Hedge funds that purchased FTX bankruptcy claims are poised to make nine-figure profits, with one investor anticipating a $25 million windfall. This article, titled “Hedge funds that scooped up FTX bankruptcy claims are looking at 9-figure paydays. One investor shares how he could rake in $25 million,” is sourced from an article by Niamh Rowe in Fortune magazine and has been compiled, translated, and rewritten by ForesightNews.
Table of Contents
Trading Debt: Risk and Opportunity
A High-Stakes Gamble with Over 700% Returns
Trading Debt is No Easy Task
When rumors spread on the internet about FTX’s financial troubles, one of FTX’s clients, Louis d’Oringy, paid little attention and instead focused on entertaining his friends at his Miami Beach apartment. “Fake news,” he recalled. He set aside his laptop and left the increasingly anxious cryptocurrency community to relax on the beach for the day.
But a few hours later, the atmosphere changed. He returned home to see tweets about FTX customer withdrawal requests being denied. “Things got more chaotic,” he recalled. As the sun set through his floor-to-ceiling windows, the 31-year-old wondered what would happen next.
“And then,” he remembered, “we couldn’t withdraw the money we had in FTX anymore.”
D’Oringy was one of over a million victims trying to recover their lost funds from FTX. The exchange had collapsed following the exposure of co-founder Sam Bankman-Fried’s financial fraud.
“At the time, it felt like doomsday in the crypto world,” he said. “The outlook was very pessimistic, and nobody believed Bitcoin would reach new all-time highs again.”
But in the darkest moments of the cryptocurrency world, D’Oringy’s perspective started to shift.
Louis d’Oringy had purchased over 1,000 FTX bankruptcy claims since December 2022. “My view was that Sam didn’t have enough time to execute this fraud and lose the money. I was very confident they would be able to recover a significant amount,” he said.
D’Oringy saw an opportunity: many creditors, like him, wanted to recover at least some of their funds, but there was no clear information on how the exchange would raise the $8.7 billion funding gap or any guarantees. In other words, creditors might be willing to sell their claims at a low price.
So, what would happen if they hedged their own claims?
D’Oringy had previously purchased some Celsius bankruptcy claims with his boutique fund, Arceau, but he was a novice in this field. Most investors he knew didn’t want to venture into FTX’s troubled waters—nobody wanted to put up money to buy these claims.
However, in the weeks following the Miami incident, D’Oringy started buying FTX positions from hedge funds with his own money and requested liquidation.
“Regarding the bankruptcy, we didn’t have any more information. We took a big risk, and I just said, ‘Let’s do it,'” D’Oringy told Fortune magazine.
Trading bankruptcy claims is a high-risk, high-reward strategy. Credit traders are believed to have made hundreds of millions, or even billions, of dollars from bankruptcies like Lehman Brothers, Enron, and General Motors. But more often than not, the claims end up being worthless.
“The end result was much better than I imagined,” he said.
When a company goes bankrupt, creditors face a lengthy bankruptcy process in court, with no guarantee of receiving a certain percentage of their claims. Instead, many choose to sell their claims for cash immediately to buyers willing to take on the risk of a steep decline in claim value, and the buyers’ losses depend on how much debt the bankruptcy trustee can recover.
Since FTX filed for Chapter 11 bankruptcy on November 11, 2022, the exact timing and value of claim trades have been highly complex. Industry traders told Fortune magazine that some claim trades were conducted online, while others were done privately, with buyers not having to immediately submit transfer applications, resulting in delays. Some claim trades were simply reported as their own claims.
As of March 28, 49 trades on the industry’s main online trading platform, Claims Market, have exchanged claims worth over $439 million. Meanwhile, hedge funds have purchased heavily discounted claims worth over $2.3 billion, according to court records as of March 20.
Although the bankruptcy court has not determined the specific date for creditors to receive payment, it now appears that they are likely to receive full repayment. “It looks like clients are likely to receive full repayment,” Bankman-Fried said in Thursday’s ruling to the Manhattan court.
When claims were initially approved, creditors sold them at low prices. Over 60 trades with a total value of over $1 million have been made, selling at around 10% of their original value in November 2022 and now reaching as high as 93%, indicating growing confidence in repayment.
At the same time, two individuals familiar with claim trading told Fortune magazine that due to the surge in cryptocurrency values and the sale of artificial intelligence startup Anthropic shares held by FTX for over $880 million, the value of these claims could exceed their initial value, reaching 120% to 140%.
