FTX Collapse Causes Major Hedge Fund to Default on $36 Million of Debt

In a tweet on Tuesday, Orthogonal Trading claimed that the collapse of FTX and related trading activity had "severely impacted" its ability to repay a $10 million cryptocurrency loan. Due to this, Maple, the organization in charge of running the DeFi lending pool, sent notices of default to all of the fund's active borrowers.

The swift collapse of Sam Bankman-Fried's FTX in November is just the latest illustration of how cryptocurrency hedge funds are being negatively impacted. Institutional crypto investors frequently used the trading platform FTX, and several hedge funds have reported cash becoming trapped there after the exchange declared bankruptcy. The majority of the FTX fallout has so far avoided decentralized finance, which allows people to borrow, lend, and trade cryptocurrency without the use of a central intermediary. The failure of Orthogonal Trading, however, provides a glimpse into the extent to which the collapse of FTX and Bankman-Fried's trading firm Alameda Research is spreading contagion.

Large pools of collateral are not necessary for loans negotiated on unsecured platforms like Maple to sustain borrowers' positions in the case of a default; instead, pool managers like M11 are used to perform due diligence on borrowers' financials. Maple claimed it broke relations with Sydney-based Orthogonal Trading as a result of Orthogonal Trading's alleged misrepresentation of its financial situation to M11 Credit, a lending pool, an accusation M11 made against the hedge fund. [1]

According to information from Maple, Orthogonal Trading has borrowed a total of $31 million in USDC stablecoins and another $4.9 million in wrapped ether tokens. It currently makes up the bulk of the loans made by M11 Credit, compared to 14% at the beginning of September. [1]

According to a statement from M11 Credit, Orthagonal Trading tried to recover losses through more trading but eventually lost a considerable amount of money in the process. Orthagonal Trading told M11 Credit on December 3 that it would be unable to make good on the $10 million loan. Requests for comments from Orthogonal Trading were not answered.

In a blog post on Monday, Orthogonal Credit, a related company that it claims works "structurally separate" from Orthogonal Trading, expressed shock and dismay over the incident and said it was not aware of its sister entity's problems. Orthogonal Credit stated, "We are in awe by the scope of the exposure and liquidity position of Orthogonal Trading's book of business.

According to Maple, Orthogonal Credit had created about $850 million worth of loans. Prior to the pool's anticipated closure in the first quarter of the following year, Orthogonal Trading's lenders will be repaid with fees from Orthogonal Credit's lending pool on Maple, the company said.

According to Maple's statement, Orthogonal Credit and it have severed all ties.

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SOURCES:

[1] Yahoo! Finance. "A Hedge Fund Hit by FTX Collapse Defaults on $36 Million of Debt, https://finance.yahoo.com/news/hedge-fund-hit-ftx-collapse-120706837.html." Accessed December 8th, 2022.