
Delays in payroll loan payments are so common in Mexico that a slang word has emerged to describe them: “jinetear,” which literally means to ride a horse, said an executive at a Mexican nonbank lender. But the holdups grew well past the normal 60 or 90 days during the pandemic, hurting lenders that needed steady cash flow to pay interest on bonds they issued in international markets, he said
Some Wall Street analysts remain steady on Credito Real debt. “The credit faces challenges, but it is not on the verge of default, in our view, and could possibly turn around,” JPMorgan Chase & Co. analyst
said in a May report.
The U.S.’s DFC takes a similar view. “Credito Real has been a transparent, responsive and highly regarded partner,” a DFC spokeswoman said.
Credit rating firms have taken a more conservative tack. FitchRatings cut the company’s score in June to double-B with a negative outlook, citing deteriorating loan quality, refinancing risk and corporate governance.
“The company’s public information disclosure is weaker than international best practices and lacks sufficient detail around some accounts; in particular, the issuer’s approach to reporting accrued interest,” Fitch said in its announcement of the downgrade.
On a summer Friday afternoon last year, hedge-fund manager
broke bankruptcy laws. That evening on a recorded line, he pleaded with a banker to say the whole thing was a misunderstanding.
“Maybe I should go to jail,” Mr. Kamensky said on the call.
Mr. Kamensky reports to federal prison on June 18. His hedge fund is in the process of closing, and a career that included stints at white-shoe law firm Simpson Thacher & Bartlett and storied hedge fund Paulson & Co. has been wrecked.
“He came undone,” U.S. District Judge
said during a court hearing on May 7.
Mr. Kamensky, 48 years old, worked in the high-stakes, high-conflict world of distressed investing, which aims to profit from companies teetering on the brink of or in bankruptcy. He launched his hedge fund, Marble Ridge, in 2015 with $20 million and was managing nearly $1 billion a few years later.
Running his own firm became stressful for Mr. Kamensky. He was anxious, had difficulty sleeping, lost weight and had trouble concentrating at the office or at home, he says. His fund, while it grew quickly, was still a relatively small player in the distressed market, which is dominated by giant private-equity companies, hedge funds and major law firms.
In 2017, Mr. Kamensky began working with a psychologist and a sleep specialist. He also consulted an executive coach, while in the middle of the day he would head to a meditation studio. He began to feel healthier and more relaxed, he says. He enjoyed family time again, playing games like Scrabble and doing crossword puzzles.
His efforts to control his emotions began to unravel in a bitter fight over struggling luxury-goods retailer Neiman Marcus Group Ltd. Things got worse in the coronavirus pandemic, which removed the support system of coaches and therapists that Mr. Kamensky had erected to help deal with his pressures.
Mr. Kamensky began buying bonds of the department-store chain in 2018 for about 60 cents on the dollar. Neiman was owned by private-equity firm
, which made an ill-fated bet that the chain could thrive despite an onslaught from online competitors. Neiman had one hidden gem; under Ares ownership it had acquired a thriving German online site called MyTheresa.
Interviews with Mr. Kamensky and court documents and transcripts show how the fight over MyTheresa led to Mr. Kamensky’s downfall.
Seeing the value of MyTheresa, Ares decided to separate it from Neiman, giving itself full control of the online site and leaving the bondholders with just the company’s bricks-and-mortar stores. The move borrowed from classic private-equity tactics, but still came as a surprise to Mr. Kamensky, who said he thought Ares had gone too far by taking a company’s crown-jewel asset for nothing in return.
“It’s like someone takes your wallet out of your back pocket on the subway and stares you right in the face while doing it,” he said. A spokesperson for Ares declined to comment.
In press releases that revealed his private letters to Ares’s board, Mr. Kamensky accused the private-equity firm of “lining its pockets” and “looting” Neiman. He said Ares broke the law by moving assets out of an insolvent company and had conflicts of interest. Word got out that he would sue to stop the deal.
Then Ares and Neiman fought back.
a lawyer representing Neiman, warned that if Mr. Kamensky sued, “we’re going to come down on you like a pile of bricks,” Mr. Kamensky later testified. Mr. Sprayregen, a bankruptcy lawyer at Kirkland & Ellis LLP, didn’t return calls seeking comment.