Claim buyers told Fortune magazine that the appointment of John J. Ray III as FTX’s new CEO after the bankruptcy filing also sparked interest in claims. “He immediately started selling assets with uncertain (price volatility). Institutional claim buyers like this approach because they don’t want Bitcoin,” D’Oringy explained.
According to data submitted in FTX’s case report, the exchange has recovered around $7 billion in assets to date, including liquidated cryptocurrencies, 38 properties in the Bahamas, and $2.6 billion in cash.
This estate includes approximately 59 million SOL tokens and 21,482 bitcoins, which have increased by approximately 1,000% and 343% respectively since the company filed for bankruptcy. FTX plans to sell 41 million SOL tokens to institutional investors at a price 68% lower than the current market price, valued at around $7.65 billion at the time of writing. This has angered some victims, including Sunil Kavuri, who criticized Bankman-Fried for “constantly lying and saying we will all be adequately punished.”
As of March 20, d’Oringy had purchased claims worth around $29 million. He said these claims were purchased with personal funds for $3.5 million: “This is an investment from my family office and some friends.” The return on this investment exceeds 700%.
D’Oringy made his first claim purchase while celebrating Christmas with his family. He recalled the worried expressions on his parents’ faces, joking that the whole family might go bankrupt by next Christmas because of his gamble. According to the contract seen by Fortune magazine, this claim was worth nearly $3 million and was delivered on December 28, 2022, at 6% of its original value.
So far, the buyers poised to receive the largest returns from the remains of FTX are hedge funds specializing in distressed debt. As of March 20, Attestor, Baupost, and Farallon have respectively purchased claims worth over $520 million, $518 million, and $346 million, taking the lead in this competition. It is confirmed by insiders that these funds have used other entity names.
Another major player in this gamble and a friend of d’Oringy is Thomas Braziel, a bankruptcy claims broker at 117 Partners, representing some of the largest hedge funds in the market. Braziel said his first trade was on November 12, 2022, before the bankruptcy was officially filed. He spent around $240,000 to purchase $8 million in claims (about 3% of their declared value), and another trade cost around $210,000 to purchase $3.5 million in debt.
The current valuations are far from the valuations these claim buyers faced when they narrowly escaped disaster on April 27 last year.
In a Zoom call with a Singaporean debtor, D’Oringy was about to finalize a $3 million claim purchase agreement. During the call, there was news that the US Internal Revenue Service (IRS) had filed a $44 billion claim against FTX, alleging tax evasion.
“You know, during the call, we were scared,” he said. But he ultimately decided to proceed with the claim purchase. “It was really, really scary.”
However, FTX has begun a legal battle against the claim, seeking to dismiss it: it would “likely indefinitely halt progress by the debtor, as well as any distributions to customers and other creditors.” In other words, since the IRS claim would make defrauded victims pay out of pocket, this is unlikely to happen, sources told Fortune magazine.
In July, FTX opened its public portal for customers to file claims. However, during the early stages of trading, information about which assets could be liquidated or how to verify claims was limited. D’Oringy said many people seemed to be crowdsourcing KYC (know your customer) through Twitter, which was time-consuming and only a temporary solution.
Braziel said, “Buying claims is really, really difficult,” and he said he bought at least two or three claims that ultimately proved to be fraudulent.
Due to the speed of claim verification, D’Oringy purchased 40 claims in the first year of trading. This gave him another idea: to speed up the due diligence process through automation. In December last year, he co-founded his own portal, FTX Creditor, which he described as a “bespoke CRM, KYC, and due diligence solution,” shortening the verification process from several days to 30 minutes. The company currently has 14 employees spread across continents, answering creditors’ calls 24/7.
The company specializes in claims below $100,000 and aims to provide a convenient way for retail investors to sell their claims through a 30-minute phone call, avoiding being stuck in lengthy transaction confirmations.
Public records show that since December, FTX Creditor has purchased nearly 1,000 claims worth around $100 million. Assuming a purchase price of 70% of the debt, this means the company will make a profit of around $30 million—part of which may be from the claims d’Oringy purchased early on.
But D’Oringy explained that the rising value of claims has slowed down the trading process. However, according to a contract seen by Fortune magazine, just this week, claims worth over $6 million have been purchased in the market, and Braziel is still buying claims at a 70% discount.
D’Oringy plans to continue running FTX Creditor after FTX, but once these claims are repaid, he will take a vacation.
Was investing in these claims a calculated move of intelligence? Perhaps. But to D’Oringy, these circumstances were just happenstance. He used a term that stood in stark contrast to intelligence: “luck.”