Over the last year the crypto currency markets have evolved rapidly. Price appreciation along with ever increasing opportunity and interest has brought new types of participants into the market.
In the last half of 2017, a number of new funds were launched, including the CAOF. These new funds were created to capitalize on the opportunities presented by an immature market and to serve as vehicles to help weary investors enter an emerging asset class with high barriers to entry.
With more fragmentation and higher barrier to entries than most asset classes, the value proposition for investing in a fund is an easy case to make.
Every manager, myself included, has different styles, strengths and weaknesses.
Through my experiences in the market and the launch of the CAOF, I have been lucky enough to become peers, collaborators and supporters of some of the finest investors in crypto currency and block chain technology.
In learning about these managers and their approach to the market, I believe four elite sets of strategies have emerged. Below I will discuss these strategies, their barriers to entry and their appeal as an investment.
Due to my network and immersion in the market, I find myself in a unique situation to leverage this knowledge and look forward to sharing details on my plan to do so.
Tactical Trading/Portfolio Management Funds
Tactical trading is the broadest reaching strategy and I would classify the CAOF in this style of fund. Funds may rely on edges gained from allocation models, intuition, information advantage or algorithmic execution to achieve the goal of creating outsized returns for their investors.
Excellent risk management and smart allocations allow these managers to construct flexible, dynamic and well-hedged portfolios. In a world full of traders from non-traditional backgrounds, it is at the helm of funds like these where you will find mangers with the highest level of trading/investment pedigrees. This experience alone serves as one of their barriers to entry.
Sophistication in approach separates managers and the best ones are constantly searching the landscape for new opportunities for their clients. As the asset class of crypto currencies evolves so will the amount of new products being created in the space. Oftentimes, managers who are on the cutting edge of these developments are best poised for long term success.
Venture Capital (VC) Style/ Value Add Seed Investment
In crypto currency markets as in more established assets classes, the earlier an investor gets into an investment the more risk he/she is taking. To compensate for this risk, early stage investment is done at lower valuations and therefore when these investments work out the returns can exceed that of investing at a later stage.
Funds that specialize in early stage investment in block chain technology projects have employed a model long used by more traditional venture capital firms.
By establishing themselves as thought leaders in the crypto currency community, the top managers of this style attract the top entrepreneurs because the value added through expertise and track record can enhance the likelihood of successful projects.
These managers conduct deep business, legal and technical diligence before investment. Due to the amount of time required for this diligence when they allocate, the managers will take large concentrated positions.
Once assets are allocated to a position, they will attempt to leverage their reputations through thought leadership and industry expertise to maximize the value of their investments.
Token Generation Event (TGE) Investment Funds
In the asset class of crypto currency, there are two types of funds that specialize in this early stage investing and have provided fantastic returns for their clients. The aforementioned VC style and TGE investment funds.
TGE is the evolution of the ICO. As regulatory guidance and market trends shift quickly in this young area of the crypto market, the market has been forced to adapt.
These funds are on the cutting edge of this regulatory environment and have the ability due to preeminent legal teams to shift focus to remain compliant quickly.
Like the previously discussed VC style strategy, this strategy also makes investments in early stage projects, but in a more public manner, and usually at the TGE stage.
Many of these managers have larger funds and write fairly substantial checks, which allow them to become involved at quite favorable terms relative to other market participants.
Because they are not offering the time and resource intensive value-added services these funds can invest in a larger number of projects and therefore have a higher opportunity for participating in the most possible projects. This spread out nature of the portfolio increases the chances of participating in the most successful projects in the market.
Arbitrage / Quant Funds
Arbitrage opportunities exist between one exchange and another as order flow, fragmentation and other anomalies can create mispricing for those set up to take advantage of them.
This strategy is essentially a large-scale logistics puzzle. Most managers make sure they have the needed crypto currencies on numerous exchanges worldwide to take advantage of the pricing anomalies as they arise.
Further serving as a barrier to entry is the considerable technology footprint required to conduct these arbs successfully on an institutional scale.
This strategy can produce considerable returns in any market environment and has much less long exposure than any other strategy.
What It All Means
As CIO of Victoria Capital and a student of the crypto market, I am always on the lookout for opportunities for my investors. I am eagerly motivated to educate myself about what the smartest investors in the market are doing.
As I said earlier, due to my network and immersion in the market, I find myself in a unique situation to leverage this knowledge and look forward to sharing details on my plan to do so.