From $10 billion to zero: How a crypto hedge fund collapsed and dragged many investors down with it

[steveluv]

https://www.cnbc.com/2022/07/11/how-the-fall-of-three-arrows-or-3ac-dragged-down-crypto-investors.html

From $10 billion to zero: How a crypto hedge fund collapsed and dragged many investors down with it
Published Mon, Jul 11 20223:30 PM EDTUpdated Mon, Jul 11 20224:25 PM EDT, MacKenzie Sigalos @KENZIESIGALOS

Key Points

- The bankruptcy filing from Three Arrows Capital (3AC) triggered a downward spiral that wrapped in many crypto investors.

- The hedge fund failed to meet margin calls from its lenders.

- “3AC was supposed to be the adult in the room,” said Nik Bhatia, professor of finance and business economics at the University of Southern California.

As recently as March, Three Arrows Capital managed about $10 billion in assets, making it one of the most prominent crypto hedge funds in the world.

Now the firm, also known as 3AC, is headed to bankruptcy court after the plunge in cryptocurrency prices and a particularly risky trading strategy combined to wipe out its assets and leave it unable to repay lenders.

The chain of pain may just be beginning. 3AC had a lengthy list of counterparties, or companies that had their money wrapped up in the firm’s ability to at least stay afloat. With the crypto market down by more than $1 trillion since April, led by the slide in bitcoin and ethereum, investors with concentrated bets on firms like 3AC are suffering the consequences.

Crypto exchange Blockchain.com reportedly faces a $270 million hit on loans to 3AC. Meanwhile, digital asset brokerage Voyager Digital filed for Chapter 11 bankruptcy protection after 3AC couldn’t pay back the roughly $670 million it had borrowed from the company. U.S.-based crypto lenders Genesis and BlockFi, crypto derivatives platform BitMEX and crypto exchange FTX are also being hit with losses.

“Credit is being destroyed and withdrawn, underwriting standards are being tightened, solvency is being tested, so everyone is withdrawing liquidity from crypto lenders,” said Nic Carter, a partner at Castle Island Ventures, which focuses on blockchain investments.

Three Arrows’ strategy involved borrowing money from across the industry and then turning around and investing that capital in other, often nascent, crypto projects. The firm had been around for a decade, which helped give founders Zhu Su and Kyle Davies a measure of credibility in an industry populated by newbies. Zhu also co-hosted a popular podcast on crypto.

“3AC was supposed to be the adult in the room,” said Nik Bhatia, a professor of finance and business economics at the University of Southern California.

Court documents reviewed by CNBC show that lawyers representing 3AC’s creditors claim that Zhu and Davies have not yet begun to cooperate with them “in any meaningful manner.” The filing also alleges that the liquidation process hasn’t started, meaning there’s no cash to pay back the company’s lenders.

Zhu and Davies didn’t immediately respond to requests for comment.
 

Tracing the falling dominoes

The fall of Three Arrows Capital can be traced to the collapse in May of terraUSD (UST), which had been one of the most popular U.S. dollar-pegged stablecoin projects.

The stability of UST relied on a complex set of code, with very little hard cash to back up the arrangement, despite the promise that it would keep its value regardless of the volatility in the broader crypto market. Investors were incentivized — on an accompanying lending platform called Anchor — with 20% annual yield on their UST holdings, a rate many analysts said was unsustainable.

The flowchart shows the crypto firms affected by the implosion of TerraUSD and 3 Arrows Capital's bankruptcy filing.

“The risk asset correction coupled with less liquidity have exposed projects that promised high unsustainable APRs, resulting in their collapse, such as UST,” said Alkesh Shah, global crypto and digital asset strategist at Bank of America.

Panic selling associated with the fall of UST, and its sister token luna, cost investors $60 billion.

“The terraUSD and luna collapse is ground zero,” said USC’s Bhatia, who published a book last year on digital currencies titled “Layered Money.” He described the meltdown as the first domino to fall in a “long, nightmarish chain of leverage and fraud.”

3AC told the Wall Street Journal it had invested $200 million in luna. Other industry reports said the fund’s exposure was around $560 million. Whatever the loss, that investment was rendered virtually worthless when the stablecoin project failed.

UST’s implosion rocked confidence in the sector and accelerated the slide in cryptocurrencies already underway as part of a broader pullback from risk.

3AC’s lenders asked for some of their cash back in a flood of margin calls, but the money wasn’t there. Many of the firm’s counterparties were, in turn, unable to meet demands from their investors, including retail holders who had been promised annual returns of 20%.

