How this crypto hedge fund fell from hero to zero, dragging investors along with it

One of the world's most well-known cryptocurrency hedge funds, Three Arrows Capital managed has shocked many investors and speculators after filing for bankruptcy. It had around $10 billion in assets as recently as March.

The company, also known as 3AC, has declared bankruptcy after the collapse in cryptocurrency prices and an inherently risky investment that wiped out all of its assets, rendering it incapable of paying back loans.

Perhaps the agony is just getting started. 3AC had a long list of partners, or businesses, whose financial future depended on the company's capacity to at least survive. Investors who have placed large bets on companies like 3AC are suffering as the cryptocurrency market has fallen by more than $1 trillion since April, driven by the decline in bitcoin and ethereum.

As part of its plan, Three Arrows borrowed money from various sources in the market before investing it in other, mostly fledgling, crypto companies. Given that the company had been around for ten years, founders Zhu Su and Kyle Davies had some level of authority in a field where newcomers predominated.

According to reports, loans to 3AC will cost Crypto exchange Blockchain.com $270 million. As 3AC struggled to pay back the nearly $670 million it had borrowed from digital asset dealer Voyager Digital, the company filed for Chapter 11 bankruptcy protection. Losses have also been reported by the American cryptocurrency lenders Genesis and BlockFi, the crypto derivatives marketplace BitMEX, and the cryptocurrency exchange FTX.

The collapse of terraUSD (UST), which was among the popular U.S. dollar-pegged stablecoin initiatives, might be linked to the collapse of Three Arrows Capital in May.

Notwithstanding the guarantee that it would maintain its value despite the volatility in the larger crypto market, the stability of UST depended on a sophisticated collection of code with little to no real money to support the arrangement. An associated lending platform called Anchor offered investors a 20% yearly interest on their UST holdings, which many analysts deemed to be an unsustainable rate.

Investors lost $60 billion as a result of panic selling related to the collapse of UST and its sibling token luna.

The Wall Street Journal was informed by 3AC that it had invested $200 million in luna. The failure of the stablecoin project effectively made that investment useless.

The fall of UST shattered the sector's credibility and hastened the decline in cryptocurrencies that had already begun as part of a larger turn away from risk.

In a barrage of margin calls, the lenders of 3AC demanded repayment of part of their capital, but there was none. Many of the company's counterparties, including retail holders who expected yearly returns of 20%, found themselves unable to satisfy the expectations of their investors.

According to recent court filings in New York, the co-founders of the bankrupt crypto hedge fund appear to be avoiding creditors.

Prior to a meeting that was planned at 9 a.m. ET on Tuesday to address the next steps in the liquidation process, attorneys for the creditors claim that the physical whereabouts of Zhu Su and Kyle Davies, who founded Three Arrows in 2012, are "now unknown." The filings, which were submitted Friday night, also claim that the founders have not yet "begun to assist in any significant manner" with the liquidation process. Attorneys asked the court to keep the names of the creditors private on Monday.