It has certainly been quite a while since we were last bombarded by a series of funds all running a similar ‘emerging’ strategy. Cryptos ‘Multi-Strategy’ is suddenly all the rave as we see funds mushrooming across the globe from Jersey to Singapore and then back to Zug, prompting even HFR to launch new strategy indices for the first time in quite a while. Given the prevailing hyper volatility of the space, the pitch was certainly an attractive one. From the basic directional punts to cross-market arbs, from cryptos RV trades to classic cash/futures spreads, low hanging fruits are just seemingly everywhere. Throwing in some ICOs and VC deals, we are definitely in a hedgies lala land like never before.
But just before you quit your day job and jump on the bandwagon, some inconvenient truth has to be told if indeed not yet been revealed. First and foremost, we are not here to disprove the value of Bitcoin and what not. While it is probably indeed something created out of nothing, hedgies are known to be trading anything from bananas to pork belly anyways, so long as there is a way to make money out of it. The challenge here for most, in our humble opinion, is the by definition not so matured eco system built around the trading of it. Before you jump on to say that is exactly what hedgies are being fed off, let’s come clean with the fact that Bitcoin is probably the only crypto with a ‘sensible’ custodian/settlement system and most of the exchanges out there do run the risk of being closed down or forced a substantial haircut overnight without any prior warnings.
With that backdrop, any promise of shorting facilities are at best at a ‘best effort’ basis, making true arb trades difficult if not impossible to execute. Liquidity and capacity, two other favourite risk measurements of ours, are also not helping. A rather seasoned trader in the commodity space reckon the actual capacity of a truly market neutral arb fund in the space may not be more than 10 bucks and this nowadays won’t even fill the boot of a small time family office in Asia. Yep, the newly launched CBOE/CME futures may help in the long run, but so far it is still predominantly a one-sided trade with limited liquidity.
While certainly a brilliant strategy on paper, the reality is that Cryptos is nothing more than a good old directional punt comparable to buying a lottery ticket for now. If one has the risk appetite to lose it all for a potentially multi-fold payout, do go ahead and grab this ‘opportunity’. Afterall, this trade is still rather asymmetric. For professional investors, it is again one of those things that is too unprofessional not to know anything about yet too early to touch with your fiduciary hat on.
Maybe a gold-coin or diamond substitute for your kids?