Mr. Kamensky’s fund did file suit in 2019. Neiman responded, stepping up the fight by suing Marble Ridge for defamation, alleging that Mr. Kamensky’s lawsuit hurt the retailer’s business position. “A defamation suit is unheard of,” he says. While litigation is common in the world of distressed debt and restructuring, a defamation suit is unusual.
Neiman eventually agreed to restore nearly half of MyTheresa to its creditors. Almost all of the creditors went along, but Mr. Kamensky thought it was a bad deal and continued to push Ares to give more of MyTheresa to Neiman’s creditors. “It felt like I was tilting at windmills,” says Mr. Kamensky, a reference to the novel “Don Quixote,” which he loved as a youth.
With the battle over MyTheresa already joined, Covid-19 hit and Neiman filed for bankruptcy. Mr. Kamensky’s fund fell 12%, adding to his pressures.
‘There was a fuse exploding. I lost it.’ ”
— Dan Kamensky
Staying at his Long Island home because of the pandemic, he worked in a cramped bedroom that he had converted into an office. A puppy once relieved himself on Mr. Kamensky’s foot during a business call. Sometimes, after working late into the night, Mr. Kamensky slept in the same room.
It became difficult to work with his coach and consult with colleagues. “Everything became more ad hoc,” he says.
As one of the few Neiman bondholders opposing the chain’s restructuring plan, Mr. Kamensky took a seat on Neiman’s creditors’ committee, which was tasked with advocating for the rights of investors during bankruptcy proceedings. He had to act in the interest of all creditors, rather than push for things that would benefit only his firm.
Once again a deal was reached on MyTheresa but Mr. Kamensky rejected it. He had spent millions on the fight and wanted to have the right to buy a bigger stake in MyTheresa to potentially boost his fund’s profits. He would offer to buy the preferred shares in MyTheresa that would be issued to other creditors.
By July, he was close to getting what he wanted and his hedge fund had recouped about half of its losses. Mr. Kamensky was feeling optimistic. But on July 31, he was blindsided by word that another bidder was also trying to buy the preferred shares. The bidder, he learned, was investment bank Jefferies LLC, one of his longtime brokers.
He feared Jefferies could scuttle a deal he had been pursuing for more than two years, just days before completion.
“There was a fuse exploding,” Mr. Kamensky says. “I lost it.”
At 3:20 that summer Friday afternoon, he texted
his contact at Jefferies, “DO NOT SEND IN A BID.” In a phone call 20 minutes later with Mr. Femenia and
a Jefferies colleague, he yelled and cursed at the men, according to a Justice Department probe.
Mr. Geller not long after told a lawyer for the Neiman creditors committee that Jefferies wouldn’t bid because Mr. Kamensky told the firm to back off.
Mr. Kamensky realized he had violated the law. As a member of the creditors committee, he shouldn’t try to stop a higher bid that could benefit other investors.
SHARE YOUR THOUGHTS
What do you make of Dan Kamensky’s case? Join the conversation below.
Four hours after he made his threat, Mr. Kamensky called Mr. Femenia again. On the call, he pleaded with Mr. Femenia to tell a different story to authorities—that Mr. Kamensky wanted Jefferies to bid only if it was serious about going through with the deal. “I pray you tell them that this was a huge misunderstanding,” Mr. Kamensky said on the call, which was recorded by Mr. Femenia. He said he could go to jail without Mr. Femenia’s help.
The creditors committee lawyer filed a report on possible wrongdoing in bankruptcy court. Mr. Kamensky apologized while admitting his wrongdoing to Justice Department lawyers.
In September, Mr. Kamensky was arrested in a surprise raid at his home, and in February pleaded guilty to one charge of extortion and bribery related to the Neiman bankruptcy.
Upon entering prison on Friday, Mr. Kamensky faces weeks of solitary confinement in keeping with Covid-19 guidelines. After completing his six-month sentence, he could face a lifetime ban from serving as an investment adviser.
While waiting to go to prison, Mr. Kamensky has given lectures to business and law students about the dangers of intense stress and letting emotions undermine one’s judgment. He spoke at several graduate schools, including the NYU Stern School of Business and the Duke University School of Law. He wonders, if he had been in his office with colleagues around, would he have reacted so quickly and angrily.
