Following a tweet by co-founder Zhu Su, speculation flared about the financial health of the largest cryptocurrency hedge fund: Three Arrows Capital (3AC). The troubles reportedly resulted from billions in losses in the wake of the Terra fiasco and other altcoin positions at risk.
The rumors first circulated on Twitter after the hedge fund’s usually vocal founders stopped commenting on social media for days. In the process, skeptics pointed to similar investments like crypto lending platform Celsius, which continues to struggle with liquidity issues. Zhu Su, a former Credit Suisse trader and co-founder of Three Arrows Capital, tweeted from his verified profile that communications with relevant parties were already underway. However, he did not provide further details.
Update 16.06.2022: According to partners of the hedge fund, various leveraged long positions were liquidated after Three Arrows Capital failed to meet margin calls from its lenders.
Update 16.06.2022: Lender BlockFi also confirmed the full liquidation of a position held by the hedge fund
A success story during the crypto boom
Three Arrows Capital became known for their “supercycle” theory, which predicted a multi-year crypto uptrend with no longer-term bear markets. Amid the bull market, combined with successful bets on early DeFi protocols like Aave, the hedge fund gained a loyal following on Twitter. But since the falsification of their cycle theory and the collapse of some investments, public skepticism about Three Arrows grew.
Supercycle price thesis was regrettably wrong, but crypto will still thrive and change the world every day
— Zhu Su ? (@zhusu) May 27, 2022
Zhu Su was particularly public with their positions in the alternative Layer 1 platforms Avalanche (AVAX), Terra (LUNA), and Near (NEAR), which undoubtedly amounted to a few billion. After the complete collapse of the Terra ecosystem and 80 percent drops in other altcoin investments, there may not be too much left. For example, Three Arrows had already been liquidated by some lenders after the required collateral could not be delivered.
Financial position of the hedge fund unknown
Information about the actual size and trading strategies of the fund, which was founded in 2012, is sparse to find. In early March, just a few months since the market peaked, blockchain analytics firm Nansen estimated their assets under management at around $10 billion. According to the latest available regulatory filings, Three Arrows Capital owned more than 5% of the entire Grayscale Bitcoin Trust (GBTC) as of December 2020, though it is unclear whether the hedge fund has maintained that position. At one point, the trust had a market value of more than $40 billion.
Three Arrows Capital’s recent attention has focused particularly on its exposure to a cryptocurrency called Lido staked Ether (stETH). Similar to crypto lending platform Celsius, the hedge fund had deposited funds in the triple-digit millions on Lido, with the token’s Ether bond slowly faltering. Since the binding loss of around 5%, the hedge fund began withdrawing several hundred million dollars worth of tokens from decentralized protocols; another bust for Three Arrows. If the numerous losses do indeed call the company’s solvency into question, the entire DeFi industry is likely to face hard times ahead.