Hedge Fund Huddle Podcast

Crypto comes to hedge funds

Episode 2, Season 1

One of the most fascinating areas of hedge funds in recent years is the introduction of cryptocurrencies, digital assets and the intersection with the broader world of decentralized finance (DeFi). But with such a volatile space, how do hedge funds and more specifically crypto hedge funds work in practice, balancing risk and reward? In today's episode, we're chatting with two experts in this space. Ali Hassan is a Founding Partner at Perceptive Capital, a DeFi native digital asset hedge fund, based in New York. Gerrit van Wingerden is the co-founder of Mercury Capital and an advisor and director at TORA, a trading technology company recently acquired by LSEG. Both have been active in the crypto space for years and join us today to talk about their mental models and broad views on the landscape, valuing digital assets as compared to more traditional asset classes, how to evaluate risks and new assets, and how they see things evolving from here.

Host: Jamie McDonald

Note: This episode was recorded before the FTX story broke.

Disclaimer: Institutional investors should not treat this communication as advice or research in relation to securities, crypto assets or investment matters. Nothing contained in this communication constitutes a recommendation, offer or the solicitation of any offer, to buy or sell any securities or crypto assets.

Listen to the podcast

  • Jamie: [00:00:00] Hello everyone, and welcome to another episode of Hedge Fund Huddle. My name is Jamie McDonald and I'm your host for today's episode. Today, we're going to be talking about the world of crypto currencies and hedge fund crypto funds. Now, I'm a little bit nervous about this one myself, and the reason I'm nervous is as a reminder, not to sound egotistical, but I'm talking about myself for a second, I was a long/ short equity hedge fund manager and I was working at SAC for many, many years. But the world of crypto is something that I'm not as familiar with, but fortunately we have a couple of experts with us today. Now, a word we've been using in this series a lot is ‘demystify’. So what we're really trying to do in this series is pull back the curtain of hedge funds and see what's going on in the inside, see how they work, and kind of find out what it's like to be working inside of one. But today, we're also going to find out how to start one. So Ali and Gerrit are our two guests today. I'm very pleased they've managed to join us for this episode. Ali, why don't you go first just to introduce yourself and a brief history about how you how you got into this world.

    Ali: [00:01:03] Sure. Well, thank you very much for inviting me into this podcast, Jamie. My career is not too dissimilar to yours actually. I started my career in very traditional financial markets. I was at Goldman right out of college, and I was the guy who wouldn't shut up about crypto. This was 2013. Once I learned about it from the guy who was sitting next to me, I became enamoured, I became obsessed, couldn't consume enough content, wouldn't shut up at every single dinner, meeting, lunch, then girlfriend, now wife. It became my entire life. I was obsessed. And I got tired of hearing from a lot of people that this was not going anywhere. It's much nonsense. It's not that exciting. It's a Ponzi scheme. So I wrote and published a paper called The Rise of Blockchain. That paper got published in 2016 and it sort of went viral. It was the first thing I did that really caught the attention of a bunch of people. That paper talked about Bitcoin when it was still $800, Ethereum was $8, Litecoin in the pennies, talked about a bunch of different use cases for the asset and how this was becoming an asset class, not just a trading or speculative instrument.

    Ali: [00:01:58] And I presented data on VC firms that were allocating to the space how sophisticated investors were viewing it. That paper garnered enough attention that I was able to raise some capital and launch my first hedge fund, Crescent Crypto Asset Management 2017. Fast forward to today, I'm on a hedge fund called Perceptive Capital. I'm one of the founding partners of this firm. We’re a DeFi focused digital asset, native firm, three partners. One of my buddies from Goldman spent ten years at the firm Taishan. He is a traditional financial markets guru, CFA fixed income portfolio manager, managed a book of almost $10 billion in fixed income products at Goldman. And then we have a crypto guru, Jamis Johnson, who is a DeFi master, one of the top 12 DeFi traders in the world. But we came together and we launched a product that we think is institutionally investable. We have traditional market experience, decentralized financial market experience, hedge fund experience, and we're building some cool stuff to give exposure to those who are looking to explore this new asset class.

