My Quant Hedge Fund (Crypto and Digital Assets) Finally Launches in 2 Weeks

justinmantra66's picture
Rank: Chimp | 14

After over 8 months of preparation, formation, operations construction and meeting with prospective team members, my quant hedge fund is finally launching. It's being led by myself as well as a former 15 year Goldman alum. Been a pretty longtime lurker on WSO from a different account (Don't have access to the email on it) but I thought I'd make a post to hear some of your guys' thoughts and any ideas you might have.

We're not a long-crypto fund, which is the main belief system of the fund, and I guess our edge. The goal was to derive the tech and process in a traditional quant fund and apply it to crypto/digital assets because the usability in these markets were a lot more attractive for the strategies we had going in equities and derivatives. In the middle of (if you want to call it) a 'crypto recession', our backtesting results are looking pretty sweet, yielding green year-to-date ROI. The basis was to establish unbiasedness in the trading so while we might not have super monster returns in years like 2017, we survive years like 2018.

Happy to answer any questions if I can also. Thanks, looking forward to hearing any thoughts on the subject!

Comments (8)

Dec 29, 2018

How would you reccomend someone break into crypto out of college and do you feel that its limited because the coins do not have to give ownership? I've always thought that the coins could create a volatile market for smaller sized firms due to the cost of an IPO. Also, can you do fundamental analysis with crypto? Thanks!

Jan 3, 2019
harden4mvp:

How would you reccomend someone break into crypto out of college and do you feel that its limited because the coins do not have to give ownership? I've always thought that the coins could create a volatile market for smaller sized firms due to the cost of an IPO. Also, can you do fundamental analysis with crypto? Thanks!

Regarding my advice, I'd say absolutely just get accustomed to crypto itself. A big mistake I've seen some people I know make is that they just see crypto as something that goes up and down in value on a chart. You need to use it and see how it functions.
**
Prime example which is actually a true story:** A friend of mine is in CRE for 6 years; great portfolio, does wholesale of properties (I'm not personally entirely keen on real estate industry) and in terms of finance the man is a wiz. He heard of blockchain and went head first, but never bothered to learn about what it is, how it works, etc. So he got abducted by the ICO craze (Which I called would tank in value this year), outsourced some devs to make a smart contract for him and they put a backdoor in the code. Smart Contract raises a couple mill for a rehashed 'token real estate utility token' and some months go by. Same devs use the backdoor (Which if he had the knowledge to have the vehicle he was raising funds on analyzed, would have been easily spot), drain the contract of the funds, run away with all the money, and go rogue, they literally haven't been found.

I think my best advice is keep learning; and everything about blockchain/crypto, not just the basics. You'll maintain an edge. The second you realize crypto is the first time assets can physically move from exchange to exchange, or from pool to pool, or from one possession to another, you realize the insane amount of opportunity. I don't care, nor look at Bitcoin price and if it keeps tanking, for me personally, I'm unaffected.

To give ownership via tokens is undiscovered. Try to research Tokenized/Digitized Securities. They derive all of blockchain's efficiency (Like immutable ownership, dividend issuance via 'stable coins', etc) and get rid of the volatile price nature, because for a digitized security the entirety of the value is intrinsic. I think 'utility tokens' the ones that don't offer ownership, are a failed experiment, but that's my thought-process. The blockchain network is great for private offerings, but since you mention IPOs, I think IPOs are still lightyears more efficient for public offerings. Privately though, these blockchain assets are groundbreaking.

And you can definitely do fundamental analysis on crypto, but the question is moreso is it going to work? Example, if the SEC approves a Bitcoin ETF tomorrow, price is going to jump on the news. But the markets are so volatile that jump could result just as easily in a sharp spike downwards. That and the fact that they're entirely digital gives me the most confidence in systematic rather than discretionary (fundamental) methods.

Let me know if you have any more questions, happy to help!

    • 1
Dec 29, 2018

What's the sharpe ratio?

Jan 3, 2019
believeit:

What's the sharpe ratio?

Our sharpe is impressive mainly because we're a quant fund, but lies with two reasons:

1.) Most of the quant strategies we employ are HFT or cross-pool so they're placed upon visualized opportunity then executed via conversion back to fiat. That's in contrast to holding say a crypto asset for 12 months, I think of it like a time bomb, and as long as your back-end is up to date and fixated with the right exit algos, there's very minimized inherent risk other than you not being able to sell the asset because of a 1 in 10000000 chance malfunction in which case you login manually and sell back to fiat (In that case you don't suffer much of any position loss other than fees when actively managing). The position sizes we take also accommodate that potentially very small risk. We employ strategies where the entirety of the position size can only be lost via discretionary trades, not systematic also.

2.) We're a digital asset only fund, so in comparison we can (with discretion) apply benchmarks strictly to crypto. That's what a lot of firms are saying. 'Oh we're down 80% but we have 10% Alpha on Ether!!' So say we calculate our sharpe ratio with reference, as most in the sector are doing, to the most 'risk-free' asset in crypto, the most 'risk-free' asset is red like 40% on the year and the volatility is immense, so a sharpe ratio in that sense basically makes it look like we're unrealistically good in that regard. I guess it depends though, but the unbiasedness is what yields the green in downturns.

The launch is surrounded by about $1M from commitment from those who heard what I was doing and contacted me directly. I haven't approached a single investor yet, they've all come to me, but in the main pitch book for when I do reach out (We're an open-ended fund, I didn't admire a close-ended strategy), the sharpe ratio is adherent to traditional markets. In most cases 'Most risk-free asset' we use in calculation would be T-bills, safe mutuals, etc; our sharpe is definitely indicative that we're riskier than the safest of traditional assets, and I think the technological risk carries some weight as well, but I'm really happy with it. That's what I wanted to ensure when forming the fund/underlying strategies which is that the risk we took on weighted more to the side of technical error. Not sure if that made complete sense (Typing on mobile), but happy to continue the convo via PM!

Dec 29, 2018

Sharpe ratio is usually taken with respect to the risk free rate, not a benchmark. Did you have any down months over the past year? If it's a true high sharpe ratio HFT strategy, it shouldnt have any down months (or ideally, no down weeks).

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Dec 29, 2018

Have you started raising assets, or have investors lined up?
If so, what are the main challenges , and what does your typical investor look like right now ? (In terms of contribution, investment experience, net worth etc)

Jan 3, 2019
ralph64:

Have you started raising assets, or have investors lined up?
If so, what are the main challenges , and what does your typical investor look like right now ? (In terms of contribution, investment experience, net worth etc)

Finding investors was actually a lot easier for me than I thought. I have not pitched to a single investor, yet I have over $1M in commitment. I've never raised capital before, either. I think a lot of capital raising when you have limited experience is based on uniqueness. Experienced investors aren't going to give a long-short equities fund $1M off the bat to someone with limited experience, at least in my opinion. But dabbling in emerging technological processes? I think that's different

Jan 3, 2019
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