# Crypto Hedge Funds: Who Has The Winning Formula? @ TOKEN2049

- Channel: [TOKEN2049](https://streameth.org/token2049)
- Date: 2018-10-09
- Watch: https://streameth.org/watch/yt-eR17nn0lg5E
- YouTube: https://www.youtube.com/watch?v=eR17nn0lg5E

## Transcript

[Music] all right hello everyone thanks for coming we have a great panel for you today about crypto hedge funds we're gonna be talking about icos and regulation market opportunities and investing in crypto so yeah let's let's kick it off by I'm gonna ask everyone to just introduce themselves where you work what your fund does and when you first got into crypto as I know some of you have come from traditional finance backgrounds hey so I Martinez here first got into crypto in 2015 by buying Bitcoin for a massive premium and it was still one of the best decisions I've ever made I am a co-founder of neural capital a long short hedge fund in space also an advisor at protocol Ventures the first fund of funds and CIO at an apex token fund a tokenized fund of funds hey Mike Patel I'm a partner blocked our capital first invested in crypto in 16 not nearly enough and then join the crypto world in October when I joined block tower I was at Goldman for 10 years prior to that mostly in trading my name is Alex Sunnah Borg my first job was in investment banking I left that in about 2014 when I co-founded a company called lawnmower Daioh which was a mobile app for investing in researching and cryptocurrencies ended up selling that to coin desk at the start of 2017 where I was a research analyst and about six months ago I started a company called Tetris capital we invest all across the crypto asset class hi I'm Lois fellows I'm the chief investment officer and co-founder of Bletchley Park I say management unfortunately only got into crypto in 2016 and that's mainly because I fail to tell on the mining rig in 2009 so it's been a long and painful path to here prior to that though I was working at the Harvard University endowment and a number of high-profile hedge funds are here in Hong Kong great thank you so much let's start off by talking about ICS so I know when I asked when I reached out to each of you and asked you for things you were excited about most excited about and most worried about some of you said I co-regulation for both excited and worried so I think are you actually said you were excited about it so tell me about that how are you feeling about I co-regulation how is that influencing your strategy in terms of what you're investing in now so I'm excited about it because I'm pessimistic on the regulatory aspect so I think a lot of icos are illegal money servicing businesses and so I'm excited about buying discount very heavily discounted tokens in about three to six months yeah I would I would say you know we're very specific about the projects we invest in I would say broadly speaking the regulation coming into the space is actually making the project teams think about their distribution model think about potentially the capital they're raising and how they're gonna be utilizing it so it's it's kind of enforcing a an intelligent approach to the process which I think in the end will benefit the ico space going forward I would just add I guess on this incoming regulation is showing us some new creativity and deal structures so some projects are looking to go purely institutional capital now and then do air drops we're seeing more pure equity structures some it's definitely a new trend and something that we're generally concerned about but it's making people think harder and more responsibly yeah I would definitely share that kind of dual a feeling of excitement and also a little bit concerned about it it's gonna be a sore tooth profile whilst regulations being implemented and I think what we'll actually see is as soon as we can see regulation which approximates that within the equity space you know it's going to be a safe time to get into icos and I think they'll be quite an exciting period yeah Louis maybe can you elaborate a little bit about your investment strategy are you you know differentiating between live blockchain cryptocurrency projects versus icos and how you invest sure um within it whenever you create a hedge fund you always have to marry the according to the fund what you put what you promised to investors then you have to marry that liquidity to the underlying investment profile of your investments and as such we have to limit our exposure to icos and also the the part of that ICO to market to match the liquidity of our fund so we're a monthly liquidity fund and so you don't see as participating in ICO is where there's a six-month lockup it just doesn't match up with our investor profile and so because of that we limit the weighting of I SEOs within the portfolio to a maximum of ten percent but in reality it's a little bit lower than that just because of the regulatory headwinds we see in the new turn Alex does that align with what your strategy is or how do you how would you describe it I'd say it's pretty similar so like I said we invest across the si class so we analyze deals on an already live tokens to these pre-ics apps as well I would say we are heavily we heavily favored sort of live block chains or live tokens versus these pre-ics offs for a couple of reasons most of these saph deals are for decentralized applications we generally think a lot of these decent but drawers applications have