Kevin Zhou of Galois Capital has been prepping his next industry move, according to two sources directly familiar with the matter — though the co-founder of the shuttered crypto hedge fund firm says that starting a new venture isn’t on his mind.
Yet Zhou has spoken to a number of crypto industry participants in recent weeks about either starting or joining another investment operation, both sources said.
“I’m not currently starting a new investment firm,” Zhou told Blockworks in an April 5 email following multiple attempts to contact him.
Zhou, who worked as Kraken’s head of trading before departing to set up Galois in 2017, did not return an additional request for comment.
Zhou’s plans, according to both sources, have been in flux since he told investors last fall that he would shutter Galois’ flagship quantitative digital assets vehicle after nearly half of its assets were frozen on FTX.
But he’s made it clear to a handful of market participants that one option for moving professionally forward would be setting up a family office, proprietary trading firm or a similar entity. Two additional sources confirmed having heard indirectly about similar deliberations.
Another option said to be on the table, per one source: creating or joining a crypto market-making entity that would tap Zhou and his team’s quantitative investment prowess as centralized exchanges have increasingly come under US regulatory pressure amped up by the SEC and the CFTC.
Options on the table
One source said Zhou and his team have also considered joining an established investment firm in a senior role, which would likely involve a pod structure in which he could bring his own team, run his own book and have back and middle-office functions handled by the firm.
That multi-strategy setup has become increasingly appealing over the years to established traders looking to focus on investing and hand over the other day to day tasks of running a fund to their employer — providing the right compensation structures are in place.
Hedge fund billionaire Steve Cohen, who also owns the New York Mets, has pushed into digital asset markets over the last year, including via his Point72 Asset Management. Macro investment firm Brevan Howard has also gotten into digital asset markets in a big way.
Read more: What’s Bad for Crypto May Be Good for Crypto Traders
In one possible arrangement, Galois discussed setting up a separately managed account (SMA) arrangement with a veteran crypto trading firm, one source said. That happened prior to Zhou’s more recent discussions about his next step.
Via flagship hedge fund Galois Capital Alpha Fund, the Galois team developed a reputation for driving substantial deal flow in over the counter (OTC) digital asset markets — as well as taking a quantitative approach to matching cryptocurrency buyers with sellers.
Buy-side traders in the industry have turned toward yield from making crypto markets as spreads have widened since liquidity started drying up in the fourth quarter of 2022.
It’s possible, both sources said, that the plan for the new entity could be postponed or altered outright. But it’s notable, they said, that Zhou and his team have been putting informal steps in place to make a larger announcement of their return to the industry’s stage.
One source pegged the timeline of those industry conversations starting more than one month ago, and another said they started happening prior to that point.
Sources were granted anonymity to discuss sensitive business dealings and private conversations.
“Not starting a new fund”
Even so, the Galois founder’s early stage attempts to lay out a blueprint for a trading operation, they said, reflects his conviction in opportunities to grow his personal capital — as well as that of his business partners. On Feb. 20, Galois tweeted that the team is “not starting a new fund,” adding that it wouldn’t be “fair to effectively reset the high water mark for current investors.”
None of the three main structures that sources said Zhou has considered — a family office, a prop trading firm or a market-making operation — would reset a high water mark for Galois limited partners. It’s also possible that those three options could be combined in some capacity.
For example: a crypto investment firm that does not take on outside limited partner capital and also engages in making digital asset markets.
Read more: OK, You Blew Up Your Crypto Fund. What Do You Tell Your LPs?
Galois caught up in FTX’s demise
The Financial Times first reported Zhou telling Galois’ investors of the predicament in November 2022, and the firm later publicly confirmed the fund’s unwinding.
The FT also reported in February the fact that Galois would wind down trading and try to return limited partner capital, with investors reportedly set to receive 90% of their capital back that was not stuck in FTX’s bankruptcy proceedings. The firm’s Twitter account later confirmed the news.
It also in a Feb. 20 tweet referenced “the selling of the FTX claim,” adding that a “strict NDA from BTIG” was in place regarding that sale.
An additional third source without knowledge of the new venture said there’s been some recent murkiness around how the unwinding is playing out among institutional limited partners.
Galois had at least 11 employees at its peak, according to data provided by TheTie.
A number of the identities of those employees or partners were learned by Blockworks and are not being disclosed in this story, because it’s not clear which would join Zhou in an emerging venture.
Galois was known as a top flight crypto investment manager before its closure started playing out. Zhou developed a reputation for being willing to take on contrarian market bets, including calling out the Terra ecosystem’s collapse publicly in March 2022 — before it happened.
The US-headquartered Galois terminated its registration with the SEC on Dec. 22, 2022. It had previously stated in filings that the firm had more than $100 million of regulatory assets under management.
Its sole reported fund available to outside investors, Galois Capital Alpha Fund, disclosed 55 investors at the time, and Galois flagship vehicle required a minimum investment of $5 million.
Though just 1% of the vehicle’s ownership was attributed to fund of funds operators, Galois and related general partners told the SEC that they owned 38% of the fund — and 46% of the vehicle’s interest was attributed to investors based outside of the US.
That designation requires certain types of traditional finance and digital asset managers to fill out an annual SEC disclosure, which typically does not take leverage into account in terms of regulatory assets.
On its most recent disclosure form, representatives for the firm said Galois Capital was running $205,000,089 of regulatory assets on behalf of just one client: a pooled investment vehicle.
Galois Twitter going strong
Galois has maintained an active presence on Twitter, including tweeting what appears to be a cryptographic key on April 4.
“Yeah, no way that’s a coincidence,” one source said of the firm’s continued social presence.
On Feb. 20, — the same day Zhou confirmed the FT’s reporting — Galois tweeted that the window marked “an end of an era,” adding that the work we have done together for the past few years has not been in vain. I can’t say more than this for now. Stay tuned.”
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