Mr. Kamensky is a “good man, but one who lost his moorings,” Judge Cote said at his sentencing. She said it wasn’t clear to her whether his actions had caused economic harm to creditors. Prosecutors requested a sentence of 12 to 18 months. Mr. Kamensky will serve six months of probation after prison.
“I regret letting anger get the best of me,” Mr. Kamensky says.
boomeranged this month on Mudrick Capital Management LP, the latest hedge fund to fall victim to swarming day traders.
Mudrick’s flagship fund lost 10% in just a few days as a jump in AMC’s stock price unexpectedly triggered changes in the value of derivatives the fund held as part of a complex trading strategy, people familiar with the matter said.
The setback comes months after a group of traders organizing on social media helped send the price of
and other stocks soaring in January, well beyond many investors’ views of underlying fundamentals.
The development prompted many hedge funds to slash their exposure to meme stocks. Mudrick Capital’s losses highlight how risky retaining significant exposure to such companies can be—even backfiring on a hedge-fund manager who was mostly in sync with the bullishness of individual investors.
the firm’s founder, had been trading AMC stock, options and bonds for months, surfing a surge of enthusiasm for the theater chain among individual investors. But he also sold call options, derivative contracts meant to hedge the fund’s exposure to AMC should the stock price founder. Those derivative contracts, which gave its buyers the right to buy AMC stock from Mudrick at roughly $40 in the future, ballooned into liabilities when a resurgence of Reddit-fueled buying recently pushed AMC’s stock to new records, the people said.
As part of the broader AMC strategy, executives at Mudrick Capital were in talks with AMC to buy additional shares from the company in late May. On June 1, AMC disclosed that Mudrick Capital had agreed to buy $230 million of new stock directly from the company at $27.12 apiece, a premium over where it was then trading.
Mudrick immediately sold the stock at a profit, a quick flip that was reported by Bloomberg News and that sparked backlash on social media.
“Mudrick didn’t stab AMC in the back…They shot themselves in the foot,” read one post on Reddit’s Wall Street Bets forum on June 1. Other posts around that time referenced Mudrick as “losers,” “scum bags” and “a large waving pile of s—t with no future.” Members of the forum urged each other to buy and hold.
Inside Mudrick, executives were growing apprehensive as the AMC rally gained steam. The firm’s risk committee met on the evening of June 1 after the stock closed at $32 and decided to exit all debt and derivative positions the following day.
It was a day too late.
AMC’s stock price blew past $40 in a matter of hours June 2, hitting an intraday high of $72.62. Call option prices soared amid a frenzy of trading that Mudrick Capital contributed to and by the end of the week, the winning trade had turned into a bust. Mudrick Capital made a 5% return on the debt it sold but after accounting for its options trade, the fund took a net loss of about 5.4% on AMC.
Mr. Mudrick’s fund is still up about 12% for the year, one of the people said. Meanwhile, investors who bought AMC stock at the start of the year and held on have gained about 2000%.
The impact of social media-fueled day traders has become a defining market development this year, costing top hedge funds billions of dollars in losses, sparking a congressional hearing and drawing scrutiny from the U.S. Securities and Exchange Commission. More hedge funds now track individual investors’ sentiment on social media and pay greater attention to companies with smaller market values whose stock price may be more susceptible to the enthusiasms of individual investors.
Mr. Mudrick specializes in distressed debt investing, often lending to troubled companies at high interest rates or swapping their existing debt for equity in bankruptcy court. Mudrick manages about $3.5 billion in investments firmwide and holds large, illiquid stakes in E-cigarette maker NJOY Holdings Inc. and satellite communications company
from such exchanges. The flagship fund reported returns of about 17% annually from 2018 to 2020, according to data from HSBC Alternative Investment Group.
But distressed investing opportunities have grown harder to find as easy money from the Federal Reserve has given even struggling companies open access to debt markets. Mr. Mudrick has explored other strategies, launching several SPACS and, in the case of AMC, ultimately buying stock in block trades.
Mr. Mudrick initially applied his typical playbook to AMC, buying bonds for as little as 20 cents on the dollar, lending the company $100 million in December and swapping some bonds into new shares. Theater attendance, already under pressure, had disappeared almost entirely amid Covid-19 pandemic lockdowns, and AMC stock traded as low as $2. He reasoned that consumers would regain their appetite for big-screen entertainment this year as more Americans got vaccinated.
