Three Arrows Founders Break Silence Over What Caused Fund Collapse

Updated by Geraint Price
In Brief
  • 3AC co-founders have denied allegations that they pulled out funds before the collapse.
  • Zhu has cited death threats as the reason for the fleeing.
  • Denying the claims of having an "extravagant life", co-founders call the allegations a smear campaign.
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The founders of bankrupt hedge fund Three Arrows Capital (3AC) have broken their silence after five weeks in hiding, calling the collapse of the fund “regrettable.”

Kyle Davies and Su Zhun told Bloomberg from an undisclosed location that they suffered losses due to the implosion and denied allegations of fraud.

“The whole situation is regrettable,” Davies said. “Many people lost a lot of money.”

Creditors allege founders pulled out funds

In a July 9 court filing by the joint liquidators of 3AC, the founders were accused of moving out funds before the collapse. The filing said: “DRB Panama checked various wallet addresses for the Company and whilst they were able to see transfers have occurred, but were unable to identify to whom the Company’s funds had been transferred and for what purposes the Company’s funds had been transferred.”

In response, Zhu said: “People may call us stupid. They may call us stupid or delusional. And, I’ll accept that. Maybe. But they’re gonna say that I absconded funds during the last period, where I actually put more of my personal money back in. That’s not true.”

Pair cite death threats as reason for fleeing

That news of the founders fleeing Singapore had added to the creditors’ worry. In the court filing, the creditors’ consortium alleged that “the Company had ceased to engage meaningfully with creditors since approximately mid-June 2022.”

However, Zhu has cited death threats as the reason for their fleeing. “That does not mean that we haven’t been communicating with all relevant authorities. We have been communicating with them from day one,” he said.

Recently, Celsius Network received approval to financially restructure its business amid the market woes. And Voyager Digital account holders were warned they should not expect to get all their crypto back as the company restructures after filing for Chapter 11 bankruptcy.

However, it is not the end of allegations by the creditors. The founders have also been accused of using the borrowed funds to buy a $50 million yacht. Zhu argues that the boat “was bought over a year ago and commissioned to be built and to be used in Europe,” adding that it “has a full money trail.”

In addition, denying the claims of having an “extravagant life”, he has called the allegations part of a smear campaign. 

Zhu said: “This kind of smearing, I feel, is just from a classic playbook of the kind of headlines that people like to play.”

That said, the co-founders also acknowledged the cascading effect the Terra (LUNA) crisis had on the hedge fund.

Terra collapse a precursor to the current crypto crisis

“What we failed to realize was that Luna was capable of falling to effective zero in a matter of days and that this would catalyze a credit squeeze across the industry that would put significant pressure on all of our illiquid positions,” Zhu explained.

Meanwhile, Zhu also admitted to knowing Terra co-founder Do Kwon on a personal level. “We got to know Do Kwon on a personal basis as he moved to Singapore. And we just felt like the project was going to do very big things, and had already done very big things,” he said.

Zhu said: “If we were more on our game, we would’ve seen that the credit market itself can be a cycle and that we may not be able to access additional credit at the time that we need it.”

As to what went wrong with the firm, the co-founders also recognized the market overconfidence born out of the multi-year crypto bull market, that eventually hit the credit ecosystem. 

The co-founders defended their position by emphasizing that their website had sufficient risk disclaimers.

Zhu added: “For now, things are very fluid, and the main emphasis is on aiding the recovery process for creditors.”

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