“Not only were they not hedging anything, but they also evaporated billions in creditors’ funds,” said Bhatia.

Peter Smith, the CEO of Blockchain.com said last week, in a letter to shareholders viewed by CoinDesk, that his company’s exchange “remains liquid, solvent and our customers will not be impacted.” But investors have heard that kind of sentiment before — Voyager said the same thing days before it filed for bankruptcy.

Bhatia said the cascade hits any player in the market with significant exposure to a deteriorating asset and liquidity crunch. And crypto comes with so few consumer protections that retail investors have no idea what, if anything, they’ll end up owning.

Customers of Voyager Digital recently received an email indicating that it would be a while before they could access the crypto held in their accounts. CEO Stephen Ehrlich said on Twitter that after the company goes through bankruptcy proceedings, customers with crypto in their account would potentially receive a sort of grab bag of stuff.

That could include a combination of the crypto they held, common shares in the reorganized Voyager, Voyager tokens and whatever proceeds they’re able to get from 3AC. Voyager investors told CNBC they don’t see much reason for optimism.

[Jamesc]

I wouldn't call them investors.

More like  gamblers or punters or even chancers.

[Jamesc]

A fool and his money is soon parted.

[Vratenza]

4 minutes ago, Jamesc said:

I wouldn't call them investors.

More like  gamblers or punters or even chancers.

Yeah, they just did not get out of the musical chair quick enough....just like how MLM collapse

[Jamesc]

Dup

Edited July 12, 2022 by Jamesc

[Jamesc]

Dup

Edited July 12, 2022 by Jamesc

[Jamesc]

Dup

Edited July 12, 2022 by Jamesc

[Stary]

Rich men problem.  Those who can invest in an hedge fund are usually the HNW or even UHNW.

They can afford to lose some here and earn it back again before I could finish a meal.

 

[Playtime]

The 3ac guy is the one who bought a GCB for his infant son via a trust. . Now allegedly trying to sell other GCB... yeah he owns multiple apparently.

Read reports he fled Singapore. 

Not sure his nationality though. 

 

[kobayashiGT]

Got such person to inject 10 billions inside the economy. . . 

Where got inflation? 

[1fast1]

45 minutes ago, Playtime said:

 

Not sure his nationality though. 

 

Take a wild guess. 

Actually, no need to guess. 

https://mothership.sg/2022/07/zhu-su-three-arrows-selling-gcb/

"Zhu, who turned 35 in April 2022, was born in China, moved to the U.S. at age six, and has been a citizen of Singapore since 2016, according to Bloomberg."

[Throttle2]

1 hour ago, Playtime said:

The 3ac guy is the one who bought a GCB for his infant son via a trust. . Now allegedly trying to sell other GCB... yeah he owns multiple apparently.

Read reports he fled Singapore. 

Not sure his nationality though. 

 

Agent huat!

Being property agent is the bestest job in SG!

shiok ah! Huat ah!

[Playtime]

1 hour ago, Turboflat4 said:

Take a wild guess. 

Actually, no need to guess. 

https://mothership.sg/2022/07/zhu-su-three-arrows-selling-gcb/

"Zhu, who turned 35 in April 2022, was born in China, moved to the U.S. at age six, and has been a citizen of Singapore since 2016, according to Bloomberg."

Well if he really fled... not saying he already did.. ,  I wonder about his GCBs, not exactly can bring along. 

And his infant son's GCB too. Not sure his wife is singaporean or also ex prc🤔.

But he surely has multiple crypto wallets. 

[Fcw75]

COE will drop?

[Enye]

wah...he run road and gave up all his properties here ah

most likely means he has 10x or 100x stashed away whereever he is liao

the assets he gave up here are probably spare change

😬

[Jamesc]

If he structured his trust properly

I think creditors cannot touch.

[Jamesc]

I studied economics and

a crypto hedge fund collapsed from $10 billion to zero

is very good for inflation.

It will reduce inflation.

I hope more hedge funds collapse.

This is help kill off inflation.

[1fast1]

1 hour ago, Playtime said:

Well if he really fled... not saying he already did.. ,  I wonder about his GCBs, not exactly can bring along. 

And his infant son's GCB too. Not sure his wife is singaporean or also ex prc🤔.

But he surely has multiple crypto wallets. 

I wonder about his wife's GCB. 

And I'm not talking property. 😁