How did a hedge fund go from $10B+ AUM to negative in a matter of weeks? The answer is simple: Leverage. We have seen this movie before, i.e. Long Term Capital Management, Bill Hwang and many others. In 3AC’s case, the story is actually simpler. It’s a rags to riches and back to rags story.
Their strategy was never going to work in the long run. WSJ has a good summary of what happened. Basically 3AC started in 2012 in a dorm room setting, overtime they grew their crypto prop trading firm from scratch to $10B+ AUM, mostly their own money. The growth primarily occurred during the 2019-2021 super crypto bull cycle. Their strategy is primarily investing in the crypto projects early, buying the dip with margin and HODL. It worked like magic until the clock stroke midnight and the magic stopped.
It appeared that when crypto prices started crashing after the UST/LUNA collapse, 3AC doubled down on their strategy (instead of cutting their losses), borrowed as much money as they could and bought the dip. They didn’t consider the possibility that BTC could go down from $30K to $20K. According to 3AC’s super cycle theory, that would never happen. This overconfidence ruined everything as the unthinkable did happen. 3AC went all the down to zero, dragging down many other crypto entities such as BlockFi and Voyager along the way.
One thing I found really crazy is that people use large amount of leverage when they are literally billionaires. Why do people take excessive risks for money they don’t need and can never spend? 3AC’s lost fortune is probably gone forever. Things could have been and should have been a lot better if they are not so caught up in their crypto religion. This is a good lesson for all investors: Risk means you can lose money. Cap your downside.
https://www.bloomberg.com/news/articles/2022-07-22/three-arrows-founders-en-route-to-dubai-describe-ltcm-moment#xj4y7vzkg?sref=3REHEaVI