    Jamie: [00:02:56] Well, that's great. Thanks, Ali. Well, we're going to dive a lot more into how you started the fund. Gerrit, why don't you tell us a little bit about yourself.

    Gerrit: [00:03:02] Sure. I'm an engineer by training. My first job out of college, much longer ago than 2013, was at Microsoft, where I worked on the original team that built sort of NT, which is now the main Windows operating system. After that, I moved to Japan and joined Lehman Brothers, where I worked on their prop trading desk. I was hired by the head trader to build up a tech team to build sort of alpha generating tech on the trading side. We left to start a hedge fund in 2000. I left with him. I built up a team there to build trading tools for the hedge fund. The hedge fund did not do so well, but the tech survived and was eventually acquired by another hedge fund, which then spun it out into a company called TORA. And TORA was recently acquired by LSEG. I worked at TORA for many, many years. I still remain as an advisor and as a director, and I sort of caught the crypto bug in 2015. And one of the reasons for that was because the clients of TORA were hedge funds and banks that were trading all asset classes, and I was really prohibited from really trading anything. The only thing I could trade was crypto. So in 2015 I started developing my own market making strategies. It was a lot easier those days, as a father of three with a full time job, in his spare time actually developed bots which made money. And so that's sort of how I got into crypto.

    Gerrit: [00:04:31] It was something I could trade. There was the intellectual appeal of writing bots. And then in around 2017, a lot of the people we knew at TORA who were using our Software for TradFi funds were interested in launching crypto funds. And so there was a lot of inbound inquiry. Are you guys going to support crypto? And so we decided to launch a product called Caspian, which is basically a trading platform and portfolio management system for crypto. We launched that product in 2018. And fast forward to today, I recently have decided, the end of last year I stopped working for TORA full time to focus on trading in DeFi and recently am launching a hedge fund that's focused primarily on DeFi. The head traders, one had a career at Goldman. He worked in Goldman as an FX trader. The other head trader has about ten years of options and crypto trading experience at a large hedge fund that used to be a client that is actually still a client of TORA’s, have also brought in a tech team of seven engineers with Web3 and strong solidity and other blockchain coding experience. And we have a couple of DeFi degen's who have been deep in the DeFi space. So we're combining all this together to launch a DeFi fund where really our edge will be sort of a tech piece that we're building to run the fund.

    Jamie: [00:05:56] Got it. Gerrit, thanks very much. And maybe, Ali, I can start with you and I'll just cut straight to the chase. How do you make money in this world and what I mean by that is, as I was saying earlier, I come from an equity long/ short background. So there I was looking at my stocks, whether it's free cash flow, whether it's book value. There was just some metric that I could hang my hat on and do some kind of relative value analysis to go long one stock and go short another. And I do read various theses about how to actually value Bitcoin, to actually come up with a number for like what you think it’s intrinsically worth. But as you sit there today in 2022 Ali, how do you go about even forming a process to value, whether it be the currencies or any other digital asset?

    Ali: [00:06:37] Sure. How do you make money is the golden question and it's easy. Buy low, sell high. In crypto totally different. Buy low sell never. That's what we say. Buy low sell never. The true believers in crypto, the ones that I know that have made the most money in crypto have actually not been the traders. They have not been the portfolio managers that are going in or out and chasing different things. The people have been the most successful have been the ones that have had really strong conviction early on and have held onto that conviction. Today, there are many ways to create value and to assess value in these crypto ecosystems. There's a number of different projects and coins that you can't even compare them to each other. You mentioned Bitcoin. Obviously there's Ethereum and there's plenty of other DeFi assets out there. For Bitcoin specifically, when it comes to relative valuation models, I like to think of it as a network, that is my mental model. And how do you value networks? Well we have comparisons. You can think of Facebook, you can think of WhatsApp, you can think of the entire Internet. The value that is inherent in Facebook is not necessarily in the actual technology of Facebook, one could argue. At the end of it, it's a page, you can write a comment, you can send a picture, it doesn't do anything that's truly exciting. But what's exciting about Facebook is the number of connections. I'm a friend of yours. You are a friend of Gerrit's. Gerrit is a friend of his wife.

