Funds With FTX Exposure Have 7% to 12% of AUM Trapped

https://blockworks.co/news/funds-with-ftx-exposure-have-7-to-12-of-aum-trapped-report/

Between 25% and 40% of cryptocurrency-focused hedge funds had some level of direct exposure to FTX or the exchange’s native token, FTT, according to a new research note.

Crypto Fund Research CEO Josh Gnaizda said in an email sent to institutional investors that the hedge funds’ exposure to the beleaguered exchange — which initiated bankruptcy proceedings last week — has been on average between 7% and 12% of assets under management.

“When the smoke clears, we expect the losses from crypto hedge funds and crypto venture funds directly exposed to the FTX collapse to have associated losses of well over $1 billion and possibly as much as $5 billion,” Gnaizda told Blockworks.

Industry participants told Blockworks the toll on asset managers appears to be mounting, still.

“The number of funds getting absolutely [wrecked] by this is just starting to come to light,” one crypto hedge fund portfolio manager said. The source was granted anonymity because they were not authorized to speak to the media. 

Binance, which moved last week to potentially acquire its rival for $1 amid FTX’s “liquidity crunch,” backed out of the deal, citing “news reports regarding mishandled customer funds and alleged US agency investigations.”  

Reuters reported Sunday that at least $1 billion of customer funds were missing after FTX then-CEO Sam Bankman-Fried transferred $10 billion of FTX user funds to Alameda Research, a digital assets trading firm Bankman-Fried founded.

More than 100 crypto funds typically report monthly performance to Crypto Fund Research. The data provider has received dozens of updates from affected funds in the last several days, according to the email. 

Paradigm and Sequoia Capital have exposure to FTX of $278 million and $213 million, respectively, the firms have said in recent days. Genesis said in a tweet its exposure to the exchange amounted to $175 million.

Galaxy Digital CEO Michael Novogratz said during an earnings call last week that his firm had roughly $77 million of cash and digital assets with FTX, adding that more than half of that was in the withdrawal process. CoinShares said on Thursday that its total exposure to FTX amounts to roughly $30.3 million. 

More recently, Ikigai founder Travis Kling said his cryptoasset manager had a large majority of its assets on FTX. Bloomberg reported Sunday that crypto hedge fund Galois Capital — the investment manager that promoted an Ethereum proof-of-work (PoW) fork in August — had up to $45 million of exposure to the exchange’s meltdown.

Crypto Fund Research also estimated that Pantera Capital has about $100 million in exposure to FTX. A spokesperson for the firm did not immediately return a request for comment. 

“The fallout will extend even to funds not directly exposed, due to spillover effects in Solana and the cryptocurrency markets more generally,” Gnaizda said. “We expect a significant portion of the affected funds to enforce gate provisions or otherwise limit/suspend redemptions temporarily.”

Crypto Fund Research expects a record number of investor redemption requests from crypto hedge funds in November that could total about $2 billion. The current record stands at $1.3 billion — set in June following the collapse of Terra’s algorithmic stablecoin.  

The overwhelming majority of crypto fund of funds have some exposure to FTX via one or more of their portfolio companies, according to the email. 

Related venture funds, too, are likely to face a difficult fundraising environment — at least until the end of the year, sources said — as potential investors question the due diligence practices of even some of the segment’s most-respected investors. 

Crypto hedge funds returned about 2% in October, despite relatively flat market conditions, according to Crypto Fund Research.

“November, however, will likely not be so kind,” Gnaizda said. “Not only do many funds face direct exposure to FTX, [but] even those not directly exposed now face the prospect of industry-wide liquidations creating strong headwinds for cryptocurrency prices in the short-term.”

Bitcoin traded around $16,500 as of 6:00 pm ET on Monday — down about 21% from a week ago and up just slightly from 24 hours prior.