The rise and fall of Su Zhu — How he lost a $10B hedge fund

Su Zhu branded himself as a normal guy. He wakes up, goes to work, goes to the gym, comes home to his wife and kids, and then goes to sleep — the eternal cycle. It just happens that he is the co-founder and CEO of one of the biggest crypto hedge funds… and he owns a $50 million yacht … other than that, a completely normal guy!

But, this super-powerful, mega-rich, normal guy may have found himself accidentally liquidating a $10 billion hedge fund — oopsies.

Education

Su Zhu was born in Singapore but studied at Phillips Academy in the US, graduating in 2006, and then attending Columbia University.

During his time there, he achieved the highest distinction in his bachelor's degree in Mathematics while also being part of "Phi Beta Kappa" which — according to their website — is "America's most prestigious academic honor society". Members have less than a 10% acceptance rate and an average GPA of 3.60 or higher.

Starting five months after the signing of the declaration of independence, Phi Beta Kappa has grown to be a society that can increase your chances of landing a job in the outside world. 17 U.S. Presidents, 38 U.S. Supreme Court Justices, and 136 Nobel laureates have been part of the society (as of 2015).

I just did the math —  that's 39% of U.S. Presidents and 33% of Supreme Court Justices. So, I'm starting to think Su Zhu wasn't so normal after all…

Early Career

In 2009, Zhu started his career as a trader for Amsterdam-based technology company Flow Traders. And then, he moved to Deutsche Bank in 2011, again as a trader.

Both of these companies seemed to have a very traditional approach to trading, neither wanting to explore cryptocurrencies during his time there.

Only a year after joining Deutsche Bank, he left to start Three Arrows Capital (3AC) with Kyle Davies, whom he met at Phillips Academy, and then continued studying at Columbia University. His bosses and colleagues thought he was "nuts" to make such a move, but he laughed at the notion.

The Inception of 3AC

Three Arrows Capital started as an emerging markets forex fund in 2012. At the same time, Zhu grew interested in the crypto market — primarily due to arbitrage opportunities.

"Really, crypto was quite small then so I didn't pay much attention to it." Zhu told the UpOnly podcast, "then in 2013, we got really active when the derivative exchanges started coming up. We used to do a lot of arbitrage on exchanges that are now dead. I got burned a bunch there personally. Then kind of said that I'll just hold some crypto and let it be and focused on FX [forex]."

The firm focused on forex trading for a few years and grew "pretty big". In 2015, Kyle Davies said, "every three to six months, the headcount grows by about 50% and we branch out to two new markets on average."

Around 2019, the hedge fund entered the crypto space more seriously, soon making it the fund's sole focus. The fund focused both on long-term investing as well as short-term tactical trades.

Zhu said in 2021, "I'm kind of deeply bullish on the whole space. Especially on the Bitcoin store value thesis, as well as smart contracts and programmable money."

The Cycle To End All Cycles

One of Su Zhu's ultimate downfalls was believing the bull market of 2021 was the super cycle — the cycle to end all cycles. This would explain a lot of his mistakes that come to burn him later on.

When questioned by Cobie on what would happen if it wasn't a super cycle, Zhu said, "I think [Bitcoin] would still survive but it would be more of a niche. It would not play out its ultimate vision. [...] I don't think it'll be the death of crypto but it would mean it's still too early to know what the base money of the market is."

Su Zhu was extremely bullish on crypto, possibly too bullish. He believed that Bitcoin would become king and alt-coins would become respected stores of value.

Possibly due to his extreme faith in the cycle, Three Arrows Capital rode the crypto wave to a $10 billion asset valuation in March 2022.

Where It All Went Wrong

In June 2022, Three Arrows Capital was ordered by a British Virgin Islands court to liquidate. From a $10 billion valuation to liquidation, the turn of events seems extreme, right? Well — extreme seems to be the name of the game. Let’s look at how 3AC dug a hole this deep.

At the start of the bull run, Grayscale started offering the Grayscale Bitcoin Trust. It essentially allowed credited investors to buy into Bitcoin without requiring an account or wallet on a crypto exchange. 1 GBTC share = 1 BTC, right? Well, no.

Although that was what it was intended to be, Grayscale put a premium on these GBTC shares. This premium went as high as 148% — meaning 1 GBTC = 1.48 BTC.

Nice, Zhu loves a bit of arbitrage. So, 3AC went out and borrowed a boat load of Bitcoin and then turned it into GBTC shares and (after a six-month lock-up period) they'll have a 48% arbitrage.

Now they have a shit ton of GBTC, but instead of liquidating it, they use it as collateral to borrow stablecoins (you already know where this is going). This investment into stablecoins was an attempt to pay back the initial Bitcoin loans while leaving a large margin.

So, they made the decisions that led to their downfall. They invested heavily into Terra and their UST stablecoin as well as buying some Avalanche. They started going crazy with loans to pay back previous loans and buy more of the market, including a $650 million loan from Voyager and $1 billion from BlockFi.

There has since been evidence that 3AC misled Singapore's central bank with allegedly false information. The fund was originally allowed to manage funds for 30 investors up to $180 million, but it exceeded its capacity for long periods throughout 2020 and 2021.

With all this new money they continued to invest in Terra, Avalanche, and gambled by investing in staked ETH tokens, praying that the merge would happen but never did.

I'm sure I don't have to tell you that all of these bets failed. The market saw a huge downswing, Terra collapsed, and the merge still hasn't happened. 3AC had overextended themselves, they had more loans than they had the capital to cover, and nothing had paid off.

Zhu was particularly close with Terra's founder Do Kwon, and he said this may have made him overlook some red flags, "if we could have seen that, you know, that this was now like, potentially like attackable in some ways, and that it had grown too, you know, too big, too fast.”

Terra's collapse wasn't what killed 3AC instead, it was the hangover, Zhu said, "throughout that period, we continued to do business as usual. But then, after that day, when Bitcoin went from $30,000 to $20,000, that was extremely painful for us. That ended up being kind of the nail in the coffin."

Basically, 3AC took every loan they could and maxed out on trades that failed and got stung. So despite Zhu's impressive Phi Beta Kappa history and billion-dollar company, he was more or less a Wall Street Bets degen.

At Least He Has A Yacht

During the collapse, our friend FatManTerra exposed Zhu for having ordered a $50 million yacht that he would "show off to friends and prospective investors to signal his luxurious wealth".

Hey, here's a quick test to see if you're paying attention. How do you think he paid for it? This isn't hard to get. Yep, you're right — BORROWED MONEY. This man was living his life in a loan book.

Larry Cermak later confirmed this, even defining the exact model to the Sanlorenzo 52Steel.

Zhu responded by rejecting that he enjoyed an extravagant lifestyle, saying that he rode his bike to work and back and that he "only has two homes in Singapore". Aww poor guy, only two homes.

"We were never seen in any clubs spending lots of money. We were never seen driving Ferraris and Lamborghinis around," Zhu told Bloomberg. "This kind of smearing of us, I feel, is just from a classic playbook of when this stuff happens. When funds blow up, these are kind of the headlines that people like to play."

The dark reality of this situation is that Zhu was never an everyday man. He had a privileged education and quickly made the most of it, rapidly gaining huge amounts of wealth. He defined himself as exceptional, one of those names that people at the Phi Beta Kappa would look up to. But not anymore. Why? Because he didn't act like an everyman, nor an exceptional man, instead he acted like a Wall Street Bets man. And, no one ever wants to be that man.

Check out writer Ryan S. Gladwin's website, follow him on Twitter, and of course, subscribe to the weekly Hedgehog newsletter!