    Ali: [00:07:49] The number of connections exponentially increases exposure, elevates your voice, allows you to create new and really exciting ways to create value within that platform. That's what Bitcoin is in my mind. It is a network, it is a monetary network. It is the Internet of money, as some have coined it. And as more users come online, these users are accounted for via wallets and we can actually track how many wallets are created. We can track how much Bitcoin is sitting in each one of these wallets. We can track how much is sent back and forth, the volume. The value of this network continues to increase rapidly. The overwhelming majority of humans on Earth still don't know what Bitcoin is. I like to start by explaining Bitcoin because you'd be surprised how many people don't realize how simple it is. If you know what a bank does, you understand what Bitcoin does. A bank sends money. A bank debits and credits every single day, whether it's Goldman, JPMorgan, Morgan Stanley, Wells Fargo, Bank of America. They have one job: debits and credit. Minus $10 Jamie, plus $10 Ali. But they control that ledger and they have final authority of what gets written into that ledger and what gets taken out of that ledger. What Satoshi Nakamoto did, the founder and the creator of Bitcoin, he said, what if I take that authority, that centralized authority that these banks have over this ledger and I decentralize it? I give a copy of that ledger to Ali, I give a copy to Gerrit, I give a copy to Jamie. And now, instead of one central authority controlling how transactions get written into and come out of this ledger, we allow every single person to make those transactions and to write them into that ledger.

    Ali: [00:09:11] No one authority can have control. No one authority can set the rules. And then, like I said, the network effects take over. The benefits of decentralizing that are massive. Anything from you don't have to worry about banking hours, bank holidays. You don't have to worry about settlement cycles. You don't have to worry about geographical dispersion. The rules for how we historically moved money almost immediately went out the window and we create a new paradigm. This network continues to grow. People have tried to assign value models that have been challenged in the past. Stock to flow is one that I think you were mentioning. Stock to flow is a valuation methodology that assesses the circulating supply of Bitcoin relative to the hard cap of the 21 million Bitcoins and looks at the inflation schedule of Bitcoin and comes up with a proposed value of that Bitcoin at timelines into the future. Others have looked at Bitcoin and said M2 monetary supply versus Bitcoin, US monetary supply, above ground gold supply. All of these things are just paradigms on how you can try to create value or assess value, but they're all new and a lot of them are broken and a lot of them get challenged every day. At the end of the day, it's a totally new technology which most people don't understand, let alone know how to value.

    Jamie: [00:10:19] So people use the gold analogy. You don't see that as a viable analogy in terms of trying to come up with a value for Bitcoin?

    Ali: [00:10:24] I actually don't like it. You know why? Because we keep finding more gold every day. We keep finding new stores and new supplies of gold. We talk about Bitcoin has a hard cap of 21 million. Technology keeps getting better. We're actually creating and finding new areas, new pockets of gold so the overall supply is expanding on gold. It's not expanding on Bitcoin. So it's not a perfect corollary.

    Jamie: [00:10:45] And Gerrit, I want to come to you in a second, But Ali, you raised a couple of things I wanted to ask about. Firstly, if crypto is the true buy and hold asset out there, why the need for a hedge fund then? Why the need to short or even trade? That's question one. And the question two is, again, I'm not an expert in this world, but when people think of central bank digital currencies and the sort of positives that they can bring, what does Bitcoin do so much better that, a central bank digital dollar, for example, can't do?

    Ali: [00:11:11] Sure. Let's tackle the first one, because I think it's a little bit easier. Why the need for a hedge fund? It's the historical question of passive versus active management. My first one that I launched actually was a passive vehicle, and it did tremendously well when all you needed to do was buy Bitcoin and ETH and give people access to buy these things that they didn't have access to and hold on to it. We did tremendously well. It's a new paradigm now. We're in a different world where there are vehicles out there where you can just get that passive exposure. You can buy GBTC in your IRA or in your brokerage account. You can have your exposure to Bitcoin, you can have your exposure to ETH. There is a long tail of new assets specifically in the DeFi world. The same way historically it was difficult to access Bitcoin and Ethereum and early adopters had to do it through hedge funds. Today you cannot easily access and not get tricked and not fall for a lot of these value traps and Ponzi schemes outside of actively being in the space and reading and really living your life into it or hiring a manager that's going to charge you 2 and 20 to do it on your behalf. So that's why you might want to have, not everyone should have the active exposure. A lot of people are comfortable and should just at least have the Bitcoin and ETH exposure. But if you're looking for beyond that, if you're looking to augment your portfolio, you're either going to have to do it yourself and dedicate a lot of time or you're going to have to hire someone to do it on your behalf. That's where the hedge funds come in. Central bank digital currencies are, I don't want to start off too hot but.

