Multicoin Capital Hedge Fund Suffers 91.4% Losses Amid Crypto Market Turmoil

Multicoin Capital's hedge fund experienced a significant 91.4% decline in value during 2022, primarily due to market volatility and the collapse of FTX. Despite the setback, the fund remains up 1,376% since inception. The firm has since implemented measures to mitigate counterparty risks, including limiting exchange exposure and diversifying custodians.

Multicoin Capital Hedge Fund Losses Reach 91.4% Amidst Crypto Market Turmoil

Multicoin Capital, a prominent venture capital firm and crypto-asset hedge fund, has disclosed substantial losses in its hedge fund operations for 2022. According to the firm's annual investor letter, the hedge fund experienced a staggering 91.4% decline in its value during the year.

The letter attributed the dismal performance to the tumultuous conditions that prevailed in the cryptocurrency market last year, compounded by the direct and indirect fallout from the collapse of the cryptocurrency exchange FTX. The firm acknowledged that while it successfully navigated the earlier implosions of LUNA and Three Arrows Capital, it failed to avoid the subsequent revelations surrounding FTX and the ensuing market contagion.

In a separate letter to investors in November, Multicoin provided a detailed account of its hedge fund's financial condition. At that time, the fund revealed that approximately 10% of its assets remained stranded on FTX, along with significant holdings in tokens such as FTT, SOL, and SRM, which experienced significant sell-offs in the wake of the exchange's collapse.

Multicoin Capital, led by Managing Partner Kyle Samani, launched its hedge fund strategy in October 2017, with the objective of investing in liquid cryptocurrencies. In addition to its hedge fund operations, the firm also manages three venture capital funds and had invested in the now-bankrupt FTX exchange.

Despite the substantial drawdown in 2022, Multicoin's hedge fund has still generated a net return of 1,376% since its inception through the end of last year, excluding fees. As the broader cryptocurrency market has rebounded from its recent lows, Multicoin reported that its hedge fund gained 100.9% in January 2023, bringing its overall inception-to-January return to an impressive 2,866%.

Multicoin's 2022 losses primarily stem from its exposure to FTX and its holdings in tokens that were directly affected by the exchange's collapse, notably the exchange's own token, FTT. The letter revealed that in November 2022, the firm swiftly established a side pocket, which is a separate carveout of the main fund, for assets impacted by FTX. This included assets held on the exchange that are now caught up in bankruptcy proceedings. The side pocket also included assets that Multicoin withdrew from FTX just prior to its collapse, which the letter indicated may be subject to clawbacks by the FTX estate.

In response to these events, the letter outlined several new measures that Multicoin has implemented to mitigate counterparty risks. Going forward, the firm will maintain only 48 hours' worth of trading assets on exchanges at any given time. It has also adjusted its collateral management practices to minimize the amount of collateral held on exchanges for derivatives positions and is actively onboarding additional custodians to diversify custodial risk.

Multicoin remains resolute in its long-term strategy and has no intention of attempting to time the market, according to the letter. A spokesperson for Multicoin Capital declined to provide further comment on the situation.