Crypto Hedge Fund Three Arrows Capital assesses asset sale, bailout

Cryptocurrency-focused hedge fund Three Arrows Capital Ltd. has hired legal and financial advisers to help find a solution for its investors and lenders, after suffering huge losses from a wide sale of digital assets, the company’s founders said Friday.

“We’re always believed in crypto, and we still are,” said Kyle Davies, co-founder of Three Arrows, in an interview. “We are committed to resolving issues and finding a fair solution for all our constituents.”

The nearly ten-year-old hedge fund, which was started by former schoolmates and Wall Street traders Su Zhu and Mr. Davies, had about $ 3 billion in total assets in April this year.

It was shortly before a sudden collapse in the values ​​of TerraUSD, a so-called algorithmic stablecoin, and its sister token, Luna, in mid-May.

Three Arrows is exploring options including selling assets and rescuing another company, Mr. Davies said. The fund hopes to reach an agreement with creditors who will give it more time to prepare a plan. The company is still working while seeking a solution.

Three Arrows was among a group of large investors who participated in a $ 1 billion token sale earlier this year by the Luna Foundation Guard, a non-profit organization started by South Korean developer Do Kwon, the creator of TerraUSD. The funds went to a bitcoin-denominated reserve for stablecoin, and were intended to help maintain TerraUSD’s value of $ 1 per coin.

Mr Davies said the Three Arrows invested around $ 200 million in Luna as part of that deal, a sum that was effectively wiped out when TerraUSD and Luna both became worthless in a matter of days.

The two cryptocurrencies were previously among the 10 largest digital coins before losing a total of $ 60 billion in market value last month, he added. Prior to the collapse, a few people in the crypto industry had expressed concern about TerraUSD’s stability and its reliance on traders to act as a backstop, saying that this mechanism could allow a potential downward spiral.

“The Terra-Luna situation kept us very vigilant,” said Mr. Davies, adding that the massive sales were outstanding. The Luna Foundation’s sale of bitcoin to support TerraUSD also exacerbated the decline in bitcoin’s value in May.

Mr Davies said the Three Arrows were able to withstand the Luna losses, but the subsequent cascade of events that caused the prices of bitcoin, ether and other cryptocurrencies to plummet in recent weeks created several problems, he added.

Credit conditions have tightened markedly as the values ​​of digital assets have fallen across the board, which has led some lenders to demand partial or full repayment on loans they have previously given to crypto investors. Rapidly rising US interest rates – a result of the Federal Reserve’s attempts to curb high inflation – have also exacerbated a sale of more risky assets.

Crypto’s total market value, which reached 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 widely used lender of cryptocurrencies, froze abrupt customer withdrawals, exchanges and transfers between accounts, blaming what they said were extreme market conditions.

“We were not the first to be hit … This has been part of the same infection that has affected many other companies,” said Mr. Davies.

He said the Three Arrows are still trying to quantify their losses and value their illiquid assets, which include venture capital investments in dozens of private cryptocurrency-related companies and startups.

“We are the largest investors in the fund, and our intention has always been for everyone to do well in it,” said Mr. Zhu, Second Arrows’ second founder.

As early as 2021, Mr. Zhu had predicted that bitcoin would enter what is known as a growth supercycle with ever-increasing prices as the cryptocurrency gained more mainstream adoption. At the end of May, when the market sale was underway, he tweeted that “The Supercycle price statement was unfortunately wrong, but crypto will still thrive and change the world every day.”

The sudden decline to Three Arrows follows the company’s previous strong performance record. Zhu and Davies started their fund in late 2012 with just $ 1.2 million. It originally focused on trading currencies from emerging markets before entering major currencies in recent years – and multiplied the fund’s investments as bitcoin and other digital assets increased in value.

The company is known for having held large positions in the Grayscale bitcoin Trust and “Lido staked ether” tokens, both of which have also suffered losses recently. The latter is derived from the cryptocurrency ether, which is locked until the Ethereum network switches to a less energy-intensive model. These tokens have recently been traded at a discount to ether itself.

Nichol Yeo, a partner at the law firm Solitaire LLP that advises Three Arrows, said all of the fund’s investors are institutions or wealthy investors. He added that the company keeps Singapore’s financial regulator, the Monetary Authority of Singapore, informed of the latest developments.

Just before the recent downturn, Three Arrows said it plans to relocate to Dubai, where the digital assets 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 the relocation plan.

WSJ’s Dion Rabouin explains why Wall Street is now investing heavily in crypto and what it means for the new asset class and its future. Photo composition: Elizabeth Smelov

Caitlin Ostroff and Vicky Ge Huang contributed to this article.

Copyright © 2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8