Crypto Hedge Fund Beaten Three Arrows Capital Considered Asset Sale, bailout

Crypto-focused hedge fund Three Arrows Capital Ltd. hired legal and financial advisors to help find solutions for its investors and lenders, after suffering heavy losses due to sell off on the broad market on digital assets, the company’s founders said on Friday.

“We have always believed in crypto and we still do,” Kyle Davies, co-founder of Three Arrows, said in an interview. “We are committed to working things out and finding a solution that is fair to all of our members.”

The nearly decade-old hedge fund, founded by former classmates and Wall Street currency traders Su Zhu and Mr. Davies, with approximately $3 billion in assets under management as of April of this year.

That was a little while ago a sudden collapse in the values ​​of TerraUSD, a cryptocurrency called stablecoin, and its sister token, Luna, in mid-May.

Three Arrows is exploring options including a sale of the property and a rescue by another company, Mr. Davies said. The fund is hoping to reach an agreement with its creditors to allow more planning time. The company was still working as they looked for a solution.

Three Arrows is among a large group of investors who participated in a $1 billion token sale earlier this year by the Luna Foundation Guard, a nonprofit organization led by South Korean developer Do Kwon, who TerraUSD created, established. The money went towards reserve in bitcoins for stablecoinsand is intended to help maintain the value of TerraUSD at $1 per coin.

Mr. Davies said Three Arrows invested about $200 million in Luna as part of that deal, an amount that was effectively wiped out as TerraUSD and Luna both became worthless over the next few days.

These two cryptocurrencies were previously among the 10 largest cryptocurrencies before they lost a combined $60 billion in market capitalization last month, he added. Before the crash, some in the crypto industry expressed concern about TerraUSD’s stability and its reliance on traders to act as support for it, saying that the This mechanism can allow potential spiral going down.

“The Terra-Luna situation caught us very off guard,” said Davies, adding that the sell-off was unprecedented. The sale of bitcoin by the Luna Foundation to support TerraUSD also caused the bitcoin value to drop further in May.

Davies said the Three Arrows could withstand the loss from Luna, but the ensuing series of events that have sent the prices of bitcoin, ether and other cryptocurrencies plummeting in recent weeks has created more problems, he said. more.

Credit conditions have tightened significantly as the value of digital assets has fallen across the board, prompting some lenders to demand repayment of some or all of the loans they previously made to banks. Cryptocurrency investors. Rapidly rising US interest rates – the result of the Federal Reserve’s efforts to contain high inflation – have also exacerbated a sell-off in riskier assets.

The total market capitalization of cryptocurrencies, which peaked at nearly $3 trillion last November, fell to $910 billion on Friday, according to data provider CoinMarketCap, according to data provider CoinMarketCap. CoinMarketCap data. Last weekend, Celsius Network LLC, a widely used cryptocurrency lending company, Sudden freeze of customer withdrawalsswaps and transfers between accounts, blaming what it says are harsh market conditions.

“We are not the first to be affected… All part of a similar contagion that has affected many other companies,” said Mr. Davies.

He said Three Arrows is still trying to identify losses and value its illiquid assets, which include venture investments in dozens of crypto-related companies and startups. private.

“We are the biggest investors in the fund and our aim has always been for people to do well,” said Zhu, another founder of Three Arrows.

Back in early 2021, Mr. Zhu predicted that bitcoin would enter what is known as a growth supercycle with prices continuously increasing as the cryptocurrency gains more popular adoption. At the end of May, as the market sell-off was underway, he tweeted that “Supercycle’s price thesis was unfortunately wrong, but crypto will still thrive and change the world every day.” day.”

Three Arrows’ surprise comedy follows the studio’s previous strong performance. Messrs Zhu and Davies started their fund in late 2012 with just $1.2 million. It initially focused on trading emerging markets currencies before moving heavily into crypto in recent years – multiplying fund investments as bitcoin and other digital assets increase in value .

The company is known to have taken large positions in the Grayscale bitcoin Trust and the “ether deposit Lido” token, both of which have suffered recent losses. The latter is a derivative of the cryptocurrency ether that is locked until the Ethereum network transitions to a less energy-intensive model. These tokens were recently traded at a discount to ether itself.

Nichol Yeo, a partner at law firm Solitaire LLP, who is advising Three Arrows, said all of the fund’s investors are institutional or wealthy investors. He added that the company is keeping Singapore’s financial regulator, the Monetary Authority of Singapore, a review of its recent developments.

Just before the most recent downturn, Three Arrows said it was planning to move its headquarters to Dubai, where the digital asset industry is booming. The company operated as a regulated fund manager in Singapore until last year, when it relocated to the British Virgin Islands as part of a relocation plan.

WSJ’s Dion Rabouin explains why Wall Street is betting big on crypto right now and what that means for the new asset class and its future. Photo compilation: Elizabeth Smelov

Caitlin Ostroff and Vicky Ge Huang contributed to this article.

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