Day traders took their first run at AMC in late January, urging each other on with the social-media rallying cry of #SaveAMC and briefly lifting the stock to around $20. AMC’s rising equity value boosted debt prices—one bond Mudrick Capital owned doubled within a week—quickly rewarding Mr. Mudrick’s bullishness. AMC capitalized on its surging stock price to raise nearly $1 billion in new financing in late January, enabling it to ward off a previously expected bankruptcy filing.
Around that time, Mr. Mudrick sold call options on AMC stock, producing immediate income to offset potential losses if the theater chain did face problems. The derivatives gave buyers the option to buy AMC shares from Mudrick Capital for about $40—viewed as a seeming improbability when the stock was trading below $10.
Mr. Mudrick remained in contact with AMC Chief Executive
about providing additional funding, leading to his recent share purchase. But he kept the derivative contracts outstanding as an insurance policy, one of the people familiar with the matter said.
—Alexander Gladstone and Soma Biswas contributed to this article.
Meme stocks have made a comeback, with one big change: this time around, short sellers aren’t a big player in the market.
Individual investors have been gearing up for some weeks to take on hedge funds that are betting against their favorite stocks. In January, their strategy of banding together online to send a handful of shares like
In the latest bout of frenetic trading in unlikely momentum stocks, there appear to be far fewer opportunities for a short squeeze. That is when a stock price begins rising, forcing bearish investors—typically sophisticated market participants like hedge funds—to buy back shares that they had bet would fall, to curb their losses.
The number of shares outstanding that have been sold short, known as short interest, remains subdued compared with the levels seen in January for popular meme stocks like GameStop,
GameStop has remained wildly popular on Reddit’s WallStreetBets online forum since the first wave in January, and its stock has skyrocketed more than 1000% this year. Short interest accounted for roughly 17% of its shares outstanding as of June 9, compared with 102% at the start of the year, according to data from
another meme stock that has surged over 1900% this year, the picture is more cloudy. The number of shares being shorted has risen, but the ratio relative to its shares outstanding has fallen to about 20%, from a peak of over 24% in early January. The movie-theater chain has sold over 100 million shares since January and converted debt into equity, which has pared the short-interest ratio.
Still, the data suggests that investors like hedge funds aren’t crowding into trades betting on the prices of meme stocks falling.
Analysts say what is likely driving the market more this time around are call options. Those are contracts that give the buyers the right to purchase a stock at a certain date and price. This type of security delivers a profit to the buyers if the underlying shares rise.
A surge in call options activity can force some participants to buy the stock, similar to a short squeeze. But instead of trapping bearish investors, rising call options activity pushes market makers such as banks to buy the stock to hedge their positions. That is because the sellers of the call options are obliged to deliver those shares if the contracts are ever exercised.
Investors like hedge funds could be buying certain stocks to try to trigger this phenomenon, which is known as a gamma squeeze, said Helen Thomas, founder of Blonde Money, a U.K.-based financial research firm. Some individual investors are also trading options and posting screenshots of their positions on Reddit forums.
However, while this type of squeeze can accelerate the ascent, it can also add juice to a stock’s decline.
“It cuts two ways: It creates crash ups, but if those stocks begin to trade lower, the dealers then sell,” said Charlie McElligott, a cross-asset strategist at
Many Reddit users show no signs of worrying that the upward trajectory of meme stocks may abruptly reverse. Clover Health has become a favorite in recent days for people determined to engineer another battle against hedge funds, sending its stock up roughly 59% this week.
“$CLOV this is the perfect setup for an epic short squeeze,” a user called u/mamagpepper wrote on WallStreetBets on Wednesday, referring to Clover Health’s stock ticker. Clover Health recently had around 10% short interest.
This time around, short sellers may be more cautious about going up against retail traders, whose wagers generally ignore metrics like the profit and sales outlook.
“Hedge funds are scared to have holdings on significant short positions [in meme stocks], even if fundamentally it makes a lot of sense,” said Lorenzo Di Mattia, chief investment officer of Sibilla Capital. “The AMC stock is probably worth $10, but that doesn’t mean it’s going there any time soon. With the retail army not really knowing anything about valuation, the risk is much bigger than normal.”
