We hope you are doing well!
Looking back the last 30 days the crypto market found itself once again in choppy waters. The overall market decreased by -23%, BTC experiencing a drawdown of -35% and ETH -26%.
Launching our solution during turbulent times allowed us to directly prove our downside protection thesis. We were able to outperform the market and were down by -6.65%. This decline was attributed to our overall approach of having roughly half of our portfolio in long only positions (i.e. offense) and the other half in e.g. market neutral, derivative protected positions (i.e. defense), which are still being phased in. You can find our most current marketing material here.
In light of recent market movements we wanted to discuss the importance of actively managed strategies. Please see a sneak peak on the topic below from our upcoming special report titled “The Emerging World of Digital Assets – Why and How to Participate”. You will be able to download the report here.
In a nascent, rapidly evolving, and still somewhat opaque and inefficient asset class such as digital assets, thoughtful active management can provide true value and significant alpha.
All markets and technologies have a natural growth curve, or life cycle, to them. Blockchain technology and digital assets are an innovation that is in its infancy. Like early technology investing across equities and venture capital, there are inherent asymmetries of information and corresponding advantages for sophisticated investors. Thus, agile investing will be required and the following aspects of the digital asset market will need to be carefully considered:
Niche themes and trends: The digital asset space encompasses unique and nuanced niches and sectors, such as Web 3.0, NFTs, DeFi, or gaming, to name just a few. Some active managers have been in the business of investing for decades. They now focus their resources and established investment processes on the digital asset class, utilizing their extensive portfolio teams and access to superior information sources to analyze the new universe of digital investment opportunities.
Market inefficiencies: This young market is subject to a plethora of inefficiencies. Reliable investment information is hard to get by. The information and data services that professional investors use today, such as offered by Bloomberg, Thomson-Reuters, or Telekurs, are not geared up to the world of DeFi yet. The access to and analysis of market data is much more cumbersome. Therefore, experienced managers with the required human talent, scalable infrastructures, and international networks are much better equipped to compete.
The value of cross-leveraged skill sets: Collecting, filtering, and deciphering the flood of information in this nascent space is not a part-time job. And, due to “moving targets” across all dimensions, expertise across multiple dimensions – technology, investment, business, research, legal, etc. – is particularly important.
Rapid change and innovation: The digital asset markets are developing much more dynamically than traditional markets. An index, rule-based, passive investment approach will hardly allow for successful sector selection and rotation. Furthermore, young markets tend to change directions quickly, small changes tend to have significant impacts, and relative domino effects are not uncommon. For example, positive press about a digital asset like Ether will not only affect its own price, but also the trade patterns for the countless other tokens hosted on the Ethereum blockchain.
Risk Management: As discussed above, the risks in this market are still formidable. Therefore, mitigating these risks requires more than just price management. It also requires rapid allocation adjustments, downside protection tactics, and a systematic market monitoring method; it involves active sizing, liquidity management, continuous risk/reward assessments, and stress tests. And it all starts, most importantly, with a thorough evaluation of counterparty risk.
Have a great day and feel free to let us know if you have any questions.
Marc S. on behalf of Frank, Dirk, and Marc B.