Written by 12:10 pm abroaden weekly insights

The Death of a Family Office

family_office

Hey, and welcome to issue #047 of the abroaden weekly insights newsletter where go over the death of a family office.

Here’s what’s been getting our attention this week:

  • The collapse of an investment firm you’ve never heard of
  • Cardboard is getting more expensive
  • China’s crackdown on H&M
  • Everything you ever wanted to know about social trading
  • For real estate, it’s not 2008
  • The office comes to the Irish pub
  • The 3&3

Swaps kill a family office (also what’s a family office?)

Early last week, the markets were in shock. The Friday prior, major global banks like Goldman Sachs, Deutsche Bank, Credit Suisse, and Nomura suddenly sold billions of dollars worth of shares. The culprit?  A little-known family office named Archegos Capital went belly up. Here’s what happened. 

Archegos Capital was a family office. If you’re not familiar with that term, think of it as a private financial adviser/hedge fund for the ultra-wealthy. 

These secretive enterprises grow the wealth of the richest people on the planet. To do so, they build vastly complicated investments using exotic structures. 

Prior to their implosion Archegos managed around 10 billion USD in client assets. 

Its investment strategy centered around high-risk, high-leverage products called “equity swaps.” 

In short, a fund or investor will exchange cash and a basket of shares to a bank. In return, the bank invests in a different set of stocks, paying out dividends or any profit.  

We call this arrangement a “total equity return swap.

“Why the nut would anyone do that? Wouldn’t it be easier to hold the shares directly?” You might ask. 

Remember – bankers are a lot like lawyers: they love making things more complicated than they should be

By using a swap, the investor gets a few advantages: 

  • Less trading fees
  • You can “buy more for less” as swaps can use leverage (i.e. borrowed money) 
  • No reporting requirements (because they don’t hold the shares)
  • No regulatory oversight as swaps don’t trade on an exchange (they go over the counter or OTC)
  • Lower taxes

Banks like them too, because they earn a lot of fees. 

The risk, though, is that the collateral the investor puts up could drop in value, leaving the bank exposed.

Last week, that’s precisely what happened.

Archegos had swaps worth billions at a bunch of banks. Their collateral started dropping in value. The banks began selling the collateral to recover cash and protect themselves from risk. 

As it became clear that Archegos was going to fail, more banks jumped in, moving markets decidedly downwards. 

By the time the dust settled, Archegos was dead, and Credit Suisse and Noruma were reporting multi-billion dollar losses. 

Now, regulators are asking why this situation came to be. Expect investigations into not only swaps but the opaque world of family offices to follow soon. 


H&M, Nike, China, and global economics

China is in a cultural war with some of the most prominent Western apparel brands. Swedish H&M made remarks about the situation in Xinjiang province, causing Beijing to retaliate. Within a few short weeks, the Chinese government effectively removed the brand from searches, shopping malls, and social media. We’re watching this story, not for the geopolitical fallout but the economic one. 

Fast fashion is one of the most controversial industries on the planet. On the one hand, it provides affordable clothing and a genuine pathway towards development for undeveloped countries. On the other, it’s a highly polluting industry requiring vast global supply chains and questionable labor. 

As we move out of the pandemic, there’s a lot of talk about shifting to a more regionalized and sustainable economy. If China is phasing out some of the world’s largest brands, will these companies reinvent the way they do business? If so, what does that mean for jobs and global development?  


We’re building the first online financial adviser & investment manager for people living & working abroad like yourself. Sign up now to get on our early access list and receive a special offer.


Increasing price and demand for cardboard boxes

Cardboard box prices are soaring right now (potential paywall). After a year of radically different consumer habits, online shopping is showing few signs of slowing down. 

Right now, the economy is in a weird spot. Things are much better than they appear, but only because we’re buying more goods (stuff) than services (restaurants and trips). 

The big questions to look out for: 

  • Will these prices fall when life returns to normal, and people spend more on restaurants, travel, going out?

 

  • Or will our new habits of shopping online keep cardboard prices high, driving up all costs for the foreseeable future? 

Our take is that it will be somewhere in between, but more because our shopping habits will remain different post-pandemic. 

What you should know about social trading

Trading stocks, cryptos, and other investments have never been more popular. Social trading — which combines trading investments with a social network (kind of) — is one of the fastest-growing sector trends. 

If you’re not familiar with it, we got you covered. We wrote a short blog post giving you everything you need to know about social trading. At the bottom of the post, we also reimagined the movie “Titanic.” If anything, you should definitely see that.  

Fast-growing housing market

The global economy continues to do things no one expected. This article in real estate publication Mansion Global reports that house prices worldwide grew by 5.6% in 2020. 

This figure isn’t surprising now. The pandemic made people rethink their housing situation. Meanwhile, homebuilders didn’t forecast rising demand last March, instead of cutting back on production. With not enough supply, prices went up. Throw in all of the stimulus money and low-interest rates, and it’s no wonder that real estate is soaring.

(There is no word yet on how housing will be made affordable for millennials). 

Ireland’s plan to turn rural pubs into coworking spaces

As anyone who’s traveled the world will tell you, “wherever you are, there’s probably an Irish pub.” The country that gave the world one of its favorite drinking establishments is trying to turn them into coworking spaces.  

Ireland, like most of the world, witnessed a rural exodus. To get people back to the countryside, the Irish government is investing in pubs in small towns, helping to convert them into coworking spaces. 

Is Ireland creating the next WeWork? It’s hard to tell, but we’ll be happy to do a thorough inspection of the country’s pubs once the situation permits. 

The 3&3 

Hey, so here at abroaden, we’re currently upping our content game. To give you amazing readers more information you can use, we’re starting a new monthly segment called “the 3&3.”

We look at three stories to know about from the month we just finished and three themes to watch for the coming four weeks. 

You can check out our first April edition here.  

We’d love to know what you think, so please let us know in the comments or reply to this email! 


 

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