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AA Digital: Performance Update May '23

Dear Alternative Investment Enthusiasts,

The month of May was dominated by headlines around the SEC coming down on the crypto industry, which will be the key focus of this update. Gary Gensler, who heads up the SEC, brought lawsuits against both Binance and Coinbase, two major global exchanges, within a short time period. The complaints ranged from breaches in KYC rules to selling of unlisted securities. While this sent shock waves through the market, e.g., for May BTC -7.6% and S&P Cryptocurrency BDM ex-Mega Cap Index -9.59%, this was also seen by many as the “show down” moment where the SEC had to show color and provide clarity for market participants. This move by Gensler was seen as controversial and, with apparent political motives working in the background, was meted with resistance within Congress as some fear that the US is losing their pole position as a tech leader.

It is hard to tell how if the path Gensler is on will continue, especially given upcoming US elections which could flip the course again. Regardless, we are starting to see the digital asset industry in the US picking up to leave and setup operations elsewhere. A prominent example is the venture capital juggernaut Andreessen Horowitz, known as a16z, which opened their new office in London. Their London operations will act as their hub for crypto activities.

While crypto native firms are under pressure within the US, traditional finance firms, known as “TradFi,” have started to emerge to fill the void. For example, the CEO of Soros Fund Management made remarks, in essence, that it was time for the adults in the room to take the lead when it comes to crypto. There have been various pushes: from Julius Baer or Deutsche Bank applying for digital asset licenses, to BlackRock and others applying for a BTC spot ETF, to Citadel Securities, Fidelity, and Schwab backing the new crypto exchange, EDX. Even Jerome Powell acknowledged that “crypto appears to have staying power as an asset class” in a recent hearing. That being said, here in the Canton of Zug, known as “Crypto Valley”, is pushing forward in further building its position as a global hub for blockchain technology with a USD 40 million funding for a research institute in collaboration with local universities.

For the month of May, we were down -5.04%. We continue to have an annualized outperformance of 7.70% (vs BGCI) and 1.06% (vs BTC) at a strongly reduced annualized volatility of 27.83% vs 74.64% (for BGCI) and 65.05% (for BTC). In light of the aforementioned course being taken by the US, we decided to be prudent and severe our ties with our US-based fund manager until further notice. Having a globally positioned portfolio, the US investment didn’t play a material role, especially considering there is a lot of talent outside of the US to choose from. Furthermore, I have received emails from some US managers informing me that they are either shutting down or moving their operations outside of the US. We wanted to stay ahead of this.

Marc Seidel, and your AltAlpha Strategies Team

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