lower target addressable markets and some of these cryptocurrencies higher velocities and the regulatory risk also kind of comes into play with both sort of potential enforcement against the ICO issuers as well as potential D listings of tokens on exchanges so it's a huge liquidity concern as well also on the lock ups make us think about everything in terms of opportunity cost versus investing in liquid assets like Bitcoin so for a plethora of reasons we are generally am extremely critical on staff deals but we do look at them I would say you know ICO is the way the market is now severely limits your ability to manage risk and so having it as any component of your portfolio you you you want to make sure that one the use case is is valid and and it's coming at a reasonable valuation and if you're deploying too much capital into this into this space again you run up against liquidity issues you run up against obviously down dressed like we've seen recently this is a very volatile market a very cyclical market and these are the high beta components to that so if you're if you're truly managing risk and as a hedge fund where you're trying to raise capital from institutional investors or responsible investors you know as a as if as a fiduciary you should really think about the construction of your portfolio yeah to Mike's point liquidity is one of the main pitches that any crypto fund makes to a potential LP and so if you lock up too much of your phone into an IC o---- you're actually going against what you're pitching to investors there are some valid use cases any IC o---- that represents something like Oh me say go that you know solves one particular issue for a blockchain that's super interesting but something that claims to be the next ethereum it doesn't really you know give you much beyond a white paper there's no product that doesn't make any sense for most people to do Nico would so you're not really kind of just drawing a line between utility token and security token it's more nuanced than that so that's actually an easy pass for us if anything is Attila T token it's an automatic pass no matter how great it looks because it's a there's no such thing as utility token your security or your not security it's as simple as that I think the space is unfortunately you had engineers try to out engineer the law and that never works there's a reason the law exists and it's better to just follow you know have lawyers comply with security regulations as opposed to try to make up a a model to try to get around it so you don't have to file in the right kind of way make the proper investor disclosures which actually is just unhealthy for the space generally why don't we talk about what I think maybe is the elephant in the room I haven't heard a lot of people talking about at this conference yet which is prices they're down what 70% or something from December I've heard at least one of you say well there may be some concern that we're in a long term bear market I'd be curious to see how each how concerned each of you is about that and how you're getting through it right now in your strategies so a lot of exercise a lot of meditation I'm just kidding yeah I think it's pretty clear at this point we're in a bear market the short term bubble for Bitcoin popped on December 17th I don't think we'll see a market like 2013 in 2014 where we saw a 58 week bear market but for anybody to say we're still on a bull market doesn't actually make sense we've had a 67 to 70 percent drawdown as of February so at this point it's really capital preservation in a bear market and then positioning ourselves for the eventual return because the bubble didn't pop at you know 800 billion if this is truly what we think it is and the the future is a tokenized model for any security or any equity this is going to go to a at least 3 to 5 trillion market cap so right now it's a matter of I can't speak for the other guys but raising money from LPS and positioning ourselves and dollar cost averaging into longer-term positions Louis I saw you nodding your head when we start with you yeah I would agree with it the fact we are in a bear market it's um all the marginal buyers the catalyst for getting them into market have been taking out the bands on social media and so that's left is in this bear market we're the only catalysts really to take the market higher is 6x successful execution of project so the tokens that have come out there with projects that raised money maybe 18 months ago it's really time to start to see them deliver if they begin to deliver the boost that we'll provide to the ecosystem overall could really kickstart the bull market again I think tokens absolutely got overvalued especially on November in December where it was obvious that basically a massive inflow of retail capital was just bidding up everything I think it became most obvious it was generally uneducated retail capital in the fact that when you look at um there's a huge trend in the actual cheaper tokens per unit price without paying any attention to supply or actually those that were rallying the most so you know these people are going on to financing which tokens were cheap and rallying and just throwing capital into it there's been a narrative for quite a while that you know institutional capital is quote-unquote right around the corner I think people are seeing now that it's really a bit farther out than a lot of people expected