A hedge fund that was one of the highest profile victims of the FTX scandal when half its assets were trapped on the collapsed cryptocurrency exchange has decided to close and return its remaining money to investors.
Galois Capital, which last year had been managing around $200mn in assets and was one of the biggest crypto-focused quantitative funds, told investors that it had halted all trading and unwound all its positions as it was no longer viable, according to documents seen by the Financial Times.
“Given the severity of the FTX situation, we do not think it is tenable to continue operating the fund both financially and culturally,” wrote co-founder Kevin Zhou. “Once again I’m terribly sorry about the current situation we find ourselves in.”
In November the FT revealed that Galois, despite pulling out some money, still had around half its assets stuck on FTX when the exchange collapsed.
In a situation reminiscent of Lehman Brothers in 2008, hedge funds were left with billions of dollars trapped on the exchange, with many having viewed it as one of the more reputable trading platforms in an often lightly regulated or unregulated industry.
As many as 1mn creditors have been identified in FTX’s Delaware bankruptcy. Its founder, Sam Bankman-Fried, is due to face trial in October on fraud charges, to which he has pleaded not guilty.
Galois said in the letter that the fund’s closure would see clients receive 90 per cent of the money not trapped on FTX. The remaining 10 per cent would be temporarily held back until discussions with the administrators and auditor were finalised.
Zhou also indicated in the letter his preference for selling the fund’s claim on FTX, rather than going through a lengthy legal process. He wrote that bankruptcy proceedings can last for a decade or more and that distressed buyers of such claims “have more expertise than us in pursuing claims in bankruptcy court”. Since sending the letter, Galois has sold its claim for approximately 16 cents on the dollar.
Galois did not respond to a request for comment.
Zhou, who previously worked at digital exchange Kraken, is known for his early criticism of cryptocurrency luna and linked stablecoin terraUSD ahead of their $40bn collapse last year. Much of Galois’s trading was acting as a market maker, which allowed it to make tiny gains on other investors’ trades.
“This entire tragic saga starting from the luna collapse to the 3AC [Three Arrows Capital] credit crisis to the FTX/Alameda failure has certainly set the crypto space back significantly,” wrote Zhou. “However, I, even now, remain hopeful for crypto’s long-term future.”
laurence.fletcher@ft.com