AMC traded at $42.81 at the end of Thursday.
Individual investors aren’t necessarily targeting their efforts on the most shorted stocks.
SHARE YOUR THOUGHTS
How do you think the meme stocks craze will affect markets long term? Join the conversation below.
which soared in popularity in January, has a short interest of about 31% of its total outstanding, according to IHS Markit. But the stock has largely lost its shine on WallStreetBets since the start of 2021, and wasn’t among the past week’s most popular stocks, according to TopStonks.com, which tracks equities mentioned on Reddit. Bed Bath shares are up over 77% this year.
Meanwhile, the potential to engineer a precipitous decline in some meme stocks is making bearish wagers more tempting for some investors.
Sibilla’s Mr. Di Mattia, is weighing placing wagers that AMC’s stock will drop in value.
“If it’s like GameStop in January, it could double again before it collapses: this is why it’s hard to short,” he said.
-MGM Holdings Inc. deal has another trade up its sleeve: going big on uranium.
New York hedge fund Anchorage Capital Group LLC has amassed a holding of a few million pounds of uranium, people familiar with the matter say, in a bet that prices of the nuclear fuel will recover after a decade in the doldrums. It is buying and selling uranium alongside mining companies, specialist traders and utility firms with nuclear-power plants, turning the fund into a significant player in the market.
Venturing into the uranium market, which is much smaller than oil or gold markets, is unusual for a firm that typically invests in corporate debt. It is another example of money managers straying into esoteric markets in search of returns after a yearslong run-up in stocks and slide in a bond yields.
Anchorage’s physical uranium holdings are also a rarity because Wall Street firms don’t typically own physical uranium. Most investors bet on uranium prices by buying shares of mining firms, or through companies like
In the 2000s, investors piled into uranium trades, helping to power a run-up in prices that peaked in 2007. Most funds exited either during the 2008-09 financial crisis or after Japan’s 2011 Fukushima nuclear disaster sapped demand.
as the financial institution with the biggest presence.
The uranium that is usually traded takes the form of U3O8, a lightly processed ore. Prices for U3O8 have sagged since Fukushima knocked demand, leading to a glut that traders say has yet to be whittled down.
The material this week traded at $32.05 a pound, according to UxC LLC, a nuclear-fuel data and research company. Prices reached an all-time high of $136 a pound in 2007, according to records going back to 1987.
Anchorage is wagering on a reversal. Spearheaded by trader Jason Siegel, the fund began acquiring uranium a few years ago, because its analysis showed most miners were booking losses at prevailing prices, a person familiar with the fund’s thinking said. The fund bet that uranium prices would rise to encourage miners to produce enough material.
Mr. Siegel didn’t respond to requests seeking comment.
The entry of a financial firm has caused a stir in the uranium market. Anchorage buys and sells infrequently, but in large quantities that put it in the same league as big uranium merchants such as Traxys Group, participants say.
Anchorage hasn’t publicly disclosed its interest in the uranium market, the size of its holdings or the terms of any specific transactions. The exact size of Anchorage’s position—a topic of speculation in the market—couldn’t be learned. The person familiar with the fund’s thinking said it owned fewer than five million pounds of uranium. The overall spot market for the nuclear fuel turns over 60 million to 80 million pounds each year, according to UxC.
Due to strict rules about where uranium can be held, trading typically doesn’t involve moving the fuel around the world. Firms instead take ownership of U3O8 stored in drums at three processing facilities in France, Canada and the U.S. When they sell, buyers take ownership on the spot. The transactions aren’t reported publicly.
Anchorage’s wager relies on buying uranium and selling it to utility companies and others at a higher price for delivery several years in the future, in what is known as a carry trade. Doing so could generate annualized returns of roughly 5% for Anchorage, according to people familiar with the matter.
SHARE YOUR THOUGHTS
How do you see the uranium market developing? Join the conversation below.
The hedge fund embeds options into sale agreements with utilities and other firms, people familiar with the matter say. This can involve selling fuel to a utility company at a discount in return for the right to deliver more uranium at a set price at a later date.
Anchorage isn’t alone in betting that prices are primed to rebound.