and I think a lot of that has to do with just uncertain regulation around the world and immature custody solutions as well as just the overall infrastructure of the market you know there's no ETFs future volumes are pretty low so how do we handle that generally by rebalancing positions towards things that we think make more sense from a fundamental value perspective it's probably easiest to justify a asset being in the tens or hundreds of billion dollars worth of value if it is some sort of a store of value asset so generally rebalancing our portfolio and we also are very comfortable holding cash in times where we think the market is overvalued and then potentially buying in lower so just kind of shifting and actively managing our portfolio I think it's kind of interesting yet it's an elf in the room but we're in a zoo so you should expect to see an elephant that's kinda how I think about it right this is this is expected this markets volatile it's it's sort of I kind of consider it the market structure is similar to distressed credit if you condense the cycle into every three months and except there are no cash flows that bottom out valuations there are no associated assets so the cycles can be more vicious I think again as you know I think as hedge funds and this is the panel is about you should be managing that risk and you know you get rewarded handsomely for being in a position to deploy capital when others can when you're a price maker instead of a price taker and if you construct your portfolio appropriately you should be in that position in times like this Alex you touched a little bit on when dealing with institutional investors and raising money what like what is sort of a state of where we are now in terms of how welcome or how attracted institutional investors are into this space what are you having to do to convince them reassure them are you seeing them make the switchover yeah I think institutional capital there's a huge spectrum of that I think right now the institutional capital that's moving in the quickest is uh probably the family office type of folks more of the venture capital firms and the bigger VC firms they're just generally for them to move into the space and why they're looking at hedge funds now to deploy capital through is uh it takes a lot of like operational expertise to analyze this new asset class you know it's very unlike the traditional stuff in their portfolio also custody is a huge risk and just something that's not worth it for a lot of these institutions to move into I'm so a lot of these investors have questions on fundamental valuation which they're used to from the equity space which honestly doesn't really exist to for the most part in crypto right now it is heavily driven by speculation but they're really just one understanding of you know how you manage your cash position how you deploy these assets when do you sell how do you custody but just an understanding of really you know how crypto works because it's very different to what they're used to Louis you have dad I would just say you know it's the three C's cash custody sorry - okay mine slip anyway sorry a little bit jet-lagged but the institutional money you know it is the cash the custody and they're looking for that killer app to come through I'll remember the third see a little bit later on but it's important to remember when we talk about this wave of institutional money coming the lead time ins on institutional money or just any traditional hedge fund that starts up is quite long you know if you're a new hedge fund launch and you were approaching an endowment you'd still be looking at at least a six-month lead time and so when we add in these extra factors of the custody the unknown asset class the valuation you commit you need to add another 12 months on top of that and so the institutional money isn't around the corner in my opinion they're looking at it but before it be hits this market I think we're another 12 months away just to add to that I think as a hedge fund the infrastructure of the market needs to develop significantly in order to deploy more capital if you're gonna be doing it in any active risk managed way I mean if you're a buy and hold you gotta see deploy quite a bit but I think in order to you know for a lot of these say a pension plan a 50 million dollar allocation is standard you know I would say at this point if you're over a half a billion as an active fund you're in a bit of trouble putting money to work you very quickly become more passive than than you'd like to believe just to add some context that if I can I mean I would say there's probably less than 20 assets that trade with above a million dollars active daily trading volume this is fragmented amongst exchanges all over the world to that most institutions are even retail traders are questionable to custody assets on so really to manage a diversified portfolio or especially to invest across shafts or icos or some of these smaller altcoins that the liquidity is just not there for substantial capital you know you're not going to be able to exit and especially if regulatory crackdowns come on some of these exchanges and take away some of those trading venues I mean you'll just be sitting on completely illiquid assets agreed with Alex especially because there are certain exchanges a couple of them in Asia that apparently might have 80% fake volume so even if you see 24-hour volume it