Liquid Funds vs. VC: How Crypto Investing Is Evolving l KBW2024

[Music] all right good afternoon everyone welcome to this evolution of liquid fonts and uh VCS today we have a very exciting uh expert panels I'm Laura from eminency group on my left we have paill from uh hila fund management um hila is a multi manager multiplatform that they've been around since 201 17 next to paa we have Jack Latz from hypersphere co-founder and uh and advantaging partner and then at DM we have Kelvin from Spartan group another leading investment firm in uh in crypto so we know for the delay let's get started uh Jack recently you guys announced uh Atlas 130 million liquid fund congrats could you share a bit of like the key insights or um through the fundraising process and how the requests from LPS have evolved compared to the last cycle sure uh thanks for having me so my name is Jack Platz I started hypersphere in 2020 it's a digital asset manager prior of that I joined the founding team of pokka do in early 2018 so hypersphere Atlas is a as you mentioned it's a multi-manager fund and it brings together a lot of the learnings from our previous our previous funds so how LP interest has changed over the past four years since we launched hypersphere is LPS are more Discerning so in 2021 2020 money was kind of falling from heaven like Mana in the sense that you could raise a fund and raise Capital rather quickly and LPS have gotten a lot more Discerning sense so we've built our latest latest fund our fourth fund hypersphere Outlet around that so it's a multi manager um multi asset fund so what that means is is we have five portfolio managers with Diversified strategies and we've evolved hypersphere to focus on risk management we've hired a chief R risk officer built processes and procedures around compliance and real-time risk management to be able to make sure we uh limit draw Downs limit concentration limits um exchange limits and so forth and the real I guess risk with a lot of crypto funds in the past is LPS invested maybe in 2021 and rote it up and in some cases were locked up but paid carry on what they invested and then when the market came down and they couldn't redeem you had a situation where the net asset value or the value of their investment was sometimes lower than the fees they paid so this is why we designed hypersphere outlas to really focus on the risk management piece yeah it seems that the Multi Management structure has been a bit of a change from last cycle to this one right a lot of the fun of funds are moving towards that direction Paula you guys have a lot of experience in that you've been a multi manager uh since pretty much the beginning besides that uh you have you have Diversified further into also Bitcoin and E funds what's the interest uh in those specifically are you noticing a lot more interest in Bitcoin e funds compared to like the other um structure you guys have uh yeah that's a great question um to be clear we uh hila funds is a uh we've been managing hedge fun of funds for over six years and you said right we're a multi manager multi strategy platform our Legacy fund is what we call the liquid Venture hedge fun of funds and a few years back we wanted to expand our offerings and we put together a joint venture with amphibian capital to launch three Quant hedge fun of funds two of them being uh crypto denominated one Bitcoin the other one etherum there are three main reasons why we decided to launch this strategy the first one is that we knew that the approval approval of the ETFs was coming and we understood that that was going to be the Gateway for institutional investors to participate in the digital asset space the second one was the last Bitcoin having that just happened we observed that a lot of the Bitcoin miners were interested in expanding their businesses Beyond just mining Bitcoin and we're seeing lately they've been investing much more in the building the infrastructure or developing the infrastructure of Layer Two on bitcoin and the third one which is the most relevant to us at least short term is the long-term Bitcoin and ethereum holders we love the crypto whales they're the investors you know make a lot of capital in their very early days they've been holding their Bitcoin and ethereum but now what they're observing is like wait I have all this capital in a CO wallet which is not necessarily the safest way anyway we want to create a yielder return on top of what we already have so that's why we launched this strategies now I know there's a big concern out there in terms of exchanges in in custody um we all had you know to digest what happened in 2020 too with FTX the good news is that our incredible partner from amphibian Capital James Hodges has been working very hard creating very strong strategies and Partnerships with banks like sikman sikon Bank in Switzerland to figure out a way to separate custody from exchanges so that's coming up um amphibian will announce that you know in the four quarter of this year but we're working on that so we're very excited about that I can second that James is great um Kelvin question for you so sparland is one of the largest or best known funds in Asia from an Asia perspective do you share the the same observations as Jack and paa or how are there any particular differences between Asia and us that you see yeah sure so we started investing in space in 2017 um and launched our first fund actually in 2018 with less than $10 million in cash Capital um obviously during the bare Market it's typically very difficult to raise capital and 2018 you know the ecosystem was much younger than what it is today so currently we manage about close to half a billion dollars in capital um spread across three funds so we have a liquid long short hedge fund which is um follows a fundamental strategy and then we do have uh two Venture funds as well um that were raised in 2021 and 2022 respectively um so in terms of our LP base uh um it's I would say about half of it is institutional and half of it is highet worth individuals and obviously a predominant uh number of them are based in Asia um we have deliberately