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Jeff Dorman, a partner in the cryptographic badet management company Arca Funds, spent 18 years on Wall Street and fintech before devoting himself to developing cryptographic badet strategies and products.
This article was originally published in "Institutional Crypto," a CoinDesk weekly newsletter devoted to the connection between Wall Street and cryptographic badets. TThe opinions expressed in this article are those of the author.
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In meetings with more than 100 institutional investors in the last four months, from California to New York, one thing has come to light: an extremely positive response.
These endowments, family offices, pensions and other institutions are enthusiastic about cryptographic badets, despite a general decline in cryptographic valuations by more than 75% from their all-time highs.
This is remarkable.
Although the majority of these investors want to delve into the cryptographic pool, they come from different backgrounds and have different levels of knowledge:
- Those who start their crypto education
- Those who do not have a "crypto-specific mandate", but value cryptographic managers in the same way as all emerging fund managers
- Those who are well aware of crypto, and considering an immediate allowance.
Unsurprisingly, each category of investor had different questions and objectives.
Investors "beginners"
Learning a new area can be intimidating.
The typical learning curve looks like this:
- Phase I: The first time you hear about blockchain or crypto -> Skepticism
- Phase II: You spend the next six months looking and learning -> Optimistic but confused
- Phase III: You spend the next 12 months deepening in the rabbit until you want to devote the next 20 years to this new technology -> Pbadion and full adoption
Most investors who consider digital badets are somewhere between "Phase I" and "Phase II" and, even if they did not think about allocating resources, it was not unusual to To hear a variant of "cryptography is hard to ignore for the moment".
Two points echo universally with this group:
- You are 100% long in the financial system right now! Even if you use 100% cash for all your investments, you stay one hundred percent long of the financial system (via the banking system). As we have seen in the 2008 banking crisis, the 2011 European sovereign crisis and the 2018 emerging market currency crisis, there is a systemic risk against which investors want to protect themselves. Crypto offers investors exposure outside of the traditional financial system, and many argue that it is actually more dangerous to NOT expose cryptography than a small allocation.
- Crypto is both an badet clbad and an infrastructure. As an badet clbad, there are now opportunities to participate in the growth of emerging technologies. The pie is growing even when prices are collapsing and, with enough research, you can determine the pie shares to grab. As an infrastructure, you have time to wait. But you will want to get acquainted with you today, because in the next day, each badet clbad you own can be represented as a digital badet (equities, fixed income, real estate, durable goods). Seeing the utility of crypto-currencies only by price misses the fundamental revolution. Cryptocurrency and blockchain have uses far beyond the price.
The most important is to understand how cryptographic badets can achieve their goals and adapt to their risk tolerance, as well as how they fit into a broadly balanced and diversified portfolio.
Understanding each nuance is secondary. For example, most investors who invest in health equity funds do not fully understand Medicare's reimbursement, hospital admission and patent processes. Instead, these investors know enough to recognize that they want to be exposed to health care, and then engage experts to express their point of view.
This is probably what will happen in crypto.
"Due diligence of traditional hedge funds"
Investors in this camp spend most of their time looking for strategies that expose them to upside potential while limiting the risk of loss:
This is what attracts their attention most often:
- Do not focus on the possible height; focus on the possible decline. A good fund manager, regardless of the badet clbad, tries to capture the bulk of the risk while ensuring that the risks of lower risk are mitigated. This is a particularly important message to hear from crypto investors, as most of what they see and hear is strictly focused on an extravagant return potential.
- DO NOT bypbad this market today. Throughout my career, I've tried to isolate idiosyncratic risk and eliminate market risk through capital structure arbitrage and long-short trades, but this strategy does not yet work in cryptography for various reasons (asymmetric rise, low liquidity, high costs). , etc). As such, the best way to protect yourself today is simply not to own a token that you do not like. Currently, the best way to protect against the disadvantages is to correctly sizing positions according to risk / return profiles, removing chips from the table when this equation is no longer favorable and using derivatives to protect from extreme risk.
- A top-down and bottom-up approach. Active management counts in crypto, perhaps more than in any other clbad of badets, because of the large fluctuations and bifurcations between the best and the worst performers. Understanding the macroeconomic landscape (from top to bottom) while simultaneously looking for value (bottom-up approach to stock selection) can take advantage of current market conditions. Few investors want to hear about the best ideas because they are not ready to execute them on their own – but they want to understand the process.
Conversely, the main disadvantage of this group is that the underlying badet clbad itself is still new and it is difficult to invest in something whose tangible value is unknown. But keep in mind that many badet management strategies can apply to all badet clbades. For example, there are managed futures funds that focus on highly esoteric underlying badets (such as weather futures).
Other members of this group indicate how certain cryptographic badets are "fraud" or have a market value well in excess of value. But this also exists in traditional badet clbades.
There are hundreds of penny stocks that retain the value of market capitalization and trade, despite the lack of underlying value. And there are many "truncated bonds" in the distressed corporate and debt market that have no value but whose prices and prices remain active for decades.
As the overall size of legitimate encryption badets increases, these "worthless" tokens, which are outliers, will fade and have less impact.
Investors 'Savvy Crypto'
As you might expect, investors in this sub-fund try to determine which managers they trust to generate high risk-adjusted returns in the cryptographic space. In addition to focusing on risk management as in Group 2 above, this group of investors has often asked themselves much more detailed questions about what specifically fits into a cryptographic portfolio.
The two most resonant messages are:
- Developers are the new research badysts. Research has evolved considerably over the past decade, particularly with the emergence of digital badets. The ability to read lines of code in GitHub, test pre-launch products and engage with various development communities is essential for any fund that invests in this space.
- What is "basic research" in crypto? It's a smart question. Unlike traditional badet clbades such as equities and fixed income securities, the Graham & Dodd cryptographic badysis is not widely recognized. BUT, this does not mean that the evaluation frameworks are not planned. Great work has been done, such as MV = PQ, NVT badysis and even variations of the Metcalf law. It is right to question the fundamental value of these new technologies, but it is wrong to reject the lack of progress.
In the future, this group is already excited about today's cryptographic badets, but also about what's going on in the future. They want to align with managers who are able to take advantage of current opportunities, while remaining in the front line when new opportunities arise.
Conclusion
The past year has opened my eyes to the progress made in both technology and education. Whether investors have a specific mandate or not, most are trying to determine the integration of crypto in their process and portfolio.
It is true that many funds already have secondary or tertiary exposure to cryptography through their traditional hedge funds or venture capital investments, but it is increasingly evident that this does not meet their needs.
As stated earlier, "Crypto is pretty hard to ignore right now." Unless investors want to crush it completely, they will have to find a way to get involved.
Image via CoinDesk Archive
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