you can't actually take that at face value because it might be significantly less so family offices and institutions and certain traditional hedge funds they're having a problem entering a space in which they can't verify liquidity they can't figure out how to actually fundamentally value an asset like this any time they talk to a crypto fund the fundamental valuation from crypto fund is more based on the protocol layer you know what does a code look like what's the long term use case and not cash flows or dividends or you know typical fundamental valuation aspects I will actually disagree though on the custodial side I think we are will start seeing the first products probably by end of q2 there's anchor labs there's a couple other third-party custodial services bit go bought kingdom trust so I think the early movers we might be seeing a head-fake from a lot of institutions and I think a lot of those will start buying in by q3 and then q4 and really mid next year as one will at earliest see the pension fund some of them to delve a little bit deeper on the custodian issue what would actually be required of a custodian if these are moving into market what would you actually from them or of them to solve that problem so verification of holding the assets being able to verify independently so currently most crypto phones will hold their own assets on exchange or on cold wallets and on multi-sig wallets however certain assets like Manero or untraceable so just because I tell you that I'm holding this because I downloaded the entire Manero blockchain onto a laptop and I Holden Monaro is not really good enough for most people who have fiduciary responsibilities so you need a third party to understand the technology and be able to verify that you do in fact I'll hold the assets that you're claiming to hold and I would say the one thing that I think mean I think the one industry needs to step up and hopefully someone will is the insurance component so I think if you can get insured custody because technology taking up technologies technology in any custodian that Garner's the bulk of the assets will become a target there will always be some group looking to disrupt that technology I think once an insurance wrapper comes into play that kid that could actually increase the adoption significantly yeah I just like talk to that funny bit moving by third see cash custody and counterparties and so the counterparty solution is part of it is insurance and I agree with you entirely on that but there's also a balance sheet element to it and so when you are pledging assets to a custodian we need to know that that custodian has a balance sheet to support their business in the long term and also to be able to process small areas when they occur because within the regular equity environment we frequently see errors and custodians frequently have to eat the cost of those errors and so a small tech startup what's their solution maybe fantastic in the absence of a balance sheet we'll struggle did you want add no you guys talked about a little bit before we were talking about using exchanges to trade versus not using exchanges all right can you talk a little bit about that and how your approach that we're where are you finding places to trade sure so almost everybody in space will exclusively like to just use over-the-counter deaths just Cumberland or octagon however if everybody else is only using over-the-counter desk there actually presents an opportunity to trade on exchanges as long as you have withdrawal in deposit limits that are high enough for you to buy assets for slightly cheaper and then take them off or be able to do short selling on exchanges if you are not set up with the proper places like Genesis or places that would let you borrow capital and that the short selling aspect is actually pretty new Genesis if I remember correctly only launched their desk about two three weeks ago but you had massive opportunities to short Bitcoin it their Ripple several other assets over the last year so in order to chase the alpha beyond just being a long fund you would have to take certain risks that would be you know qualified risk that you would vet ahead of time not just sort of shotgun cowboy-style and be able to short on centralized exchanges like coinbase before their meltdown in the middle of the summer was actually a place you can the margin trade and you could actually short any of the three major assets that they listed I think over time you're going to see ledger and several other wallets will just start allowing that while allowing you to hold custody of your own assets but for the time being it's really on exchanges I think that's very important for a permit Raiders perspective the synthetic exposure if you can keep your assets in cold storage we also have synthetic exposure the exchanges and are some people that are working on that that's very important shorting on exchange really exchange arbitrage anything where you're leaving assets on exchange you need to be ready you need to have done the diligence and understand what your risk adjusted returns are because if that exchange is hacked and your assets are pulled you better be ready to answer to your investors it's a very very big concern and issue for a lot of hedge fund managers yep so that's obviously there's huge benefits to trading OTC but I will add certain ot most of all OTC desks don't trade every asset so you know you