“We have always been believers in crypto and we still are,” Kyle Davies, Three Arrows’s co-founder, said in an interview. “We are committed to working things out and finding an equitable solution for all our constituent.”
The nearly decade-old hedge fund, which was started by former schoolmates and Wall Street currency traders Su Zhu and Mr. Davies, had roughly $3 billion in assets under management in April this year.
That was shortly before a sudden collapse in the values of TerraUSD, a so-called algorithmic stablecoin, and its sister token, Luna, in mid-May.
Three Arrows is exploring options including asset sales and a rescue by another firm, Mr. Davies said. The fund is hoping to reach an agreement with creditors that would give it more time to work out a plan. The firm is still operating as it seeks a solution.
Three Arrows was among a group of large investors that took part in a $1 billion token sale earlier this year by Luna Foundation Guard, a nonprofit organization started by South Korean developer Do Kwon, the creator of TerraUSD. The funds went toward a bitcoin-denominated reserve for the stablecoin, and were meant to help maintain TerraUSD’s value at $1 per coin.
Mr. Davies said Three Arrows invested about $200 million in Luna as part of that deal, a sum that was effectively wiped out when TerraUSD and Luna both became worthless in a matter of days.
The two cryptocurrencies were previously among the 10 largest digital coins before they lost a total of $60 billion in market capitalization last month, he added. Before the collapse, a few people in the crypto industry had voiced concerns about TerraUSD’s stability and its dependence on traders to act as its backstop, saying this mechanism could allow for a potential downward spiral.
“The Terra-Luna situation caught us very much off guard,” Mr. Davies said, adding that the massive selloff was unprecedented. The Luna Foundation’s sale of bitcoin to help support TerraUSD also worsened declines in the value of bitcoin in May.
Mr. Davies said Three Arrows was able to withstand the Luna losses, but the subsequent cascade of events that caused prices of bitcoin, ether and other cryptocurrencies to plummet in recent weeks created more problems, he added.
Credit conditions have tightened markedly as digital asset values have fallen across the board, leading some lenders to demand partial or full repayment on loans they previously made to crypto investors. Rapidly rising U.S. interest rates—a result of the Federal Reserve’s attempts to rein in high inflation—have also worsened a selloff in riskier assets.
