Hedge funds are stranded at FTX with billions

hedge funds have put billions of dollars on the failed cryptocurrency exchange FTX and could wait for years until they get back from a marketplace that they once believed that it was one of the most reliable betting in the industry.

In a situation that is reminiscent of Lehman Brothers in 2008, in which the billions of dollars remained trapped for years in the billions of dollars, investors found themselves in the middle of thousands of creditors in a highly complex bankruptcy.

The sudden failure of FTX this month, which was estimated at $ 32 billion this year, has shocked investors who supported him and dealers who used him. Judicial submissions on Sunday showed that FTX owes more than $ 3 billion to its 50 largest creditors, which are probably a large number of hedge funds, more traditional asset managers and other dealers.

"I lost my investors' money after they trusted me to manage risks, and I'm really sorry," tweeted Travis Kling, founder of Ikigai Asset Management, which holds a "vast majority" of his hedge fund of FTX. "I have publicly supported FTX many times," he added. "I was wrong."

According to data group Crypto Fund Research,

crypto-focused hedge funds have a direct engagement in the FTX Group or FTT, the own digital token from FTX, which it has advertised to stimulate more trade in its main exchange, in the amount of around 2 billion USD.

At the beginning of this month, the Financial Times revealed that Galois Capital, whose founder Kevin Zhou was attributed to discovered the collapse of the cryptocurrency Luna, was tied to FTX about half of his capital.

Zhou admitted that he was "deeply sorry" and that he "underestimated the risk of solvency with the holding of our funds at FTX". He said it could take a few years before "a few percent of our assets" were regained.

Crypto Fund Research estimates that between 100 and 150 crypto hedge funds or about 25 to 40 percent of the total number of such special funds have direct engagement in the FTX Group or in FTT.

The average commitment is around 7 to 12 percent of the total managed fund, with some funds keeping a large part of their assets on the stock exchange according to the data group.

including companies such as Genesis Trading, which has set the withdrawal in his loan unit, and Blockfi, which has taken similar steps, could be up to $ 4 to $ 5 billion, said Crypto Fund Research.

ftx announced on Sunday in court files that each of his ten largest creditors owed at least $ 100 million. The 50 most important creditors whose names are blackened in the submission are all due to more than $ 20 million.

Institutions that act with crypto wonder who you can trust if the supposedly rockproof FTX could collapse so quickly. Managers have deducted money from the stock exchanges from caution.

"I think we will see further business failures in the coming weeks, so we have reduced our commitment to all other opponents," said a fund manager.

In contrast to traditional stock exchanges that simply bring buyers with sellers, crypto exchanges generally keep customers' assets over a longer period of time to make trading easier for customers. However, this makes the users attackable if the stock exchange itself gets into difficulties.

and unlike Lehman, where the creditors were finally repaid more than 100 percent of the assets, is anything but clear how much is to be paid back.

In an ominous sign, the new Chief Executive from FTX, John Ray III, said on Thursday that he had never seen such a complete failure of corporate controls. Ray added that he had no confidence in the balance sheets he had seen.

So far,

ftx has only found $ 740 million of crypto, which is "only a fraction of digital assets", which would hope to regain back, compared to $ 9 billion in liabilities the day before the collapse. In addition, FTX examines “abnormal” transactions that have taken place on its stock exchanges after its bankruptcy.

Many specialized crypto hedge funds were caught with assets at FTX because it was considered one of the blue chip exchanges in a largely unregulated sector.

"FTX was the highlight, the most beautiful girl in the class," said Kvamme Jensen, co-fund manager of the AKJ Digital Assets Fund. "They were seen as a refined and clean counterparty, an image that was the main reason for their success."

He said that crypto hedge funds “generally have little focus on risk analysis” of large stock exchanges. The implementation of a thorough diligence is difficult, he said, due to the lack of regulation and the remote locations where there are many stock exchanges.

SU ZHU, co -founder of the collapsed hedge fund Three Arrows Capital, tweeted that he shifted the trade to FTX last year, encouraged by generous conditions and the support of a variety of large risk capital names. "I assumed that someone did DD there [Due Diligence] and they must have grown up."

ftx has also courted more mainstream hedge funds that consider trading with crypto in order to benefit from the high yields of the asset. According to a hedge fund manager, his range of potential customers was that it started with crypto, but would expand to foreign exchange and futures, which would efficiently use the money of a fund across all of its margin accounts.

"How many of you have trusted that FTX is a good player who is committed to promoting the industry", wrote the investment company Sino Global Capital last week and added that your direct engagement was on the stock exchange "in the middle seven -digit range". "We deeply regret this misguided trust."

laurence.fletcher@ft.com