Three Arrows Capital: Bankruptcy Caused by High-Leverage Investing and Concealed Losses at a Crypto Hedge Fund

Who Gets Targeted

The victims were primarily high-net-worth individuals, family offices, crypto-native enterprises, and institutional investors who entrusted significant capital to Three Arrows Capital. They generally believed in the 'crypto genius' personas of founders Su Zhu and Kyle Davies and their track record of high returns during bull markets, mistakenly assuming the firm possessed robust risk management capabilities. Many relaxed their independent due diligence due to word-of-mouth recommendations or referrals, and, fueled by optimistic expectations for long-term crypto asset growth, ignored the devastating risks of leverage. They also failed to timely identify the managers' strategy of concealing losses and projecting confidence even as the market turned.

骗局怎么运作

• Based in Singapore, the two founders were long-time active participants on Twitter and in crypto communities, consistently promoting ultra-bullish views on assets like Bitcoin and Ethereum, and positioning themselves as a top-tier hedge fund with deep insights into macro and on-chain data. High returns from the early bull market were repeatedly amplified in their marketing, attracting significant capital from high-net-worth individuals and institutions.
• Once capital was raised, the fund did not merely hold spot assets; it heavily leveraged crypto assets through lending platforms, OTC trading, and derivatives, including large positions in GBTC arbitrage and Terra-ecosystem assets. While leverage amplified gains during market rallies, it became the core catalyst for the subsequent collapse.
• After the Terra/Luna crash in 2022, Three Arrows Capital had already suffered severe losses and liquidity gaps. However, they did not immediately disclose their true positions and debt scale to investors and counterparties. Instead, they downplayed risks, with founders even using vague rhetoric like 'we are in communication with relevant parties' to stall inquiries.
• As multiple lending platforms issued margin calls, Three Arrows Capital was unable to meet them, exposing the fact that its balance sheet had long since deteriorated. Simultaneously, counterparties and insiders alleged that the fund had misappropriated client funds and shuffled assets between different entities to maintain a facade of operation, further accelerating the collapse of trust.
• In July 2022, Three Arrows Capital filed for Chapter 15 bankruptcy in the United States and entered formal liquidation proceedings. The claims filed by creditors far exceeded the fund's actual realizable assets. The founders were reported to have left Singapore for locations like Dubai, leaving behind complex cross-border recovery challenges, leaving ordinary investors with almost no chance of recovering their principal.

红旗信号（看到这些快跑）

• 🚩 Managers consistently cultivate a 'perpetually bullish, never wrong' persona on social media and respond to any questioning with mockery or by blocking critics.
• 🚩 The fund fails to provide transparent information regarding holdings, leverage ratios, or third-party custody, leaving investors unable to verify actual risk exposure.
• 🚩 Even when the market experiences systemic declines, managers claim 'everything is fine' and fail to proactively disclose drawdowns or liabilities.
• 🚩 Heavy reliance on lending and derivatives to amplify returns, which triggers cascading liquidations in the short term if the market reverses unilaterally.
• 🚩 Founders refuse to appear in court or cooperate with liquidators after the crisis unfolds, frequently changing their place of residence to complicate judicial enforcement.

真实案例

• In mid-June 2022, Three Arrows Capital was exposed for failing to meet margin calls from multiple lending platforms. Subsequently, several crypto lenders admitted to having hundreds of millions of dollars in exposure to the fund, and the market began to realize the fund might be insolvent.
• On July 22, 2022, Bloomberg reported that founders Su Zhu and Kyle Davies, while en route to Dubai, compared the collapse of Three Arrows Capital to an 'LTCM moment' but provided no concrete compensation or restructuring plan, further angering creditors.
• In December 2022, documents submitted by liquidators to the court showed that Three Arrows Capital estimated its assets at approximately $1 billion in July of that year, while media reports indicated outstanding debts as high as $2 billion, leaving a massive gap and little hope for creditor recovery.
• On June 27, 2022, the Singapore-based crypto hedge fund Three Arrows Capital was ordered to liquidate by a court in the British Virgin Islands. According to July 2022 bankruptcy filings, the fund faced $3.5 billion in creditor claims and lost over $4.2 billion between 2021 and 2022, marking one of the largest hedge fund trading losses in history. (Source: https://en.wikipedia.org/wiki/Three_Arrows_Capital)
• On December 21, 2023, TheBlock reported that Three Arrows Capital liquidator Teneo stated the court had frozen approximately $1 billion in assets belonging to Su Zhu and Kyle Davies, with the British Virgin Islands court setting a freeze cap of up to $1.1 billion. Previously, in September 2023, Zhu was arrested at Changi Airport in Singapore and sentenced to 4 months in prison for failing to cooperate with liquidators. (Source: https://www.theblock.co/post/268758/bvi-court-freezes-three-arrows-capital-founders-1-billion-in-assets)

Official Stance

• On September 14, 2023, the Monetary Authority of Singapore (MAS) announced a 9-year prohibition order against Three Arrows Capital founders Su Zhu and Kyle Davies from performing regulated activities, citing misconduct in fund management.
• The U.S. Bankruptcy Court for the Southern District of New York approved Three Arrows Capital's Chapter 15 bankruptcy filing in July 2022 and repeatedly urged the founders to cooperate with liquidation proceedings, but liquidators reported that the two founders remained uncooperative for an extended period.
• Multiple crypto lending platforms issued risk warnings in mid-2022, admitting to significant exposure to Three Arrows Capital and either pausing withdrawals or entering restructuring, indirectly alerting the industry to the risks of over-concentrated credit.

How to Protect Yourself

• ✅ For crypto hedge funds or asset managers, it is mandatory to require proof of third-party custody, independent audit reports, and clear historical drawdown records; do not rely solely on screenshots of bull market gains.
• ✅ Be wary of any fund manager who excessively markets their personal brand on social media and rarely discloses detailed risk management information, especially those who only report good news.
• ✅ Avoid concentrating large amounts of capital in a single crypto fund or a single strategy; for large mandates, implement phased redemption schedules and risk exposure caps.
• ✅ If you notice a manager avoiding inquiries with vague rhetoric like 'we are in communication' or 'market liquidity issues,' immediately initiate legal and due diligence review procedures rather than continuing to wait.