Hedge fund admits half of its capital is locked up on FTX exchange

Galois Capital, a hedge fund whose founder is credited with spotting the collapse of cryptocurrency luna this year, was caught off guard after nearly half of its assets were trapped on crypto exchange FTX , which filed for bankruptcy on Friday.

Galois co-founder Kevin Zhou wrote to investors in recent days, in a letter seen by the Financial Times, that if the fund had been able to pull money from the exchange, it still had “about half of our capital locked on FTX”. Based on Galois assets under management as of June, that could be around $100 million.

“I am deeply sorry that we find ourselves in this current situation,” Zhou wrote. “We will work tirelessly to maximize our chances of recovering the blocked capital by all means.”

He added that it could take “a few years” to recover “a certain percentage” of his assets.

FTX said Friday that Sam Bankman-Fried was stepping down as chief executive, after failing in a last-ditch effort to secure a bailout. This follows a tumultuous week in which the exchange admitted it was unable to meet customer withdrawal requests without external funds, raising fears that customers could suffer severe losses.

FTX’s Chapter 11 bankruptcy filing in federal court in Delaware includes FTX’s U.S. entity, Bankman-Fried’s proprietary business group, Alameda Research, and approximately 130 affiliates. His empire was valued at $32 billion just a few months ago.

Industry insiders say the fact that FTX has been used by so many hedge funds and considered one of the safest crypto trading venues in the world means that many managers may have money locked in the exchange.

Galois did not immediately respond to a request for comment.

Galois is one of the largest crypto-focused quantitative funds in the industry, and as of the summer it managed over $200 million in assets. Much of his trading activity is as a market maker, allowing him to make tiny gains on the trades of other investors.

Zhou, who worked at digital exchange Kraken before founding Galois, is well known for his early reviews of cryptocurrency luna and its related stablecoin terraUSD, before their $40 billion crash in May.

He said in the letter that his fund was left with the money in FTX because he had “a ton of open positions” that he needed to close and because of “underestimating the solvency risk associated with the holding our funds at FTX”.

He added that if FTX goes bankrupt, then Galois will become a creditor.

If that happens, then “I expect we’ll get a certain percentage of our assets back on FTX over the course of a few years,” he said.

laurence.fletcher@ft.com

Leave a Comment

Your email address will not be published. Required fields are marked *