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Quant Funds Lost FTX Millions Were Meant to Short Crypto

source-logo  blockworks.co 01 December 2022 18:39, UTC

Both Canadian crypto quant fund Gadze Finance and its prominent CEO were victims in FTX’s implosion, with founder Mike Silagadze personally losing around $1 million.

Silagadze, known for building online learning firm Top Hat, switched focus to the crypto and decentralized finance (DeFi) by launching Gadze last October.

The fund didn’t directly invest in crypto but operated as a liquidity provider for exchanges in return for yield. It also employed arbitrage strategies in a bid to shield itself from volatility and provide predictable returns, with Silagadze reportedly pitching up to 10% to 12% per year.

Gadze was apparently doing well right up until FTX crumbled. The fund’s managed $40 million when trouble bubbled over earlier this month, up from $25 million at its launch. Of that, the firm kept $5.4 million on FTX directly, funds now relegated to bankruptcy proceedings and may never come back.

He told The Globe and Mail the funds were being used to short sell crypto on FTX as part of a hedging strategy — betting against digital assets to capitalize on their anticipated decline to balance overall risk.

Bitcoin and ether both shed up to a quarter of their value as FTX bombed.

Gadze attempted to retrieve its asset in time but was unable to do so, alongside swathes of FTX users. Silagadze anticipates overall losses of 10% to 15% to the fund.

Silagadze hopes to recover 20% to 50% of Gadze’s missing funds but doesn’t expect it to happen for another few years. Gadze is backed by prominent Canadian investors including Boris Wertz’s Version One Ventures and BlueCat co-founder brothers Michael and Richard Hyatt. Blockworks has reached out for comment.

Silagadze told Globe and Mail he’d used FTX as he believed it to be more secure and reliable than its competitors. Those feelings were bolstered by founder Sam Bankman-Fried’s high political profile and FTX’s suite of suitors, which counted Silicon Valley veteran Sequoia and state-owned Temasek, among many others.

He also cited the Ontario Teachers’ Pension Fund’s $95 million investment in FTX, which contributed to its credibility, stating the fund was “clearly asleep at the wheel.”

But Silagadze told reporters he feels awful for his fund’s investors, of which there are 65. He said he let people down because he was “supposed to be protecting their own money — and my own.”

Gadze investors are said to still be supportive, with one explaining that everyone was happy with the fund but failed to spot FTX as a counterparty risk.

The quant is now switching crypto strategies somewhat. Gadze’s market neutral fund is reportedly out for higher returns via higher risk strategies, commenting that its new style is more interesting with greater upside.

Silagadze said he initially thought twice about continuing to invest in crypto but remains bullish.