Investment firms including Segra Capital Management LLC, Sachem Cove Partners LLC and Azarias Capital Management LP expect that efforts to wean the world off fossil fuels will require new nuclear-power stations, according to executives at the funds. They are seeking to profit by buying shares of uranium miners or firms like Yellow Cake, which is up 31% in London trading over the past year.
Some investors hesitate to own uranium outright because of the perception that it can cause dangerous accidents, according to Joe Kelly, chief executive of brokerage Uranium Markets LLC.
“There’s a deterrent that does not exist in other commodities,” said Mr. Kelly.
to make wagers on a handful of stocks, including the entertainment companies.
As is standard practice, Archegos had handed over cash to Credit Suisse to secure its bets. With the stocks more than doubling since the start of the year, Archegos asked for some of that money back, and it was credited, according to people familiar with the matter.
The transfer essentially meant Archegos had even less cash on the line backing up its positions. Some of Credit Suisse’s rivals, meanwhile, moved in the opposite direction. They noticed an increasing risk in the concentration of the firm’s positions and demanded it back up its investments with additional cash, according to executives at the banks.
Days later, ViacomCBS plunged, Archegos collapsed and the Swiss bank was stuck with a colossal loss.
Now Credit Suisse is picking over what went so badly wrong. The central questions include, why did it give the money back to Archegos? And more broadly, why did it back risky bets to a level that went wildly beyond all its stated norms and projections? Bank executives had even received a stark warning a year earlier on how the bank was handling risk—but the recommended changes hadn’t been made.
A preliminary conclusion is emerging: Credit Suisse’s creaky risk-management systems didn’t do their job as the bank’s guardrails and left it highly exposed to human errors in judgment, according to current and former people at the bank.
Trading data reviewed by risk managers in the lead-up to Archegos’s March failure was out of date. Credit Suisse’s staff didn’t quickly analyze its growing exposure to single stocks.
An internal audit in April 2020—made after the bank earlier had a loss of about $200 million from a hedge fund’s collapse—identified key problems that would come into play in the Archegos failure. But the bank was slow to roll out the planned improvements.
When employees flagged risks, they didn’t communicate them to higher ups. Contributing to the breakdown in risk controls was a key personnel change in the bank’s prime brokerage unit, which handled the Archegos account, after the death of an experienced manager in a ski-lift accident, people familiar with the matter said.
“The events that led to the losses in the Archegos case which we disclosed in our Q1 results are the subject of a Board level investigation which is looking into all these issues thoroughly,” a Credit Suisse spokesman said in an emailed statement. “We are committed to report the conclusions of that investigation (including the lessons learned).”
A spokesman for Archegos and Mr. Hwang declined to comment.
Taking on such a huge risk appears to have been for only a modest reward. Archegos, which managed the fortune Mr. Hwang made as a hedge-fund manager, produced for Credit Suisse revenue only in the tens of millions of dollars over several years, according to people familiar with the matter.
The collapse of Archegos, piled on top of the insolvency of another key Credit Suisse client, Greensill Capital, has plunged the bank into crisis. Credit Suisse took a $5.5 billion loss on Archegos, the largest related to that firm’s collapse on Wall Street.
It ousted its chief risk officer, investment bank head and others, and turned to investors for $2 billion in fresh capital to shore up the bank’s balance sheet. The Swiss regulator, Finma, said it opened civil enforcement proceedings against Credit Suisse. Regulators in the U.S. and the U.K. are probing the losses from Archegos at multiple banks, the Journal previously reported.
Just over a year before Archegos’s collapse, Credit Suisse Chief Executive
presented the bank’s best results in nine years, then said farewell to colleagues at its Zurich headquarters. The bank’s board had ousted him after a lieutenant ordered a spying operation on a Credit Suisse executive leaving for a rival. Mr. Thiam has denied knowledge of the spying.
In the overhaul, Mr. Thiam kept the bank’s prime brokerage business, which lends money to hedge funds and other big investors, because it supported a bigger equities business. That was seen as crucial, because rich clients needed access to stock markets for investments and to raise money for their own companies via Credit Suisse.
But Mr. Thiam said the unit should be more disciplined on risk-taking and focus on fewer clients. His team scaled back other parts of Credit Suisse’s investment bank, and dozens of senior people left. Less experienced colleagues frequently took their places, in a “juniorization” that former executives and investors who worked with Credit Suisse said left it more vulnerable to mishaps.