need to make the decision and weigh the risk of if you're trying to exit or enter positions in certain asset some it is necessary sometimes to trade on exchanges or even the growing world of decentralized exchanges just depending on what suppose you're trying to get yeah I would just have to issue around exchanges there's clearly an optimization of the coins available liquidity etc and the ability to go short but the big hurdle we have when we appraise any exchange is the transparency and the information that's available to us from the exchanges and again to my earlier comment about the balance sheet these are all privately held companies and so it's very hard to understand how much cash they have on balance sheet if you then pair that up with what is the policy around error trades and generally the policy on any form of crash has been very very positive in terms of making the the ecosystem whole but ultimately there's no formal policy and so the exchanges if they could provide more transparency would probably win more market share actually okay so when it comes to actually sourcing investments one company that we've been talking a lot about lately its telegram which we all use but I don't think anybody on stage here is actually invested in telegram all right you want to start and talk a little bit about why that is and what made you skip sure the number one problem with telegram for me well let me say the positives the team is fantastic there's definitely a use case there's significant traction they could build a platform that could work what doesn't make sense for me is the people that are valuing what telegram should be worth are using traditional equity metric equity metrics like daily active users monthly active users amounts the amount of time spent in the app and that doesn't necessarily apply to the crypto space and so that that was one of my biggest hesitations and also you know power to the entrepreneurs for raising non-dilutive fundraising but telegram should doesn't need a token the to date the token does not make sense and the amount of literature that they have says you know we will build something that will make sense that will be a token that we will use but that's not really good enough to raise a billion dollars in my opinion Michael you yeah no comment on the investment side but just broadly speaking you know I think things like liquidity alignment valuation all come into play and I think what they did that was you know I guess intelligent from a regulatory perspective was only raising capital from institutional quality investors a twenty million dollar minimum subscription and created many syndicates so that was interesting a lot of family offices got involved in this and you know unfortunately I don't think they understand again the token economics you're not even hear from folks who are in crypto explaining to others you know it's kind of like investing in Facebook before they had advertising dollars and they said and I said that's absolutely wrong it's it's basically like investing in Facebook token that you need to have to be on Facebook you never have affiliated cash flows from the advertisements and a lot of traditional investment houses have a hard time understanding that and so I think they'll understand it once you know all said and done with a telegram raised and once they start once it starts trading and they start to gain a better understanding of token on economics but I think that's that's it's yet to be seen you know just to reiterate a lot it's just you know what is the fundamental value and usage of the token you know a broader question on top of that is what incentivizes people to actually hold this token over time make a keep the velocity relatively low but the huge ones here are just like you know they raised several billion dollars so the valuation is several billion dollars north of that at least the lock-up is I think at least 18 months and so generally that just gets down to you know what's the opportunity cost of investing in telegram versus just holding something like Bitcoin over that same time period I would agree it was just simply the critias evaluation it just doesn't match the fund profile besides valuation are there when you're evaluating a new token any red flags that would make you bow out or skip Alex I'm sure you know when investing into I guess soft deals unclear terms around the actual I see oh okay the date the amount being raised the lockup those are all clear red flags I mean I want certainty in my investment I want to know when I'll have liquidity I want to know what my valuation will be and when I can't get any of those terms some it's really hard to to jump in at that point you know obviously the the path to liquidity or the path to market is key but you know right now the quality is shockingly low if I were to appraise an equity investment as a bare minimum we would see a cash bond protection for the team and the amount of developers required and sometimes these basic elements are missing and that's a red flag straight away that they're raising an unknown quantity given the high volatility of the underlying assets being pledged where there's no projection on this cash burn so it's very difficult for them to model their business it's do more difficult for me to understand it if I can't see a simple projection so I actually think investing into tokens early on the venture style approach is very relevant