    Ali: [00:12:28] It's a total sham. The whole purpose for Bitcoin and some of these other decentralized currencies is to decentralize the control of the ledger, not allow one party to manipulate, to censure, to control these assets. It's to take back control by the users, by the people actually using the value of this network to take all the good parts of it, like all the efficiencies we've created and then give them back to a central bank and have them have full and complete authority over every single transaction you do, view everything you've ever spent money on, every money that's ever come in, decide how you should spend your money, who should spending your money with. It's a step backwards. It does obviously sound like a government's, a taxing authority’s greatest issue in the world is to have this control. But it's the antithesis of the global hard cap supply. These central banks are going to do the same thing they've always done. They're going to issue new debt, artificially create new units of whatever this currency, whether it's centralized or decentralized. You can't do that with Bitcoin. I would argue that as soon as a politician has, as the winds sway, they will choose to break all the things that we find valuable in these decentralized cryptocurrencies.

    Jamie: [00:13:32] Thank you very much. Moving on to you, Gerrit, if you could tell us a little bit about, I think the funds you're launching. I think you said it would be a market mutual fund, but right now, what's your approach to the world of crypto and how you feel about valuing assets?

    Gerrit: [00:13:44] Right. So we are not taking directional bets on particular tokens. You know, I think there probably is demand from some of our LPs for a higher octane fund that would have more volatility and more upside as well as more potential downside. And I agree with Ali that you can't apply a lot of traditional methodologies from TradFi like discounted future cash flows when you're valuing tokens. And I think the network effects are very important. If we were to take directional bets, I think we would sort of leverage two things. A number of guys on the team have very strong connections to DeFi. They know sort of the people behind the projects. We would speak to the teams, understand who's behind the team, and we could also understand the tech and the actual sort of code, the smart contracts which are behind the tokens that are being launched in DeFi. That's the approach we would take, but we're not doing that now. We're focusing largely on yield farming. So you can have basically two types of assets that are generally fungible, like one stablecoin versus the other stablecoin and people who are launching a new stablecoin, for example, they want to encourage people to provide liquidity for that stablecoin. So if I'm launching a new stablecoin, stablecoin X, and I want to allow people to buy that stablecoin in DeFi there are sort of decentralized exchanges.

    Gerrit: [00:15:07] So if you take the Bitcoin analogy of sort of a decentralized ledger, in DeFi you have this concept of smart contracts which are code which are also decentralized, and once the code is written and out there, it can't be changed, right? There's no one single point of trust that's running the code. So in this code you can build things like lending protocols where you can deposit one token and borrow another token against that, or exchanges where you can swap one token for another token. So this is sort of what DeFi looks like and there are exchanges in DeFi called decentralized exchanges where you can swap one stablecoin for another. And the people that are  launching new stablecoins or other new tokens are incentivizing liquidity providers to effectively provide their stablecoin into that pool and be willing to swap it or swap that stablecoin for other stablecoins in the pool. And they provide incentives and those incentives go to people who are providing liquidity. And so that's what's yield farming. Now there's a whole nascent field of decentralized derivatives markets and there's funding rate arbitrages that can be run against those as well. So the funding rate for a particular derivative on one decentralized exchange may be different than one in a centralized exchange. And you can arb that in a market neutral way. So these are the areas which we're focusing on initially.

    Jamie: [00:16:27] Ok. When I was just trading equities and I was wanting to short something, I would just, I guess, call a prime broker or someone in our operations and ask what the borrower was, find out what kind of interest rate there was on that borrow and then put the position on it. But how does it work exactly, shorting in crypto world?