On the same February 2020 day that Mr. Thiam left the bank, Jason Varnish, a top risk manager in Credit Suisse’s prime brokerage, boarded a ski lift at Vail Ski Resort in Colorado. His coat became entangled, and the 46-year-old father of three was killed.
In a memo to staff at the time, the bank said Mr. Varnish “successfully struck the right balance between being commercially minded with clients while maintaining risk discipline for the bank.”
As at other banks, risk management had grown into an extensive operation inside Credit Suisse in recent years. The function gained stature and power after banks took large losses from complex trades during the financial crisis.
Risk management monitors the bank’s operations, seeking to avoid financial and reputational problems. Computer programs abide by rules and processes that are wired into the bank’s technology and must be followed by staff. In addition, at every level, the bank relies on human judgment.
Credit and reputational risk committees vet clients and transactions, and the bank puts limits on how much could be lost from a single client or counterparty. Bank executives, the board and board committees are in charge of the system and making sure it works, with assistance from internal-audit and credit-risk-review departments.
Regulators also play a role in assessing banks’ risk models, which draw on data, assumptions and scenarios to calculate expected outcomes. In 2019, the Federal Reserve said it found weaknesses in how Credit Suisse projected trading losses in an annual stress test and gave it four months to fix them.
The systems were tested when the spreading coronavirus pandemic spooked financial markets. In the volatility, Credit Suisse’s prime brokerage had a loss of about $200 million closing out investments for a flailing hedge fund, Malachite Capital, in March 2020, people familiar with the matter said.
then head of Credit Suisse’s markets business, oversaw the prime brokerage. An internal audit probed the loss, the size of which shocked some bank executives, the people said.
The audit flagged two failures, according to people familiar with the matter. The first was a lack of drilling down by the bank on Malachite’s trading strategy and how it would fare in volatile markets. The second was the use of an outdated margining system, which didn’t effectively monitor in real time how much risk a position created for the bank as the prices of the underlying securities changed.
Its recommendations included focusing on similar weak points with other clients, including those with high gross exposures through equity derivatives, which are based on the stock-price movements of the underlying asset, the people said. Plans were made to work on “process improvements” over two years, they said.
One effort was to move such trades to a more sophisticated “dynamic margining” system that would draw on additional real-time factors beyond price, such as volatility and concentration risk, according to the people. But changes weren’t in place for Archegos by the time it collapsed.
To fill Mr. Varnish’s senior risk-manager role in the turbulent markets, the bank turned to
a New York-based salesman in the prime brokerage unit. He had two decades of experience at the bank, carving a niche in financial derivatives that let hedge funds amp up stock bets with borrowed money.
His clients included Archegos, a heavy user of a derivative called a total-return swap, according to people familiar with the matter. The swaps let Archegos post a small amount of collateral to take large stock positions without owning the underlying securities.
Mr. Shah referred a request for comment to Credit Suisse, which declined to comment on his role. He didn’t respond to another request for comment.
Even with the Malachite stumble, Credit Suisse reported its best first-half net profit in a decade last July, mainly from resurgent markets and investment banking.
The new CEO,
who took over from Mr. Thiam in February 2020, said it was the right time to “capture growth opportunities.” His words were seen as a signal for the bank to capitalize on the market’s dizzying rally coming out of the pandemic, according to Credit Suisse executives. The Credit Suisse spokesman said Mr. Gottstein declined to comment.
Mr. Gottstein, who had previously headed Credit Suisse’s domestic unit catering to the rich, promoted Mr. Chin to run the investment bank and gave
Credit Suisse’s chief risk officer, a bigger role overseeing risk and compliance.
The Archegos portfolio rode hot markets, too. The fund’s positions at Credit Suisse dramatically multiplied from summer last year until March 2021, according to people familiar with the matter.
In September, Mr. Shah, who had been on the job for about six months, flagged the growing Archegos exposure to the investment bank’s counterparty-credit-risk team, one of the people familiar with the matter said. It couldn’t be determined if the specialist team, meant to monitor the health of Credit Suisse’s clients, reacted. The matter wasn’t escalated further by Mr. Shah or the counterparty-credit-risk team within the investment bank or to group-level managers, people familiar with the matter said.
