The two founding partners of busty Crypto hedge fund Three Arrows Capital (3AC), Su Zhu and Kyle Davies break their silence in a new interview with BloombergIt was published today.
Chu and Davis attribute 3AC’s rapid collapse to over-optimistic speculation on their part, with Chu saying they “Positioned [themselves] For some kind of market that didn’t happen in the end.” “We believed everything,” Davies echoed.
At their lengthy postmortem autopsy, Chu said it was “no surprise” that 3AC had folded and filed for bankruptcy, along with Celsius and Voyager.
They weren’t the only ones who felt the coded winter chill.
Lenders like Fuld and BlockFi had it liquidity issueswhile some names are at the top — like Queen Pieceand Gemini, OpenSea, and Blockchain.com Mass layoffs.
“We have our own capital, we have our own balance sheet, but then we also take deposits from these lenders and then generate a return on them. So if we’re working on taking deposits and then making a return, that, you know, means we’re at the end of the day,” Chu said. Eventually we do similar deals.”
The trade that sank the ship
In their interviews, Su Zhu and Kyle Davies attributed the collapse of 3AC to overexposure to Terra, Ethereum, and Grayscale’s confidence in Bitcoin.
In the Terra case, Zhu said he initially saw no red flags: “What we failed to realize was that Luna was able to collapse to effective zero within days and that this would spur credit pressures across the industry. It would put Huge pressure on all of our illiquid positions.”
Cho said, “We started getting to know Do Kwon on a personal basis when he moved to Singapore. We felt like the project was going to do pretty big things, and he’s already done really big things. If we can see that, you know, that’s now like, ‘Maybe that’ be attackable in some ways, and that it has also grown, you know, very large and very fast.”
Another common trade between distressed crypto firms has been traded Ethereum, or steth. Each stETH will theoretically be redeemable for 1 Ethereum after the network goes to file proof of stake (PoS) consensus mechanism in September.
However, one of the side effects of Terra’s collapse is that StETH started it I miss the peg.
This attracted opportunistic traders to bet on the token: “Because Luna just happened, it was pretty much a contagion where people were like, ‘OK, are there people that are also borrowed from Ether for Ether who are going to be liquidated as the market moves down?’ So the whole industry is actively chasing these jobs, thinking that, you know, because basically they can be hunted.”
Zhu also attributed 3AC’s collapse to exposure to Grayscale’s Bitcoin Trust (GBTC), an investment product for institutional investors who want exposure to bitcoin without the risk of holding it outright. GBTC is currently trading at 30% off to BTC.
Cho and Davis shadows?
Su Zhu claimed that the reason 3AC’s founders remained almost silent for the past five weeks was not because they fled with capital, but because they felt their lives were threatened.
“For Kyle and I, there are a lot of crazy people in cryptocurrency, this kind of death threat or all that kind of hype,” Chu said. “We feel it is in everyone’s best interest just to be physically secured and to stay out of sight.”
Last Tuesday, Zhu broke his month-long silence on Twitter to post screenshots of a recent email from Advocatus Legal LLP, the company hired by 3AC, that was sent to the legal representatives of the company’s liquidator, Teneo.
In the letter, 3AC’s lawyers asked Teneo’s liquidators if they had mentioned in July 8 Deposit to US Bankruptcy Court “threats of physical violence” that the founders of 3AC and their families were receiving.
So 3AC may be hiding from disgruntled investors, but they are no longer hiding from the public.
There is no doubt that this is the end of the road for a hedge fund. For now, though, the pair are focused on meeting their creditor obligations and eventually moving to Dubai, likely due to its crypto-friendly regulatory approach.
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