Analysis: Debacle at Archegos throws excessive risk-taking into spotlight

NEW YORK (Reuters) – Highly leveraged Archegos Capital’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 around 80% in a year.

NEW YORK (Reuters) – Highly leveraged Archegos Capital’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 around 80% 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 and Discovery to the shares of investment banks who dealt with the fund, such as Credit Suisse – without rippling out into broader markets.

Yet, there are other signs that the mood has turned exuberant in recent months, leading to potentially excessive risk-taking across asset classes.

Among those are the market’s robust appetite for special-purpose acquisition companies (SPACs) and the popularity of cryptocurrencies such as Bitcoin. And an 850% rally in the shares of GameStop, fueled by retail investors with the help of options on sites such as Reddit’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,” said Andrew Beer of Dynamic Beta Investments.

Equities now account for 50% 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 showed. Many investors are leveraging that stock exposure through options, with equity options trading volume up 85% last year from 2017, according to data from Trade Alert.

And 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 BofA 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.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.