Crypto hedge fund capital raising - thoughts?
Hello,
I work for a hedge fund which launched in June 2022. Its investment strategy is to algo-trade cryptocurrencies using its trading system built on neural networks. It is fully automated and directional. The team is based in European Union, the fund is incorporated in the Cayman Islands. The strategy is well tested in real trading - it has been employed by an alternative investment fund incorporated in one of the EU countries for more than 4 years. During the 4 years, the assets under management grew so much that we had to establish a regulated entity - that is why we have just launched the hedge fund. The strategy has a great track-record (2800% cumulative return since inception) beating both the underlying assets (BTC, ETH) and frankly anything I have ever seen. However, the last 6 months were not really good and this year the strategy is down 36% - still massively outperforming the crypto industry but making a big loss anyway. The fund itself began trading in June so it did not make any significant loss or gain so far but still we present the past results of our strategy to prospective investors (carefully describing the story ofc).
I would like to ask a few things:
1) it has been quite an issue to attract investors in the current market conditions plus it seems the investors really look on the near past performance the most - how many positive months in a row do you think we need in order to be attractive to investors again?
2) I would also appreciate any advice on how to market it and how to setup processes - we are a team of 12 guys, but I am the only one doing the business/administration/compliance/sales - whatever is not machine learning/quant/trading and I often struggle with prioritization plus I do not have the luxury of a sales team. Should I focus more on finding distributors/introducing brokers/ external sales companies or should I spend my time cold calling people on linkedin? Regarding “cold calling” I currently search prospective investors through google, linkedin and some investment articles aggregators. Do you have some suggestions on how to proceed in searching prospective investors?
3) Regarding marketing documents – we have a factsheet and private offering memorandum. Currently working on DDQ – do you have any tips which one to use for a crypto fund? I am making one based on some Aima Managed Futures Fund Managers/Commodity Trading Advisors (CTAS) template which I adjust to better fit on crypto markets. It is already 30 pages long, isn’t that too much? My impression is that I will kick it off to the one investor which demands it and based on his feedback/questions, I will rework it - am I correct?
Thank you in advance for your tips.
Caveat here in that I don't touch crypto but invest in other high-risk, high-beta assets:
"During the 4 years, the assets under management grew so much that we had to establish a regulated entity - that is why we have just launched the hedge fund. The strategy has a great track-record (2800% cumulative return since inception) beating both the underlying assets (BTC, ETH) and frankly anything I have ever seen. However, the last 6 months were not really good and this year the strategy is down 36% - still massively outperforming the crypto industry but making a big loss anyway."
1) Reading through the lines here, this implies alpha was generated but also that perhaps a substantial amount of performance seems to be beta-driven as well. Have you internally determined to what extent your returns are driven by alpha vs. beta? What's market correlation? This is going to be important as the recovery of the strategy, assuming you don't adjust anything, will depend on market conditions to a certain extent. LPs are getting nailed across the board from high net strategies that have large market correlations and are now reactively moving toward lower net strategies, so this may impact their ability to come around to something with meaningful market correlation again until we see a broader recovery of the markets;
2) So are you the COO AND you are also on the investment team? COO and investment team need to be separated -- both are full-time jobs and different skillsets. If you have a team of 12 and no designated full-time COO/CCO, you need one ASAP IMO. What is your skillset and what was your role before you began scaling?
3) Since this is crypto-specific I'll defer to others here -- don't want to give bad advice;
Something extra: since it sounds like you guys are scaling now from what was sub-scale before, and maybe you've done this already, I'd just recommend making sure you ideally simulate your targeted amount of capital to determine whether your strategy can scale into what you plan to raise. It can be very exciting to raise (or organically grow) a lot of money quickly, but many funds have had their lifetimes cut short by growing beyond scale and then getting mediocre or bad returns as a result (also, the performance decline may not be linear as well, depending on what you're doing).
Thank you for your reply, it gave me some food for thought.
1)Our beta to BTC is 0.49, I have no idea how that stands in comparison with other strategies. However it is decreasing as we allocate more capital to derivative instead of spot strategy. Is that high or low in your opinion?
2) let me clarify the structure. I work for an investment adviser of the hedge fund. The investment adviser used to run the alternative investment fund and the whole team is on the payroll of the investment adviser. The investment manager and the fund are basically run by the CEO of investment adviser who is the man behind the whole strategy and a director in both the investment manager and fund (both also have one independent director each). I sit with the investment team but I am responsible for everything concerning the fund/manager/adviser which is not directly connected with the trading system. COO is probably the most convenient name - you can also call me a jack of all traits for the scope I cover is really wide and I am hardly proficient in all areas. Regarding hiring more people for business side/COO - (i) our AUM is not that high to afford other people for this role; and (ii) we are located in a country with not a very developed financial market, the local market is not very developed and it is hard to find experienced COO - that is why I got picked probably. I joined the firm to help with the business side and administration of the regulated entity, before I was a lawyer. I also have some background in crypto and good understanding of math for I have a minor in it, that is why I got the position - I understand (i)trading, (ii) statistics, (iii) crypto, (iv) law-funds/compliance. What I don't have is finance background and experience with the role. Is it common that sales, marketing, PR, compliance, legal et al. is done by one person?
3) regarding scaling we are very strong regarding data analysis, computer simulation, quant and machine learning so we have done many simulations and are pretty confident we can scale up to USD 400 million AUM with the current strategy, however we are only aiming for USD 100 AUM, so this should not be an issue. The issue is we lack know how/experience/connections on the business side.
Sit eos iste voluptatem. At aut non ut aperiam aut maxime ut deserunt. Atque dicta itaque reiciendis possimus.
Enim quidem sed sapiente dolorum porro odio et. Accusamus id dolorum aperiam blanditiis vero. Consequuntur et voluptatum ipsa qui et autem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...