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Investor Letter Shocker: Multicoin Capital's Hedge Fund Reports 91.4% Loss in 2022 – Here's What Happened

Source: Multicoin Capital

Digital asset investment firm Multicoin Capital lost as much as 91.4% in 2022 as investors rushed for the exits following the catastrophic collapse of FTX.

According to a copy of the firm’s annual investor letter, the hedge fund was hit hardest after the collapse of FTX despite managing to weather the collapse of Terra's algorithmic stablecoin and the failure of another crypto hedge fund Three Arrows Capital (3AC). The letter read:

“While the fund successfully dodged the catastrophic implosions of LUNA and Three Arrows Capital earlier in the year, we didn’t avoid the explosive revelations about FTX nor the subsequent contagion that spread across the market. After a remarkable year in 2021, our performance in 2022 was the worst since inception.”

Multicoin Capital is one of the largest and oldest investment management firms in the crypto company, and it is widely regarded as a very astute encryption investment management firm. 

The fund describes itself as "a thesis-driven investment firm that invests in cryptocurrencies, tokens, and blockchain companies reshaping trillion-dollar markets."

Headed by managing partner Kyle Samani, Multicoin Capital launched its hedge fund strategy in October 2017, which invests in liquid tokens. The firm also operates three venture capital funds and has invested in the now-bankrupt exchange FTX.

It is worth noting that Multicoin’s crypto hedge fund remains up over 1,300% net of fees from its inception through 2022 despite the massive drawdown. 

Meanwhile, as the broader crypto market rebounded earlier this year, Multicoin reported that the fund gained 100.9% in January 2023, bringing the fund’s inception-to-January return to 2,866%.

Multicoin Hit Hard by FTX Implosion

Multicoin’s losses last year largely come from its indirect exposure to the company through holdings of crypto assets like FTT, the native token of the exchange, as well as assets stuck on the platform. The firm noted that it quickly created a side pocket (a carveout of the main fund) for assets impacted by FTX in November 2022.

This included assets stuck on the exchange, which are now trapped in bankruptcy proceedings. The side pocket also included Multicoin assets withdrawn from FTX just prior to collapse, which the letter says may be subject to clawbacks by the FTX estate.

Multicoin wrote in the letter that it has taken new steps to "mitigate counterparty risks." The firm plans to only keep 48 hours' worth of trading assets on an exchange at a time.

Furthermore, the fund will adjust collateral management practices to reduce the amount of collateral held on exchanges for derivatives positions and is onboarding additional custodians to diversify custodial risk.

FTX and its group of crypto companies filed for Chapter 11 bankruptcy in early November. Sam Bankman-Fried, the disgraced founder of FTX, was later arrested in The Bahamas after US prosecutors formally filed criminal charges against him. He was eventually extradited to the US, where he was released from jail after posting a $250m bond in a New York court.