SBF blamed market conditions for Alameda's insolvency

Feature Image: HackerNoon’s Stable Diffusion AI, prompt “classic hedge fund risks”

What went wrong?

A large number of things had to go wrong for this to happen. Because I was not running Alameda, I was not aware of some of the critical events at the time. But I was running FTX, and that means it was ultimately my responsibility to do right by FTX’s customers.

1. Alameda Research became insolvent when the economic environment changed.

   1. Alameda put on a margin position that was sustainable in the economic environment of late 2021, with roughly 10% leverage. As tightening monetary policy, a war, and supply chain problems hit throughout 2022, asset prices crashed: I believe that Alameda’s assets fell by roughly 90% over the course of the year, and so even 10% leverage was too much.

   2. A run on the bank forced immediate liquid delivery from FTX. i) This meant that FTX had only a few days to margin call a substantial, fairly illiquid margin position.

   3. A failure of hedges.

      1. As best as I can reconstruct looking back, in late 2021, Alameda Research was not sufficiently hedged; I believe that it had a total margin position, much of which was not on FTX, that was roughly $8b in size, and likely had on roughly $2b of hedges.
      2. By the fall of 2022, I believe that Alameda Research had a margin position of roughly $8b, and likely had roughly $8b of hedges. However, the crash that occurred in November 2022 was not a broad market crash, or even a broad crypto market crash. From November 7th to November 9th, Bitcoin was down roughly 17% and equities markets were roughly flat, but many of Alameda’s assets were down more than 50%. And so Alameda’s hedges didn’t work.
      3. This is the classic ‘hedge fund risk’--that all of a firm’s positions can become highly correlated, even if some are thought to be hedges, as happened with e.g. Long-Term Capital Management and in the 2008 financial crisis.

   4. Uses of capital:

      1. Piecing together what data I can, in retrospect, Alameda Research’s roughly $8 billion net short margin position in liquid assets lined up with the following approximate expenditures:

         (1) Interest payments to lenders: ~$1b

         (2)VC investments: ~$4b

         (3) Buying back Binance’s stake in FTX: ~$3b