Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout

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Firm’s founders say they still believe in the future of cryptocurrencies

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The nearly decade-old hedge fund, which was started by former classmates and Wall Street currency traders Su Zhu and Mr. Davis, in April of this year had nearly $3 billion in assets under management.

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

Three Arrows is exploring options including a sale of the asset and a hedge by another firm, Mr Davis said. The fund is hoping to reach an agreement with creditors that will give it more time to plan. The firm is still working as it seeks a solution.

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Three Arrows was among a group of large investors who took part in a $1 billion token sale earlier this year by the Luna Foundation Guard, a non-profit started by South Korean developer Do Kwon, the creator of TeraUSD. organization is. The fund went toward a bitcoin-denominated reserve for the stablecoin, and was meant to help maintain the value of TeraUSD at $1 per coin.

Mr Davis said Three Arrows had invested about $200 million in Luna as part of that deal, an amount that was effectively wiped out when both TeraUSD and Luna became worthless within days. .

The two cryptocurrencies were among the first 10 largest digital coins, before losing a total of $60 billion in market capitalization last month, he said. Prior to the collapse, some in the crypto industry had expressed concerns about the stability of TeraUSD and its reliance on traders to act as its backstop, adding that this mechanism could allow for a potential downward spiral.

“The Terra-Luna situation got us very upset,” Mr. Davis said, adding that the massive sell-off was unprecedented. The Luna Foundation’s sale of bitcoin to help support TeraUSD also drove bitcoin’s value in May.

Mr Davies said Three Arrows was able to cope with Luna’s losses, but the subsequent cascade of events caused by the collapse in the prices of bitcoin, ether and other cryptocurrencies in recent weeks created more problems, he said.

Credit conditions have apparently tightened as digital asset values ​​have plummeted across the board, with some lenders seeking partial or full repayments on loans previously made to crypto investors. Rapidly rising US interest rates—as a result of the Federal Reserve’s efforts to rein in high inflation—have also worsened the sell-off in riskier assets.

According to data provider CoinMarketCap, the total market capitalization of crypto, which stood at around $3 trillion in November last year, had fallen to $910 billion as of Friday. Last weekend, Celsius Network LLC, a widely used cryptocurrency lender, abruptly halted customer withdrawals, swaps and transfers between accounts, following extreme market conditions.

“We weren’t the first to be hit … it’s all part of the same transition that has affected many other firms,” ​​Mr Davis said.

He added that Three Arrows is still trying to quantify its losses and value its 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 it was always our intention to do well for everyone,” said Mr. Zhu, another founder of Three Arrows.

In early 2021, Mr. Zhu predicted that bitcoin would usher in what is known as a growth supercycle, which would be accompanied by an ever-increasing price as the cryptocurrency gained more mainstream adoption. In late May, as the market sell-off, he tweeted that “the supercycle price thesis was regrettably wrong, but crypto will still thrive and change the world every day.”

The sudden return of Three Arrows follows the firm’s previously strong performance record. M/s Zhu and Davis started their fund at the end of 2012 with just $1.2 million. It originally focused on trading emerging market currencies before moving heavily into cryptocurrencies in recent years – multiplying the fund’s investments as the value of bitcoin and other digital assets increased.

The firm is known for having large positions in the Grayscale Bitcoin Trust and the “Lido Stake Ether” token, both of which have also suffered recent losses. The latter cryptocurrency is a derivative of ether that is locked until the Ethereum network transitions to a less energy-intensive model. These tokens have recently traded at a discount to Ether.

Nicole Yeo, partner at Solitaire LLP, a law firm that advises Three Arrows, said all investors in the fund are institutions or wealthy investors. He said the firm is keeping Singapore’s financial regulator, the Monetary Authority of Singapore, apprised of its recent developments.

Just ahead of the latest downturn, Three Arrows said it plans to move its headquarters to Dubai, where the digital-asset industry is booming. The firm acted as a regulated fund manager in Singapore until last year, when it moved its domicile to the British Virgin Islands as part of its relocation plan.

Caitlin Ostroff and Vicky Ji Huang contributed to this article.

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