as part of our strategy generally avoided um US capital uh for various regulatory reasons although we do have us based investors in our fund if they reach out directly um and in terms of I think the way that um these investors are different is in general I think Asian investors tend to be willing to um accept risk you know with crypto uh Investments um in a way that some of these larger institutional pools of capital whether you talk about endowment funds or Pension funds are less willing to um and also in Asia we tend to have a lot of um Family office money as well um and quite a bit of that is obviously in places like China for instance or or you know even Korea Singapore and Hong Kong um and so with these family offices many of these entrepreneurs made their money by taking risk right and so they are comfortable with the kind of risk that is involved with crypto Investments whereas a big institutional money manager um that's managing externally uh external Capital uh may require strategies that are um perhaps lower volatility um so I think that's probably the most significant difference um but for us when we invest we look at um projects from all over the world um and I would say that in the early days many of the better projects tend to come out of the US and to a certain extent Europe um over the last few years we've started to see a lot more of those um projects come out of Asia right so the ecosystem here is is growing very rapidly and um I think particularly when it comes to at the application layer we also tend to see a lot more projects here so uh we invest globally but we also do um spend quite a bit of time here and have most of our team based here speaking of geographies actually we were discussing before the panel a little bit about latam PA is there anything you would like to add there yes it's very interesting um how different jurisdictions and markets have different appetites I I always said you know that these emerging Technologies like blockchain and also AI will get implemented more efficient and and faster in economies where they're needed we want we like it or not in the US things work and the infrastructure Works in a way but in countries like in Mexico and for Mexico City originally we observed that there's a real need for these Technologies to come in and we're seen over and over again with some of the political you know um volatility you know and inability like countries like Venezuela so there's a huge opportunity for us we observe this fraction of Iz Market but also there's a lot of wealth in the in the region um we are about to launch next year at our first direct Venture strategy for Latin America um and visiting Asia in a way you know it's it's a good indicator of the appetite for Asian investors to come into this region because they understand the need um and more than ever with a commercial relationship between the US and China uh we see all this injection of capital coming from China to Mexico and other countries in Latin America so there's a huge opportunity there there Jack just a little more to what Kelvin was saying on where most of their Venture investment are going where were from your perspective in 2020 where were you geographically where were you investing more and were you investing more today predominantly we've been investing in North America uh Europe and Asia has that is still the same today you would say or has there been a little bit of a difference in some spots no I'd say it's it's broadly consistent yeah I'd say the best place is probably to do Venture Capital continue to be San Francisco New York and London and uh this year I think there's there's been a lot of tatter on Twitter specifically about why VC still are getting a lot more attention than liquid and we still see that VC has there's a dominance as like the capital that goes into VC over liquid why do you think that is and this is a question that we love to hear from the three of you I believe that we're still in a speculative growth phase of the space and I and and we saw similar you know activity in the early days of the internet in the 60s 70s and then later in the 90s where a big injection of capital was done by venture capitalist and then these projects were struggling to show real returns even though the valuations were on only on paper so we're seeing something similar I think we're still struggling to see the or find the real value of some some of these innovative solutions and we'll see but we need to be careful I mean I remember 2017 during the Ico cray the amount of capital that was coming in into projects that make no sense whatsoever now after what happened in 2022 we are being more cautious about where we invest our money and I will say this you know for all the managers out there the the hybrid liquid Venture fund strategy is very attractive but we also need to be very careful not to push our Founders to launch a token what is not necessary we really need to look at the application not all the application need a token we want liquidity yes and we want the high returns but with those High Returns come high risk attached to it so is the double-edged sword so I think we do have the responsibility as fund managers you know to be careful about that I'm glad you brought that up I think some people in the audience will also agree with you uh Jack Elin anything you want to add to that yeah I add a couple of things uh because we manage both um liquid strategy as well as two Venture funds right so we actually see talk to investors that sometimes are invested across all three funds but sometimes prefer the liquid strategy or the Venture strategy all right I'll would say a big challenge for most investors um that are investing in uh the liquid strategy is the volatility of the fund right so there's some months where we could be up 30% there's some months where we could be down 15 20% and a lot of um Family officers as well as institutional investors have trouble with that kind of extreme vol ility right and they they can't sleep at night right um so so it's so that strategy is not for everybody um but at the same time I can also tell you that you