so being able to do due diligence on teams seeing what they did before why they're in the space one day God in this space what's their motivation is actually pretty relevant and then being able to see if they have previous regulatory flags against them for doing any particular you know illegal activity or being illegal Securities Dealers would also be obvious red flag again the flip side of that when you what are you looking for and we're using some of the greatest opportunities and if you can give any examples you know even better where you're bullish on I know some of you can't talk about that but re maybe you want to start yeah I can't give examples because I don't want people thinking I'm trying to show them my bags so to speak but protocol tokens anything that can allow for icos or for building distributed communities or distributed non functional tokens or assets that that's super interesting to us also governance models that are different than just the Bitcoin model of forking whenever you disagree with the decision so that also has like masternodes something's I think what we've seen over last year is a lot of people thought they became traders but really it was a bull market and you couldn't really miss so a lot of people are now either getting burned out or they're realizing that over the next few years and especially over the next year it makes more sense to have passive investments so anything that has a infrastructure type investment that Kurds could resemble some sort of buy back stock buyback so a number of exchanges have tokens that fall into this category those are super interesting investments for longer-term holders yeah I would say from a market standpoint this resembles early 15 whence Mid Cap Growth tech and preclinical biotech went through a massive bear market and you know things that never traded it you know to time sales were trading at a time sales and coming to market through an IPO and everything fell off a cliff and everyone ventured back into the highest-quality tech in and health care names and it took a very long time to get back down towards that tail but in that kind of mess there were some diamonds in the rough and I think those could be interesting opportunities you know I would I would also say this is probably a very good time for the hedge fund crypto hedge fund space to work with a developer community there's some very very smart projects and technologist in this space and you know they're going through a very difficult time in a market I don't think they were aware of what it meant to be in a publicly traded market and so this is a time where you can sort of have that that double bottom line effect where you have the economic return of the investment as well as the goodwill from the developer community I think it's actually a pretty interesting piece of wood could be the next cycle of this market I mean to kind of build on what Ari said just you know show me show me what you've built before show me what advisors that are in the space that are excited about your product show me an NVP and show me why people would hold this token over time as opposed to some sort of behavior like let's use a hypothetical application like a decent decentralized gambling application tell me why I would hold this access token over time rather than just buy this token use it to access your marketplace do all the gambling I want and then at the end of the day just sell that token right back like what incentivizes long I'm holding I think that is what a cruise value yeah and just to take that to the next level is when the tokens come through we it's very easy to come up with the idea which is going to change everything and we see that and to build a Michaels point about our side of the business providing input to pretty much finding out what is the terminal valuation and it's recurrent question is that what is the valuation and so when we reach the steady state where these tokens are out there we don't really want to sell them and so I think people when a creating an IC o---- need to spend a little bit more time around the game theory of what happens when there's tokens in a steady state you know what volatility will drive it you know then we can actually begin from a game theory model to create valuations for tokens without that game theory at the terminal evaluation when it's in a widespread usage it's nearly impossible for us to ascribe evaluation to a project and so I think somebody needs to make that first step of an IC o---- with an end plan where there's an equilibrium model that we can begin to create or at least tried to create a valuation metric for it one more thing to add I mean I would say obviously a lot of network value came out of the market but network value doesn't equate to dollars right people can leave resting orders in a book and lift a market cap or a network value by 200% on ten thousand dollars of volume so a lot of the tale and and the 95 percent draw downs we've seen in the tale of early stage tokens there's small caps it's it was never real to begin with I would say the the benefit of this IC o---- I would call it an IC o---- bubble that we've had is it did draw in some dollars and now there's a reallocation of those dollars towards projects that are meaningful which is important great well I think we're out of time but thank you so much to all of you and hope you enjoyed the panel Thank You Jenny thanks [Music] [Applause]