Su Zhu and Kyle Davies, the elusive co-founders of the now-defunct hedge fund Three Arrows Capital (3AC), have re-emerged to publicly address their side of the story following the fund's spectacular collapse. They firmly dismissed rampant rumors about absconding with investor assets, asserting their commitment to resolving the fallout.
In a revealing exclusive interview with Bloomberg, the duo pinpointed a perfect storm of factors that led to the fund's downfall. These included highly leveraged positions, the catastrophic collapse of the Terra ecosystem, and significant losses tied to their Grayscale Bitcoin Trust (GBTC) holdings.
The founders conceded they had made aggressively leveraged bets that backfired spectacularly amid the harsh crypto winter. They admitted that their own overconfidence led 3AC to position itself for a market exit that unfolded far more disastrously than they had ever anticipated.
Davies commented on their unwavering belief, stating:
“We believed in everything to the fullest. We had all of our, nearly all of our assets in there. And then in the good times, we did the best. And then in the bad times, we lost the most.”
He added with a somber tone:
“The whole situation is bleak, some people lost a lot of money.”
The catastrophic implosion of the Terra ecosystem was the primary catalyst for 3AC's demise. Not only did the fund suffer massive losses on its LUNA holdings, but the ensuing credit crunch across the crypto market created a death spiral for the hedge fund.
3AC also held substantial positions in Staked ETH (stETH), which came under severe pressure. As the market crashed, traders shorted stETH, causing its price to de-peg from ETH and adding to 3AC's mounting losses.
To stay afloat, 3AC borrowed extensively from major digital asset lenders and investors, pushing the situation to a breaking point. When 3AC ultimately blew up, the shockwave forced other prominent firms like Voyager Digital and BlockFi into bankruptcy, illustrating the interconnected fragility of the crypto lending market.
Reflecting on the misjudgment, Zhu stated:
“What we failed to realize was that Luna was capable of going to zero in a matter of days and that this would trigger a credit crunch across the industry that would put severe pressure on all of our illiquid positions.”
Following the collapse, 3AC went from managing over $10 billion in assets to owing creditors an estimated $3.5 billion across 32 different entities.
The aggrieved creditors have filed legal motions in the British Virgin Islands to liquidate the fund's assets, a move that could potentially allow them to recover a portion of their losses from the proceeds.
Zhu and Davies noted that they are cooperating with the relevant authorities to facilitate the restructuring process for the benefit of the creditors.
Following reports suggesting the shift of 3AC's proceedings from the BVI to Dubai, the founders are reportedly seeking refuge in the United Arab Emirates.
As Dubai solidifies its position as a global crypto hub, Zhu and Davies believe they can rebuild their lives from this new base, motivated by a need to escape death threats from disgruntled investors.
“For Kyle and I, there are so many crazy people in crypto who have made death threats and all this kind of noise,” Zhu said. “We feel that it's just for the benefit of everyone if we can be physically safe and keep a low profile.”
