Story of the 3AC fund failure

The story of the first case of a crypto fund that seems to have reached the end of its rope: Three Arrows Capital (3AC).

The story of the collapse of the 3AC hedge fund

The story of the hedge fund Three Arrows Capital, founded in 2012 in Singapore by Su Zhu and Kyle Davies and declared bankrupt by a Virgin Islands court this week, represents very well how deregulation of cryptocurrencies can be detrimental to the market.

From the start, the fund’s policy has always been very aggressive in investments, sometimes considered borderline reckless. The fund has managed to have as much as $10 billion in assets under management. The gains in 2021, when the market reached its highs, rewarded the bold choices of the two founders. 

But as soon as the markets began to fall back, the fund began to show its first cracks, due in part to a debt exposure that was widely considered excessive. Until early June, its eccentric founder, Zu Shu, always expressed calmness and confidence, even when the situation seemed to have been compromised. In June, after Terra’s bankruptcy, he wrote tweets urging confidence in Bitcoin and the market in general, but these were evidently desperate attempts to hide the dire situation his fund was in.

Holder behavior at all-time highs on $BTC ? https://t.co/cr22vh1ufi

— Zhu Su ? (@zhusu) June 8, 2022

To avoid problems with Singapore regulatory authorities, the company moved its registered office to the Virgin Islands, which has always been considered one of the last remaining tax-havens. 

And that is why it was from a court in the Virgin Islands that the bankruptcy petition for the company started a few days ago. It all started in June when Debirit, a platform specializing in futures and options, reported that the fund had not repaid a loan, thus triggering the margin call mechanism.

Deribit sold all its positions in the fund to repay its loan and demanded payment of the remaining $80 million in accumulated interest and losses, which the fund could not repay.

Voyager platform also faces financial distress

The same thing happened with cryptocurrency lending platform Voyager, which in late June first asked 3Ac to repay $25 million in interest on the $690 million loan it had taken out. Once 3AC could not repay, Voyager opened default proceedings, which led the Virgin Islands court to declare bankruptcy for the fund.

According to some rumors, what finally blew up the fund’s accounts was the substantial exposure on the Terra Ecosystem, which, once bankrupt, would have caused enormous losses for the hedge fund.

Consulting firm Teneo, which the court appointed as the fund’s liquidator, has already hinted that the situation of 3AC’s accounts could be much worse than people think. 

According to a Singaporean business newspaper, Business Time, Zhu has reportedly put up for sale a house in Singapore, purchased two years ago for S$30 million, the proceeds of which will evidently have to be put to the court. A tangible sign that even for Zhu, the time for confidence and optimism seems to be coming to an end, like the entrepreneurial story of his 3AC fund.