Key Takeaways
- • Three Arrows Capital (3AC), a Singapore-based crypto hedge fund with an estimated peak AUM of $18 billion, filed for Chapter 15 bankruptcy in New York after its insolvency became public.
- • 3AC's collapse traced to a chain of exposures: a roughly $550 million peak-value Terra (LUNA) position that fell to an estimated $500 million, stETH liquidity withdrawals of about $400 million from the Curve pool, and leveraged long positions funded by lenders.
- • A British Virgin Islands court ordered 3AC's assets liquidated after loan defaults, with advisory firm Teneo appointed to manage the process.
- • Court documents show 32 companies lent $3.5 billion to 3AC, with Genesis, a unit of Digital Currency Group, the largest lender at $2.36 billion.
- • The fund had earlier been reprimanded by the Monetary Authority of Singapore for providing false information and managing more AUM than permitted.
Summary
Three Arrows Capital (3AC), once one of the largest crypto hedge funds, filed for Chapter 15 bankruptcy in New York. The Singapore-based fund, which reached an estimated $18 billion in assets under management at its peak, had previously been reprimanded by the Monetary Authority of Singapore (MAS) for giving false information and managing more AUM than it was permitted to. According to an exclusive interview with Bloomberg, founders Zhu Su and Kyle Davies laid low, consulted lawyers and ultimately relocated to Dubai, where they had initially planned to move headquarters.
The fund was founded in 2012 by Zhu and Davies, Columbia graduates who had worked on bank trading desks and at Credit Suisse before launching 3AC to trade emerging-market foreign exchange. The fund became crypto-exclusive by 2018, began with Bitcoin and Ethereum derivatives, and later diversified into venture investments, including Deribit and Layer 1 tokens such as Avalanche, Solana and Polkadot.
The fund's downfall was driven by several concentrated exposures. 3AC held roughly $200 million in Terra positions, valued at about $550 million at their peak, which were reportedly worth about $500 million after the Terra ecosystem collapsed. Zhu told Bloomberg the fund had failed to anticipate that Luna could fall to effectively zero within days, a development he said catalyzed an industry-wide credit squeeze. The fund also held a large position in Grayscale Bitcoin Trust (GBTC) shares, reportedly 6.26% of total shares by mid-2020, which shifted from a premium to a discount as competing spot products launched and the SEC repeatedly rejected Grayscale's conversion to an ETF, most recently on June 29, 2022.
After the Terra collapse, stETH traded below the value of ETH amid heavy selling. According to Nansen, 3AC removed about $400 million of liquidity from the Curve stETH/ETH pool on May 12. Lenders including BlockFi, Genesis, Nexo and Celsius continued extending credit, and filings later indicated that very little collateral had been required. As crypto prices fell, 3AC's loan-to-value ratios rose, and the fund lacked liquid funds to meet margin calls because many venture positions were not scheduled to vest until late.
A court in the British Virgin Islands ordered 3AC's assets liquidated after it failed to repay loans, and the fund itself filed for liquidation there. Teneo was appointed to manage the process and distribute remaining assets to creditors. Court documents show 32 companies lent a combined $3.5 billion to 3AC. Genesis, the crypto brokerage arm of Digital Currency Group, was the largest lender, extending a $2.36 billion loan collateralized by GBTC shares, Grayscale Ethereum Trust shares, Avalanche and NEAR Protocol tokens.
The fund was founded in 2012 by Zhu and Davies, Columbia graduates who had worked on bank trading desks and at Credit Suisse before launching 3AC to trade emerging-market foreign exchange. The fund became crypto-exclusive by 2018, began with Bitcoin and Ethereum derivatives, and later diversified into venture investments, including Deribit and Layer 1 tokens such as Avalanche, Solana and Polkadot.
The fund's downfall was driven by several concentrated exposures. 3AC held roughly $200 million in Terra positions, valued at about $550 million at their peak, which were reportedly worth about $500 million after the Terra ecosystem collapsed. Zhu told Bloomberg the fund had failed to anticipate that Luna could fall to effectively zero within days, a development he said catalyzed an industry-wide credit squeeze. The fund also held a large position in Grayscale Bitcoin Trust (GBTC) shares, reportedly 6.26% of total shares by mid-2020, which shifted from a premium to a discount as competing spot products launched and the SEC repeatedly rejected Grayscale's conversion to an ETF, most recently on June 29, 2022.
After the Terra collapse, stETH traded below the value of ETH amid heavy selling. According to Nansen, 3AC removed about $400 million of liquidity from the Curve stETH/ETH pool on May 12. Lenders including BlockFi, Genesis, Nexo and Celsius continued extending credit, and filings later indicated that very little collateral had been required. As crypto prices fell, 3AC's loan-to-value ratios rose, and the fund lacked liquid funds to meet margin calls because many venture positions were not scheduled to vest until late.
A court in the British Virgin Islands ordered 3AC's assets liquidated after it failed to repay loans, and the fund itself filed for liquidation there. Teneo was appointed to manage the process and distribute remaining assets to creditors. Court documents show 32 companies lent a combined $3.5 billion to 3AC. Genesis, the crypto brokerage arm of Digital Currency Group, was the largest lender, extending a $2.36 billion loan collateralized by GBTC shares, Grayscale Ethereum Trust shares, Avalanche and NEAR Protocol tokens.
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