The report on Credit Suisse’s $5.5 billion Archegos losses was valuable as a post mortem into the risk management flaws that made such a disaster possible. The lines of defence intended to protect the bank were thwarted by a combination of management incompetence, cost-cutting and front-office greed.

But there is another way of reading the report – as a warning about systemic risk posed by leveraged equity investors and risk management flaws in the hedge fund financing industry as a whole. In this reading, Archegos is a sort of canary in the coalmine. Could the sell-off in the family office’s portfolio back in March be translated into a broader unwind of leveraged exposures?

In this article we will expand on our previous analysis and explore the evidence.

Let’s start with the insights from the 172-page report. It explains in detail how Credit Suisse enabled hedge fund clients to take levered equity exposure – via traditional prime brokerage or margin lending, and prime financing, which involved derivatives. Both routes required hedge funds to post a percentage of total borrowing as margin to protect the bank, but with crucial differences that contributed to the Archegos disaster.