Mr. Shah received regular reports indicating growing risks in the Archegos positions, the people said. The executive didn’t adequately flag these reports to senior personnel, they said.
In a total-return swap, a bank receives fees and owns the stock. Credit Suisse became one of the largest holders in some of Archegos’s stocks, according to the bank’s filings to the Securities and Exchange Commission. By the end of 2020, it owned about 6.5% of ViacomCBS’s Class B shares, according to FactSet.
But the bank’s tracking of the shareholdings had a lag, people familiar with the matter said, and the significance of the growing positions wasn’t picked up on, the Journal previously reported.
By mid-March, Credit Suisse’s notional exposure, or the value of the stocks underpinning the Archegos positions, was above $20 billion. Some inside the bank thought the exposure was only a fraction of that figure, in part because of the lagging tracking system, the Journal previously reported.
Mr. Gottstein and Ms. Warner, the chief risk officer, became aware of the bank’s exposure to Archegos in the days leading up to the forced liquidation of the fund, and neither had been aware of the fund as a major client before that, the Journal previously reported.
Days before Archegos blew up, ViacomCBS and Discovery stocks hit new highs. Around the middle of March, Credit Suisse released margin payments back to the fund, the people said.
Returning collateral might be a normal thing to do for a client with a diverse portfolio of holdings that had risen in value. But in the Archegos case, it was a problem because most of what it held was in a handful of stocks. This created special risks since any one stock falling could torpedo the firm.
Archegos also was making highly leveraged bets on some of the same stocks with other investment banks. Credit Suisse wasn’t aware of those moves, according to Credit Suisse executives.
The bank wasn’t fully assessing its risks in the stocks being so concentrated by single name and sector, according to the current and former people at the bank.
On March 22, a Monday, ViacomCBS shares fell when the company said it would issue new stock to invest in streaming services. Archegos got caught in a downward spiral as the stock fell and it couldn’t make margin calls. Other stocks tied to the fund’s trading positions also had been dropping.
In Zurich, Mr. Gottstein and Ms. Warner were entrenched in another crisis. Greensill Capital, a financing partner for a $10 billion set of Credit Suisse investment funds, filed for bankruptcy, putting billions in fund assets in doubt. Greensill ran into trouble because it couldn’t renew credit insurance on supply-chain finance loans it made to companies, exposing holes in Credit Suisse’s oversight of the funds. (The company’s founder, Lex Greensill, in May told a U.K. parliament committee he bears responsibility for Greensill’s collapse and that it relied too much on one insurer.)
In that March week, Credit Suisse was being pelted by questions from regulators, shareholders and fund investors over Greensill.
That Thursday, Archegos summoned its half-dozen lenders to try to hash out a survival plan.
Credit Suisse suggested the banks work together to unwind Archegos’s trades over a month. Some considered it, according to people familiar with the discussions. But no deal was reached and some swiftly unloaded their positions to other investors.
The next Monday, March 29, Credit Suisse warned of a significant loss. In April, it said exiting the positions cost $5.5 billion, and it raised $2 billion in fresh equity. Messrs. Chin and Shah and Ms. Warner were among the staff pushed out.
The Journal previously reported the bank has plans to roll out dynamic margining across client positions. In recent weeks, that system still wasn’t being applied to some positions, people familiar with the matter said.
Credit Suisse recently hired McKinsey & Co. to help identify and fix weak spots in its risk management, people familiar with the bank said.
special-purpose acquisition company is nearing a transaction with Universal Music Group that would value the world’s largest music business at about $40 billion, people familiar with the matter said.
The deal would be the largest SPAC transaction on record, exceeding the roughly $35 billion that Singaporean ride-hailing company Grab Holdings Inc. was valued at in a similar deal recently, according to Dealogic. It would have a so-called enterprise value, taking into consideration Universal’s debt, of about $42 billion.
the latest target for the activist hedge fund, according to people familiar with the matter.
Elliott has told Dropbox it is the company’s largest shareholder after Chief Executive Officer
the people said. That suggests the hedge fund owns a stake of more than 10%, worth well over $800 million. The two sides have been in talks since earlier this year.
Dropbox, a cloud-computing company with a market value of roughly $11 billion, went public in March 2018 and has been trading below its IPO price for most of that time. Its modest valuation compared with those of other cloud companies such as