This crypto hedge fund went from $10 billion to zero in just 3 months; founders gone missing

BlockFi, Celsius Network, and Voyager Digital are just a few of the companies with exposure to now-bankrupt crypto hedge fund Three Arrows Capital (3AC). Now, Three Arrows is about to drag down other companies and crypto investors with it. As recently as March of this year, 3AC managed about $10 billion in assets, making it one of the largest crypto hedge funds in the world.

Two weeks ago, the troubled Three Arrows Capital was ordered into liquidation by a court in the British Virgin Islands. The firm was also told to sell all its assets and holdings in crypto startups.  The liquidation makes Three Arrows one of the biggest casualties of the latest so-called “crypto winter.”

As we reported last month, Three Arrows Capital surprised many in the crypto industry after the firm announced it was unable to meet margin call demands from lenders, causing the leading crypto hedge fund into a crisis that comes as turmoil and credit crunch grip the crypto market. Three Arrows is one of the biggest and most active players in the crypto industry with investments spanning the lending and trading platforms.

Another casualty of Three Arrows is crypto exchange startup Blockchain.com, which reportedly faces a $270 million hit on loans to 3AC. On the other hand, digital asset brokerage Voyager Digital also filed for Chapter 11 bankruptcy protection after Three Arrows couldn’t pay back about $670 million it had borrowed. The carnage didn’t stop there. U.S.-based crypto lenders Genesis and crypto derivatives platform BitMEX and crypto exchange FTX are also hit with losses.

“Credit is being destroyed and withdrawn, underwriting standards are being tightened, solvency is being tested, so everyone is withdrawing liquidity from crypto lenders,” said Nic Carter, a partner at Castle Island Ventures, which focuses on blockchain investments.

Meanwhile, lawyers representing Three Arrows’ creditors say the firm’s founders Zhu Su and Kyle Davies have gone missing and their physical whereabouts are “currently unknown.” In a filing last week, the lawyers alleged that Three Arrows founders have not yet begun to cooperate with the liquidation process “in any meaningful manner.”

According to Teneo’s Russell Crumpler, the attorney tasked with helping to facilitate the bankruptcy process, they were last in contact with the two founders on a Zoom call last week. During the call, Zhu Su and Kyle Davies did not communicate with liquidators and kept their video and microphones turned off. As a result, Teneo deemed that the two had not provided “meaningful cooperation” throughout the liquidation process.

Meanwhile, Three Arrows’ margin call has already rippled through the entire crypto market. One of the affected crypto companies is crypto lender BlockFi, which recently announced that it has liquidated its position in Three Arrows.

Just like falling dominos, the fall of Three Arrows Capital can be traced to the collapse of stablecoin terraUSD (UST), and its sister token luna.

3AC told the Wall Street Journal it had invested $200 million in luna. But other industry observers said that Three Arrows’ exposure could be far greater. Some reports suggested that the firm’s exposure was around $560 million.

Teneo also said in a sworn statement that there is a “real risk” that 3AC’s assets would disappear, “absent immediate authority to pursue discovery.”

“That risk is heightened because a substantial portion of the Debtor’s assets are comprised of cash and digital assets, such as cryptocurrencies and non-fungible tokens, that are readily transferrable,” Crumpler said in his statement.

Founded in 2012 by Su Zhu and Kyle Davies, Three Arrows Capital is a hedge fund manager that provides risk-adjusted returns. The firm is headquartered in Singapore.