Galois hedge fund closes after half of its assets are stranded on FTX

Kevin Zhou, co-founder, says the fund is no longer viable and sells a claim on a defunct cryptocurrency platform for 16 cents on the dollar.

A hedge fund that was one of the most visible victims of the FTX crisis, with half of its assets stuck on the defunct cryptocurrency exchange, has opted to shut and refund its remaining funds to investors.

Galois Capital, which managed roughly $200 million in assets last year and was one of the largest crypto-focused quantitative funds, informed investors that it had ceased all trading and unwound all positions because it was no longer feasible.

"Given the gravity of the FTX situation, we do not believe it is financially or culturally viable to continue operating the fund," stated co-founder Kevin Zhou. "I apologise once more for the unfortunate circumstance we find ourselves in."

It was reported in November that Galois, although withdrawing some funds, still had almost half of its holdings on FTX when the exchange collapsed.

In a scenario reminiscent of Lehman Brothers in 2008, hedge funds were left with billions of dollars locked on the exchange, despite many viewing it as one of the more trustworthy trading platforms in an industry that is sometimes loosely regulated or unregulated.

In FTX's Delaware bankruptcy, up to 1 million creditors have been identified. Sam Bankman-Fried, the company's founder, is scheduled to stand trial in October on fraud charges, to which he has pleaded not guilty.

Galois stated in the letter that the fund's demise would result in clients receiving 90% of the money that was not stuck on FTX. The remaining 10% would be kept back until conversations with the administrators and auditor were completed.

Zhou also stated in the letter that he would like to sell the fund's claim on FTX rather than go through a protracted legal procedure. He added that bankruptcy proceedings can extend for a decade or more and that distressed buyers of such claims "have more competence than us in pursuing claims in bankruptcy court". Galois has sold its claim for about 16 cents on the dollar since issuing the letter.

Galois did not respond to a comment request.

Zhou, who previously worked at the digital exchange Kraken, is well-known for his early condemnation of cryptocurrency luna and its connected stablecoin terraUSD prior to their $40 billion collapse last year. Much of Galois' trading was done as a market maker, allowing it to profit from 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.”

By fLEXI tEAM