The Three Arrows Capital Collapse: A Leverage Risk Case Study

Three Arrows Capital was, for years, one of the most respected and closely followed crypto hedge funds in the industry. Within about six weeks in mid-2022, it went from a firm managing billions of dollars to a liquidated shell with $3.5 billion in creditor claims — and it took a significant part of the crypto lending industry down with it.

What happened

Three Arrows Capital (3AC), a Singapore-based fund founded in 2012 by Su Zhu and Kyle Davies, began as a foreign-exchange derivatives trading operation before pivoting heavily into cryptocurrency around 2017, building a reputation for aggressive, high-conviction, and heavily leveraged bets on the sector. That leverage — borrowing extensively from crypto lenders and exchanges to amplify its trading positions — became fatal when the Terra/Luna ecosystem collapsed in May 2022. 3AC had invested roughly $200 million into Luna tokens in February 2022, a position that was rendered essentially worthless within days as Luna's price collapsed to near zero.

The Luna losses alone might have been survivable for a fund of 3AC's size, but they arrived alongside a broader, sharp decline across nearly the entire crypto market, which hammered the value of the fund's other leveraged positions simultaneously. On 16 June 2022, 3AC failed to meet margin calls from its lenders. Unable to raise sufficient capital or unwind its positions in time, the fund was ordered into liquidation by a British Virgin Islands court on 27 June 2022. Bankruptcy proceedings later revealed 154 creditors with claims totalling $3.5 billion, and investigators found 3AC had lost more than $4.2 billion across 2021 and 2022 combined — one of the largest hedge fund losses in history.

The numbers at a glance

• $200 million — approximate value of 3AC's Luna token position at the time of the Terra collapse
• $3.5 billion — total creditor claims filed against 3AC in bankruptcy, across 154 creditors
• $4.2 billion+ — total losses the fund racked up across 2021 and 2022
• 16 June 2022 — date 3AC first failed to meet lender margin calls

What happened to the founders

Su Zhu and Kyle Davies avoided contact with authorities and liquidators for weeks after the collapse, reportedly moving between locations including Bali before attempting to relocate to the UAE. In September 2023, Zhu was arrested at Singapore's Changi Airport while attempting to leave the country and was later sentenced to four months in prison for failing to cooperate with 3AC's court-appointed liquidators — a relatively minor penalty given the scale of the losses involved, and one that reflected a contempt-of-court-style charge rather than a fraud conviction. Davies's whereabouts remained unclear for an extended period. Remarkably, both founders went on to launch new crypto ventures, including an exchange platform, within months of 3AC's collapse — a detail frequently cited as illustrating how limited direct personal accountability can be in less tightly regulated corners of the crypto industry, compared with the lengthy prison sentences handed down in more directly fraud-driven cases like Terra's Do Kwon or Celsius's Alex Mashinsky. The episode also renewed calls among regulators internationally for hedge funds and lenders operating in crypto markets to face disclosure and leverage-reporting requirements closer to those already applied to traditional financial institutions, precisely because 3AC's true leverage and counterparty exposure were largely invisible to the market until the fund was already failing.

Why this matters for accounting and finance students

Three Arrows Capital is a valuable case study in leverage and counterparty concentration risk, rather than fabricated numbers or a Ponzi structure. The fund's downfall illustrates how heavily leveraged positions across multiple lenders can create a systemic vulnerability: once one large, highly leveraged counterparty starts to fail, the lenders and exchanges that extended it credit face simultaneous, correlated losses of their own — precisely the mechanism that connected 3AC's collapse directly to the subsequent failure of crypto lender Voyager Digital and contributed to the strain that helped bring down Celsius Network. For finance professionals, it's a modern illustration of counterparty and concentration risk management principles that predate crypto by decades, simply playing out in a new, faster-moving, and more thinly regulated asset class.

Frequently asked questions

Was Three Arrows Capital's collapse the result of fraud?
Not primarily — it stemmed from heavy leverage and concentrated exposure to Terra/Luna and the broader crypto market downturn, rather than fabricated financial statements or deliberate misappropriation of investor funds.

What triggered 3AC's collapse?
The May 2022 Terra/Luna collapse wiped out a roughly $200 million position, and the fund failed to meet lender margin calls on 16 June 2022 amid a broader crypto market decline.

What happened to founders Su Zhu and Kyle Davies?
Zhu was arrested in Singapore in September 2023 and served four months for failing to cooperate with liquidators; both founders later launched new crypto ventures.

Three Arrows Capital is useful material for ACCA and CIMA coursework on leverage, counterparty risk, and financial stability. Learnsignal's CPD courses also cover ongoing risk management training for qualified professionals.