Cryptocurrency-focused hedge fund Three Arrows Capital Ltd. has hired legal and financial advisors to help craft a solution for its investors and lenders after suffering heavy losses from a broad market sell-off in digital assets, the company’s founders said on Friday.
“We’ve always believed in crypto and we still do,” said Kyle Davies, co-founder of Three Arrows, in an interview. “We are committed to clearing things up and finding a fair solution for all of our constituents.”
The nearly 10-year-old hedge fund, founded by former schoolmates and Wall Street currency traders Su Zhu and Mr. Davies, had about $3 billion in assets under management as of April this year.
That was just before a sudden plunge in the values of TerraUSD, a so-called algorithmic stablecoin, and its sister token Luna in mid-May.
Three Arrows is evaluating options including selling assets and a rescue by another firm, Davies said. The fund hopes to reach an agreement with creditors, which would give it more time to come up with a plan. The company is still working while searching for a solution.
Three Arrows was among a group of major investors who participated in a $1 billion token sale earlier this year by Luna Foundation Guard, a nonprofit founded by South Korean developer Do Kwon, the creator of TerraUSD became. Funds flowed into a bitcoin-denominated reserve for the stablecoin and should help keep TerraUSD value at $1 per coin.
Mr. Davies said Three Arrows invested about $200 million in Luna as part of this deal, a sum that was effectively wiped out when TerraUSD and Luna both became worthless within days.
The two cryptocurrencies were previously among the top 10 digital coins before losing a combined $60 billion in market cap over the past month, he added. Before the collapse, some people in the crypto industry had raised concerns about TerraUSD’s stability and its reliance on traders for support, stating that this mechanism could allow for a potential downward spiral.
“We were very surprised by the Terra Luna situation,” said Mr. Davies, adding that the massive sell-off was unprecedented. The sale of bitcoin by the Luna Foundation in support of TerraUSD also exacerbated bitcoin’s decline in May.
Mr Davies said Three Arrows was able to weather the Luna losses, but the subsequent cascade of events that have caused prices of bitcoin, ether and other cryptocurrencies to fall over the past few weeks have further problems created, he added.
Lending conditions have tightened significantly as digital asset values have fallen across the board, leading some lenders to demand partial or full repayment of loans they previously made to crypto investors. Soaring US interest rates – a result of the Federal Reserve’s attempts to contain high inflation – have also fueled the sell-off in riskier assets.
Crypto’s total market cap, which peaked at nearly $3 trillion in November last year, had fallen to $910 billion as of Friday, according to data provider CoinMarketCap. Last weekend, Celsius Network LLC, a popular cryptocurrency lender, abruptly froze customer withdrawals, exchanges, and inter-account transfers, blaming extreme market conditions.
“We weren’t the first to be hit… This was all part of the same contagion that has hit many other companies,” Mr Davies said.
He said Three Arrows is still trying to quantify its losses and value its illiquid assets, which include venture capital investments in dozens of cryptocurrency-related private companies and startups.
“We’re the largest investors in the funds, and we’ve always wanted everyone to do well in them,” said Mr. Zhu, the other founder of Three Arrows.
Back in early 2021, Mr. Zhu had predicted that Bitcoin would enter a so-called growth super cycle with continuously rising prices as the cryptocurrency gained more mainstream acceptance. In late May, with the market sell-off underway, he tweeted that the “supercycle price thesis was unfortunately wrong, but crypto will still thrive and change the world every day.”
Three Arrows’ sudden demise follows the company’s previously strong track record. Messrs. Zhu and Davies started their fund in late 2012 with just $1.2 million. It initially focused on trading emerging market currencies before diving heavily into cryptocurrencies in recent years, multiplying the fund’s investments as bitcoin and other digital assets appreciated in value.
The company is known to have had large positions in Grayscale Bitcoin Trust and Lido Stacked Ether tokens, both of which have also suffered losses recently. The latter is a derivative of the cryptocurrency Ether, which is locked until the Ethereum network transitions to a less power-intensive model. These tokens have recently been trading at a discount to Ether itself.
Nichol Yeo, a partner at law firm Solitaire LLP who advises Three Arrows, said all of the fund’s investors are institutions or wealthy investors. He added that the company will keep Singapore’s financial regulator, the Monetary Authority of Singapore, updated on the latest developments.
Just before the recent downturn, Three Arrows announced it would be moving 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 moved its headquarters to the British Virgin Islands as part of its relocation plan.
WSJ’s Dion Rabouin explains why Wall Street is now heavily into crypto and what that means for the new asset class and its future. Photocomposite: Elizabeth Smelov
Caitlin Ostroff and Vicky Ge Huang contributed to this article.
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