The ultimate trap of high-leverage investing: Revealing the truth behind liquidations from Bill Hwang's $20 billion loss

In March 2021, Wall Street witnessed a capital catastrophe. Hedge fund manager Bill Hwang evaporated $20 billion within just 48 hours, becoming one of the fastest losing investors in modern history. On the surface, it appeared to be a simple liquidation event, but behind it hid many financial risks that most investors do not understand—Forced Liquidation.

Two Outcomes of a Financing Story

Many investors have limited funds but want to buy stocks of promising companies. This is when “margin trading” comes into play—borrowing money from a broker to buy stocks. Suppose you are interested in Apple stock (at $150/share), but only have $50. The broker can lend you $100 to complete the purchase.

At first glance, margin trading can amplify gains. When Apple stock rises to $160, you sell and repay the broker $100 principal plus $0.5 interest, netting $59.5, which is a 19% return—far exceeding the index’s 6.7% increase.

But what if the stock price drops to $78? At this point, the broker intervenes. Taking Taiwan stocks as an example, margin financing usually involves 40% equity and 60% borrowed funds. The initial margin maintenance ratio is 167% (100 ÷ 60). When the maintenance ratio falls below 130%, the broker will require you to Top Up Margin—that is, to add more funds to maintain the collateral.

If the investor cannot make the required payment within the deadline, the broker will directly force sell your holdings to recover the loan. This process is called Forced Liquidation, which from the investor’s perspective is known as Margin Call or Liquidation.

How Forced Liquidation Triggers Chain Reactions in the Stock Market

The story of Bill Hwang shocked Wall Street not just because he was liquidated, but because the scale of his liquidation triggered systemic risk.

He managed a huge amount of capital with a vast number of holdings. When brokers began forced liquidations, the market lacked enough buy orders to absorb such a large sell-off. Stocks plummeted sharply.

This sharp decline not only affected him but also triggered a chain reaction of forced liquidations among other margin investors—others were forced to top up margins or face liquidation due to falling stock prices. Even stocks that originally showed no signs of decline, like Baidu, experienced intense volatility—initial rebounds followed by further drops—driven entirely by market sentiment rather than fundamentals.

The Real Consequences of Forced Liquidation

Overreaction in Stock Prices: When large-scale margin liquidations occur, brokers sell at market prices rapidly to recover loans, not waiting for higher prices. This causes stocks to fall well below their fair value, triggering more liquidations and creating a self-reinforcing downward spiral.

Disruption of Capital Structure: Institutional investors (retirement funds, insurance companies) holding the stock are usually stable shareholders. After forced liquidation, large amounts of stock flood into retail hands. Retail investors tend to be short-term oriented, buying and selling on small fluctuations, which discourages large funds from entering. As a result, stock prices often remain depressed for a long time until significant positive news can attract new capital.

How to Use Margin Without Getting Forced Out

Margin trading itself is not inherently evil; the key lies in how it is used:

Choose Highly Liquid Assets: Only margin buy stocks with large market caps and active trading. Avoid low-liquidity stocks, as a large forced liquidation can crush the price into oblivion.

Control Leverage Ratios: Don’t use extreme leverage like Bill Hwang. Moderate margin allows you to build positions gradually; if prices fall, you still have room to average down; if prices rise, you enjoy amplified gains.

Assess Interest Costs: Margin involves paying interest. If the annual dividend yield of your target stock is close to your borrowing cost, the investment loses its edge. Ensure your expected returns can comfortably cover the interest.

Leverage Technical Levels: Stock prices often consolidate at resistance or support zones. If you buy on margin and the price stalls at resistance, consider taking profits because you still need to pay interest during this period. Conversely, if the price breaks support, it’s usually difficult to rebound quickly, so stop-loss is advisable.

Conclusion

Leverage can indeed accelerate wealth accumulation, but it can also speed up losses. Forced liquidation may seem like a personal investment issue, but it actually involves systemic market risks. The Bill Hwang incident proves that even Wall Street elites can crash under high leverage.

True investment wisdom is not about chasing maximum returns but about respecting risks and maintaining a safety margin while pursuing gains. Margin trading must be approached cautiously—doing thorough research is essential to avoid exposing yourself to uncontrollable dangers.