know if you look at the last cycle between 2020 and 2021 those two years the liquid our liquid fund delivered 15x return there's no crypto Venture Fund in the world that even over five 7even 10 year lifespan will be able to do that in such a short period of time right so if you are able to manage your liquidity then the liquid strategy makes sense and you can withstand volatility right not everyone can whereas on the Venture side um I would say that um I think people are a lot of investors including family officers um they don't see the volatility when they invest in a venture fund right because the capital gets deployed over a number of years and the value from these projects gradually acre so and and they don't have to make any decisions about when to invest and when to redeem the capital gets returned to them at the end of the fund life right and if the fund if you have invested in a good fund manager then ideally you should get a few X on your investment right and um and some of these investors also are trying to learn more about the um the web3 space and they also eventually want to be able to build up their own capability to deploy into these projects so many of them invest in these Venture funds to also get direct deal access um and hopefully increase their own capability over time right so the strategies are quite different but I'll would say there is a point in the cycle where the liquid strategy is very interesting which is now whereas there's a point in the cycle where the Venture strategy is more interesting um right yeah and i' I'd add that the launching a a crypto fund is is harder than than it was in terms of uh the competition especially on the Venture side there is because of the returns you know you guys had had amazing returns 15x um we we've returned 650 million profit in in four years and so whenever you see funds sending around Decks that say Hey you know 40x 15x 50x that brings in a lot more competition other fund managers see that and go well maybe I should have a crypto arm or maybe I should start a crypto fund so that brings in a lot more Capital that increases the valuations for projects raising and ultimately dampens returns so whenever we think about um Venture fund I think you have to be aware that you know you need to have a Competitive Edge and so we've taken a lot of the the carrying profits to invest in systems and and people and to build that Competitive Edge so this is all fantastic information but now I'm wondering what will be the future of funds the next like one to five years right like hybrid funds is kind of a new thing of this cycle as a proxy of what happened the last cycle will regulation play a role in the definition of crypto fund specifically I definitely think regulation is a key component for the ecosystem I mean we're seeing especially in jurisdictions like like the US um uh as I said before I think the heavy like heavy Capital allocation still going to traditional Venture funds and not crypto there's a huge difference in that but also as I said before I think it's important that we start making a norm splitting for example the exchanges from Cody I think we're starting to see more negotiations and Partnerships with traditional institutions to make that happen but I think until we don't accomplish that it's still going to be difficult both to raise capital for crypto funds but also to deploying projects that are actually Innovative and based on fundamentals and not a speculation I think regulations are good in the long term because it brings more Capital into the space um I think on the Venture side it probably won't affect Venture um funds so much I think Venture funds will probably sort of um uh see more competition but it's not because of regulations but because of the pool of capital that wants to be in the space um I think on the liquid side over time the regulations will matter and fund managers that are uh regulated will have an advantage over those that aren't uh but getting that timing right is really important because you know we have observed many funds that chose to be regulated two three years ago and frankly they've not really benefited from that at all um uh just because the regulations don't give investors safe har protections right because the assets are not regulated across the world at the moment um and then but what we've seen recently also is even with the introduction of uh the Bitcoin and ethereum ETFs that alone has sort of shifted a conversation right where before investors were happy to look at Absolute returns from our strategy for instance and now every month they're looking at the performance of Bitcoin and eth and comparing our performance with that so they become more sophisticated and they also don't want us to hold any of the larger assets because they can invest themselves they don't have to pay us a fee to do it right so the game's definitely gotten more competitive um and then the other Trend that I think is going to be very important with regulations is that when it happens um and all of the large traditional asset managers the T priz and fidelities and capitals of the world that Capital can then come into the space right and we start to see the creation of long only funds crypto funds right which today doesn't exist right in crypto a lot of investors are very short-term minded there's no um longly funds right the real diamond hands and that's why the asset class faces so much volatility whereas if you have that investor base um which typically is many times larger than hedge fund Capital then hopefully that will dampen the volatility of the asset class in the long term yeah unfortunately we are at time already but this was a great panel thank you to to the three of you for answering all these questions and yeah just as a final thought for everyone we've touched on like I was reading it this morning we touched on like the number of funds that were there in 2018 as opposed to today 2018 there were 50 funds that were crypto native today there's 1,50 so I think we've done something pretty good and hopefully next year there'll be 1,500 thank you very much everyone thank you