Hedge fund admits half its capital caught on FTX trade

Galois Capital, a hedge fund whose founder is credited with recognizing the collapse of cryptocurrency luna this 12 months, has been caught off guard after near half its property had been left trapped on crypto trade FTX, which filed for chapter safety on Friday.

Galois co-founder Kevin Zhou wrote to traders in latest days, in a letter seen by the Monetary Instances, that whereas the fund had been capable of pull some cash from the trade, it nonetheless had “roughly half of our capital caught on FTX”. Based mostly on Galois’s property underneath administration as of June, that might quantity to round $100mn.

“I’m deeply sorry that we discover ourselves on this present scenario,” wrote Zhou. “We’ll work tirelessly to maximise our possibilities of recovering caught capital by any means.”

He added that it may take “a number of years” to get better “some share” of its property.

FTX on Friday stated Sam Bankman-Fried was resigning as chief govt, after failing in a last-ditch effort to safe a rescue package deal. It follows a tumultuous week through which the trade admitted it was unable to satisfy buyer withdrawal calls for with out exterior funds, elevating fears that purchasers may face massive losses.

FTX’s Chapter 11 chapter submitting in a federal court docket in Delaware contains FTX’s US entity, Bankman-Fried’s proprietary buying and selling group Alameda Analysis and about 130 affiliated firms. His empire was valued at $32bn simply months in the past.

Business insiders say that the actual fact FTX was utilized by so many hedge funds and seen as one of many world’s safer crypto buying and selling venues means many managers might have cash caught on the trade.

Galois didn’t instantly reply to a request for remark.

Galois is likely one of the business’s largest crypto-focused quant funds and, as of this summer time, it was managing greater than $200mn in property. A significant a part of its buying and selling exercise is as a market maker, permitting it to make tiny features on different traders’ trades.

Zhou, who labored at digital trade Kraken earlier than organising Galois, is well-known for his early criticism of cryptocurrency luna and its linked stablecoin terraUSD, forward of their $40bn collapse in Might.

He stated within the letter that his fund had been left with the cash in FTX as a result of it had “a ton of open positions” that it needed to shut and because of “underappreciating the solvency danger with holding our funds at FTX”. 

He added that if FTX did file for chapter, then Galois would grow to be a creditor.

If that occurred, then “I count on we are going to get better some share of our property on FTX over the course of some years,” he stated.

laurence.fletcher@ft.com