Three Arrows Capital states possibility for asset sales & bailout options.

Three Arrows launched in 2012 and grew to become one of the crypto space’s largest hedge funds, holding over $10 billion in assets under management at its peak. However, it took a hit as the crypto market started to decline in 2022. Bitcoin registered an 18-month low just above $21,000 as the news of the firm’s problems first surfaced, a 70% drawdown from its November peak. Shaky macroeconomic conditions accelerated by the Federal Reserve’s commitment to hiking interest rates have also accelerated the current crypto downtrend. 

In the Wall Street Journal report, Davies revealed that the firm had invested $200 million in Terra’s LUNA token before it collapsed to zero last month. The firm’s other investments include Layer 1 tokens like Solana and Avalanche, Ethereum DeFi applications like Aave and Balancer, and a few crypto-focused companies such as Deribit and Fireblocks. 

The news comes after speculation that Three Arrows was facing insolvency surfaced in the crypto community earlier this week. Zhu and Davies stayed quiet as the rumors spread, save for a vague tweet from Zhu that said the firm was “fully committed to working this out” and “communicating with relevant parties.” 

Three Arrows Capital (3AC) has hired legal and financial advisers to help the crypto hedge fund consider its options following large trading losses, the Wall Street Journal reported on Friday. Crypto exchanges FTX, Deribit and BitMEX had liquidated 3AC's positions after it failed to meet margin calls. 

“We have always been believers in crypto and we still are,” co-founder Kyle Davies told the WSJ in an interview. “We are committed to working things out and finding an equitable solution for all our constituent,” Davies said, before revealing that the fund was looking into asset sales and a potential bailout. The firm is also hoping to buy more time with creditors as it formulates a plan. 

Three Arrows Capital may sell off its assets or seek a bailout from another firm to overcome its ongoing liquidity woes, according to a Friday report published in The Wall Street Journal. 

The crypto hedge firm’s founders Su Zhu and Kyle Davies spoke out for the first time together in an interview with the New York publication, revealing that it has hired legal and financial counsel as it attempts to navigate its biggest crisis ever due to the recent decline in the cryptocurrency market. 

In 2021, Zhu and Davies became known for championing the “supercycle” thesis, a narrative that suggested that crypto had reached an inflection point that would prevent the asset class from suffering from dramatic drawdowns like it had done in previous bear cycles. Zhu tweeted in late May that the thesis was “regrettably wrong” as the market extended its brutal bleed in the wake of Terra’s collapse. 

According to the report, the firm is in the process of calculating its losses and valuing its illiquid assets. Nichol Yeo of Solitaire LLP, a legal firm advising Three Arrows, told The Wall Street Journal that the firm is keeping the Monetary Authority of Singapore updated on its plans. The Three Arrows website still lists a variety of investments in the cryptocurrency ecosystem, and the firm is yet to make an official announcement. 

Also a DEFI protocol backed by the now-unraveling Three Arrows Capital has a significant portion of its treasury unaccounted for. The protocol closed its $3.5 million seed funding round, led by Three Arrows, in late 2021. As part of the round, the protocol received stablecoins USD Coin and Tether, which the company could have either actively managed by lending it on a decentralized market or opted to keep all or a portion of it with TPS Capital, Three Arrow’s over-the-counter trading desk.  Three Arrows guaranteed 8% annual returns on this treasury management service. Because of the high yields, many protocols backed by Three Arrows decided to keep their funding round capital, plus portions of their own treasuries, with Three Arrows, the founder said. 

It felt like the safer option, the protocol’s founder said, compared to the alternative — deploying the capital through risky smart contracts. The decision was further validated when it was unaffected by Terra’s collapse, but now, a notable chunk of the protocol’s treasury is unaccounted for.  The founder said that the protocol is weighing its legal options and has been in contact with two other Three-Arrows-backed protocols that face the same uncertainty about the state of their treasuries with no communication since June 10th from the TPS team or founders.

The issue still in limbo going into this week with many people and projects wondering what is being planned behind the scenes with their capital investments being managed.