A Hedge Fund Hit by FTX Collapse Defaults on $36 Million of Debt

Contagion from the collapse of crypto exchange FTX is spreading into the world of decentralized finance, as lending protocol Maple Finance severed ties with a hedge fund that defaulted on almost $36 million worth of crypto loans on its platform.

Sydney-based Orthogonal Trading said in a tweet on Tuesday that it defaulted on a $10 million loan after being “severely impacted by the collapse of FTX and associated trading activities,” without giving further details. M11 Credit, which runs a lending pool on Maple, on Monday said Orthogonal Trading had informed it on Dec. 3 about its inability to repay.

Orthogonal Trading had taken out $31 million of loans in the USDC stablecoin and another $4.9 million denominated in a token called wrapped Ether, according to data from Maple. M11 Credit said it has issued a notice of default for “all active loans” to Orthogonal Trading.

The default is the latest example of crypto hedge funds getting roiled by the swift implosion of Sam Bankman-Fried’s FTX in November. FTX was a favored trading venue for institutional crypto investors, and several hedge funds have seen funds trapped on the venue after it filed for bankruptcy.

Decentralized finance, where people borrow, lend and trade crypto without a central intermediary, has so far evaded the brunt of the FTX fallout. But Orthogonal Trading’s default hints at just how widely contagion from the demise of FTX and Bankman-Fried’s trading house Alameda Research is spreading.

Finances Misrepresented

Maple said it severed ties with Orthogonal Trading because it misrepresented its financial position to M11 Credit, an allegation M11 also leveled against the hedge fund.

“Rather than cooperating with us and disclosing their exposure, they attempted to recover losses through further trading, ultimately losing significant capital,” M11 Credit said in its statement. Orthogonal Trading didn’t respond to requests for comments.

Loans arranged on unsecured platforms like Maple don’t require large pools of collateral to support borrowers’ positions in the event of a default, but instead rely on pool managers like M11 to conduct due diligence on borrowers’ financials.

Orthogonal Credit, which says it operates “structurally separate” from Orthogonal Trading, said in a blog post on Monday that it was “shocked and dismayed” by the event and was unaware of its sister entity’s woes. “We are speechless by the extent of the exposure and liquidity position of Orthogonal Trading’s book of business,” Orthogonal Credit said.

Orthogonal Credit had originated roughly $850 million in loans over Maple, according to the platform. Fees generated from Orthogonal Credit’s lending pool on Maple will be used to repay Orthogonal Trading’s lenders before the expected closure of the pool in next year’s first quarter, Maple said.

Maple also cut all ties with Orthogonal Credit, according to its statement.