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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 “Credit is being destroyed and withdrawn, underwriting standards are being tightened, solvency is being tested, so everyone is withdrawing liquidity from crypto lenders,” said Nic Carter, a partner at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.

A $60 million hedge fund led by a high-profile Wall Street executive lost all but $200,000 of its assets in about three weeks, a stunningly quick fall for the well-heeled investors in the fund. The collapse of Canarsie Capital LLC caught the attention of Wall Street because it was run by the longtime former head of risk management at Morgan Stanley — Kenneth deRegt —along with Owen Li, a 28-year old former Galleon Fund Management trader. Among the fund’s wealthy investors, according to a person familiar with the matter, was Richard Axilrod, a top lieutenant to Louis Bacon of Moore Capital Management. Messrs. Li and DeRegt didn’t return requests for comment and telephone calls to the firm weren’t picked up. Mr. Axilrod declined to comment. In a letter to investors sent Thursday morning, the fund said that Mr. Li was stepping down and that Mr. deRegt would take over the fund’s unwinding, according to a person familiar with the matter. The details behind the fund’s fall aren’t clear. In a letter to his investors earlier this week, Mr. Li—who named the fund after the Brooklyn, N.Y., neighborhood where he grew up—said he was writing to express his “sorrow and deep regret for engaging in a series of transactions over the last several weeks that have resulted in the loss of all but two hundred thousand dollars.” According to a March 2014 regulatory filing, the fund had a “gross asset value” of $98 million, which included leverage, or borrowed money, according to a person familiar with the matter. The fund managed $60 million, not including borrowing, at the start of this year, the person said. In March, Morgan Stanley, Carnarsie’s sole prime broker, executing and financing the fund’s trades, told the fund it was uncomfortable with its risk practices, people close to the situation say. Canarsie at the time hired an independent consultant to look into Morgan Stanley’s concerns, one person familiar with the firm said. About a month later, Morgan Stanley told Carnarsie it would need to move its assets to another clearing firm because of remaining questions about the fund’s risk profile, the people said. Several months ago, Goldman Sachs Group Inc. began clearing for Canarsie, some of the people said. Mr. Li launched Canarsie in January 2013 and focused on investing in technology, energy, financial and consumer growth stocks, people close to the situation say. In 2013, he ended the year up 50%, one investor said, partly stemming from heavy leverage, or borrowing, by the fund and big investments in social media, including FacebookInc. and Twitter Inc. In 2014, Mr. Li invested in some less-successful IPO stocks, includingFireEye Inc. and Splunk Inc., both of which foundered last year. In his letter to investors, dated Jan. 20, Mr. Li said the fund’s losses happened after “I engaged in a series of aggressive transactions over the last three weeks that—generally speaking—involved options with strike prices pegged to the broader market increasing in value, but also involved some direct positions.” In his letter, Mr. Li didn’t elaborate on the soured trades. He wrote later on in the letter, “I acted overzealously.”

Litigation tied to Porsche's failed attempt to buy a controlling share of VW could now threaten the proposed VW/Porsche merger which was announced last year. In a VW prospectus on the merger, the litigation was listed as a risk factor that could delay or even derail the merger plan. Last December, VW obtained a 49.9 percent stake in Porsche AG, the sports car division of holding company Porsche SE. According to the plan, VW will have to pay for the rest of Porsche AG as well as buy the Porsche Holding dealer network, the largest in Europe, by 2011. The lawsuits threaten VW Group's ability to fund the deal without going into substantial debt. Porsche SE is accused of breaching market rules during its (failed) hostile takeover of VW which took place before the companies announced what amounted to a reverse takeover of Porsche by Volkswagen Group in 2009. Lawsuits filed by hedge funds, who claim to have lost more than 1 billion in what they contend was a manipulation of the stock market, were listed as a risk factor in the VW prospectus. "The merger may not be possible at all, or may only be carried out at a later date," reads the prospectus. How much of a risk the litigation is, analysts are not sure. But one banker did say the level of risk as described in the prospectus was "unusual."