The aftermath of the astounding fall from grace of crypto trading platform FTX has left many investors, and those who they entrust with their money, scrambling to pick up the pieces.
A number of crypto hedge funds, in particular, have admitted they have a range of exposure to the now collapsed FTX exchange. While some are bullish that the crypto world can survive this storm, others are questioning whether investor confidence can be restored.
“Quite a few big crypto hedge funds worked closely with FTX and insolvency will have a big impact on them and the industry in general,” Marc Bernegger, co-founder of crypto hedge fund AltAlpha Digital told MarketWatch in an interview.
The mess began last week when FTX, once the world’s third largest crypto exchange, filed for Chapter 11 bankruptcy in the U.S., citing a “severe liquidity crisis.”
On Sunday, founder Sam Bankman-Fried tweeted that $5 billion worth of withdrawals were requested before withdrawals were halted.
FTX, the crypto exchange platform, collapsed last week, leaving many external and internal investors left in the lurch.
olivier douliery/Agence France-Presse/Getty Images
It’s still too early to gauge how much those hedge funds with FTX exposure have pulled down overall industry performance.
However, the latest monthly figures from Hedge Fund Research indicate that its cryptocurrency index in October was only just realizing returns in the black after two months of negative performance. The index is down 45% year to date.
Read: Here’s what account holders need to know about this ‘very messy and complex bankruptcy case.’
Stuck in the mud
Among those crypto hedge funds confessing to FTX exposure, Galois Capital appears among the biggest losers so far. The firm told investors that it has almost half of its assets trapped on the exchange, which the Financial Times estimated at around $100 million. Galois is the hedge fund that foresaw and shorted the collapse of Terra/Luna.
“We will work tirelessly to maximize our chances of recovering stuck capital by any means,” Galois founder Kevin Zhou told investors recently.
Crypto investor and hedge fund operator Multicoin Capital wrote to investors that it was able to salvage 24% of its capital before the exchange froze withdrawals, but still has 10% stuck at FTX, The Wall Street Journal reported. Investors were told earlier this month that the fund size was around $1.2 billion.
One former Point72 fund manager and FTX investor apologized for endorsing the exchange in the past. “I’m pretty disgusted with the space as a whole,” Travis Kling, founder of California-based Ikigai Asset Management said on Twitter.
He added that a large majority of his fund’s total assets were still on FTX, and he could only withdraw a small amount.
Some fund of funds claimed to have only small indirect exposure to FTX, which they say ensured “no permanent loss” of capital to investors.
One such example was Marc Seidel, partner of Alternative Investments at BFI Consulting, which runs the AltAlpha Digital fund strategy.
“The good news is that the damage was contained to a few single digit percentages of the overall portfolio. Counterparty risk is a considerable one in this space, which is one of the reasons why we spread our investments across different partners,” Seidel told MarketWatch.
Block Asset Management founder Manuel De Luque Muntaner also confirmed that his fund had no direct exposure, but calculated they had approximately 5% in FTX via underlying funds within their Blockchain Strategies Fund.
He said while the crypto market may continue to suffer, they made moves to protect investors, such as not directly putting money in FTX’s native token FTT.
“Just like the collapses of Celsius, Terra/LUNA and Three Arrows Capital earlier this year, Block Asset Management’s careful due diligence process, constant monitoring and diversification have reduced the direct impact from such events and ensured no permanent loss of investors capital has been incurred,” he told MarketWatch.
Others were lucky enough to return investor capital altogether.
“We were risk managing the situation, and redeemed all investor assets early Monday,” said Charles Edwards, founder of Capriole Investments, told MarketWatch in emailed comments.
As for those hedge funds claiming no exposure to FTX, one explanation could be that they took their money to rivals with bigger trading volumes.
Last week, when FTX was still open, CoinGecko listed FTX trading volume at $626.69 billion, fifth in the list of cryptoexchanges. Binance topped the list, with $4.953 trillion in volume.
“He talked a really good game. He wasn’t insignificant, but it looked to me like he had 5% of the market or so,” said Patrick Ghali, managing partner of hedge fund allocation advisory firm Sussex Partners, of FTX co-founder Bankman-Fried.
Crypto winter thawing
FTX’s knock-on effect has left bitcoin
trading at levels not seen since August 2020, around $16,571 and Solana
immeasurably linked to FTX, has tanked to historic lows, over 90% to $14.28.
Still, some crypto hedge-fund managers are fairly positive about the future of the market’s reputation, saying more regulation will rein in the previously untamed territory of the cryptocurrency world.
“Financial regulators around the world are going to accelerate their efforts in pushing legislation to control and regulate the activities of crypto and blockchain related companies. We see this as a positive move,” Belobaba’s chief investment officer Carlos Gomez told MarketWatch. He added that his firm had no exposure to FTX.
Some maintain their faith in crypto despite FTX’s collapse.
But for crypto hedge funds themselves, it may not all be plain sailing. A fund manager who requested that his name not be used told MarketWatch that those with a large portion of their assets locked in FTX will most likely wind down their funds and sell whatever wasn’t on the exchange.
“That could put a lot of pressure on other tokens that were held in other places,” he said, adding that most funds shorting on FTX “probably have unrealized gains in the form of shorts.”
“One, the unrealized gain evaporates. Two, you’re now much more long than you thought you were because the short protection that you thought you had against it doesn’t exist. So that’s going to be a very big problem for certain funds,” he said.
Sussex Partners’ Ghali, whose firm advises family offices and wealthy individuals, added that while clients haven’t inquired much about crypto funds, he thinks even less will in the future.
“My view is that a lot fewer will ask us. Why would people want to take that risk now? It feels very much like the Wild West.”