Singaporean hedge fund company Three Arrows Capital exhibited signs of risk mismanagement before its collapse in June. According to a report by New York Magazine, firm co-founders Su Zhu and Kyle Davies were criticized by banks and financial professionals before they even started trading in the crypto market.
During its early days, the company focused on foreign exchange trading. It was reportedly able to capitalize on the mispriced quotes from other brokers by using currency arbitrage, which allowed Davies and Zhu to make money even if the gains were just fractions of a cent. 3AC did not allow banks to call them and adjust their trades. By 2017, the company had reportedly been cut off by the financial industry.
According to a former FX trader, 3AC's failure was partly the responsibility of the company's foreign exchange traders. They knew the company's co-founders could not make money in the market.
"We FX traders are partly to blame for this because we knew for a fact that these guys were not able to make money in FX," the former trader told New York Magazine. "But then when they came to crypto, everyone thought they were geniuses."
Arbitrating crypto
Initially, 3AC successfully applied the same currency arbitrage principles used in foreign exchange trading to the crypto market. However, in 2019, New York Magazine reported that investors realized the company might be in trouble. The company was able to sell its stake in a cryptocurrency exchange, Deribit, for $700 million. However, the value of the investment was only around $289 million, and 3AC allegedly tried to sell a portion of its stake at a steep price.
Despite a $2 billion investment, 3AC was reportedly too slow to sell its stake in GBTC (Grayscale Bitcoin Trust), which lost its value after being acquired by venture capital Castle Island. Davies later admitted that he knew that the value of GBTC would eventually fall.
The company also bet on Terra and Luna. In May, the former lost its dollar peg and crashed. According to Herbert Sim, an investor based in Singapore who closely tracked 3AC's assets, the company's holdings went from $500 million to just $604. Despite the company's losses, Zhu and Davies insisted they were still believers in the crypto industry.
Filing bankruptcy
After 3AC filed for bankruptcy, it was reported that the company had brought down another prominent crypto broker, Voyager Digital. According to Sam Bankman-Fried, a crypto billionaire, the company's actions triggered a ripple effect that affected the entire industry.
"I suspect they might be 80 percent of the total original contagion," Bankman-Fried said. "They weren't the only people who blew out, but they did it way bigger than anyone else did. And they had way more trust from the ecosystem prior to that."
The whereabouts of the company's co-founders are now unknown. According to New York Magazine, the company used money from individuals involved in organized crime to fund its operations. Three Arrows Capital reportedly had $32 million worth of stablecoins in the Cayman Islands, a location that wealthy individuals frequently use to avoid taxes.
In an interview with Bloomberg, Davies and Zhu said they planned to go to Dubai. The pair left behind a $150 million yacht and a $30 million mansion in Singapore.
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