    Ali: [00:16:44] It's very similar Jamie. There's two paths you can take. Path number one, you can go the centralized way and it all depends on your level of sophistication, the infrastructure your fund has. The centralized way is you call up a OTC desk or a centralized exchange and you say, hey, I want to borrow some of coin A. They can source you the borrow and you get a couple of quotes. And the term, decide on a term and you can take your borrow and then you can do whatever it is that you want to do with it. You can sell it and you're short. The other way that's slightly more unique and new to the crypto market is you can access what Gerrit said, these decentralized markets. There are decentralized finance platforms of a compound maker that will allow you to borrow coins. Where are they getting these borrow? If I own a coin, I can go deposit it into these platforms and they'll give me an interest rate. That interest rate is paid for by the borrowers. How the interest rate is set is supply and demand depending on the utilization ratio.

    Ali: [00:17:34] So if there's 100 coins in this platform and there's only demand to borrow 30 of those coins, well, the interest rate might not be that high because there's a 30% utilization rate. If all of a sudden 90 of the coins get borrowed while the interest rate gets higher, it's an incentive for new users to come in and deposit more of those coins. The risk being you're almost always open to a variable rate term in these decentralized markets. Some have allowed to solve for it with more fixed term products. But the overwhelming majority is variable rate terms. They're decided in real time via funding rates that can move for or against you. But you never need to worry. There's almost always a borrow if you're willing to pay for it. The market is efficient in that matter, in that if you want to borrow something, you can pay. You can pay sometimes up to 1000, 10,000% to borrow some things, and sometimes it's almost nothing. You can borrow Bitcoin for very cheap.

    Gerrit: [00:18:21] There's another path as well. If you're borrowing for the sake of shorting and not for some other reason, then the most liquid markets are these perpetual swaps. You’re not actually borrowing an asset, but it allows you to take very high leverage directional bets on pretty much any token that's out there up to 100, 120 times leverage. You can do this on both centralized and decentralized platforms. So that's another way to effectively short without actually borrowing.

    Jamie: [00:18:49] Okay. Thanks very much, both of you. Before I really looked into the returns a crypto hedge fund could make, I guess I hadn't realized that so much of the returns could come from yield farming, lending, staking, some of these some of these other activities. Because when, as I say, I keep referring to the hedge fund I worked at, but really the way we made returns was longs minus your shorts, your genuine return on investment, plus some leverage. So we would be levered two or three times. When you look at your breakdown of returns now, Ali, or maybe even historically, how do you see it changing between the returns you're making from lending, yield farming? Can you use leverage? And how do you use leverage?

    Ali: [00:19:26] Yeah, that's a great question, Jamie. It changes a lot. You asked a question earlier where this applies to why a hedge fund, if you can get a lot of your returns from absolute return on Bitcoin growth or Ethereum growth. And the reason is there are so many unique things you can do with your Bitcoin, Ethereum and other DeFi assets, the yield farming, the liquidity mining, the staking, etc. Those are all additional return profiles that can be augmented on top of the return of whatever these assets are. That's what these funds and funds like mine are really good at. We might be long ETH and you might be long ETH, but our ETH will almost always outperform your ETH because we're doing so many different things with it, not just staking it.

    Ali: [00:20:03] You can own Bitcoin and I can own Bitcoin and I can do very unique and interesting things with that Bitcoin that don't significantly add more risk. Obviously with every unit of return you're expected to have additional risk. That's what we do as a hedge fund. We're evaluating the additional risk metrics and seeing if it makes sense to get this additional return. Historically, off the top of my head, at the peak of DeFi season, you know, some of our yields were ridiculous, like mind-numbing numbers. Certain assets we were holding, while we were long and the asset was appreciating we're earning from liquidity mining incentives. These are incentives that are paid for by venture capitalists, right? So you, Jamie, want to launch a project and you say, hey, like I really need to incentivize people to come use my platform because it's so good and it's going to fix decentralized lending. In order to do that, I need to give them a coupon, I need to augment their returns for depositing. You go and raise money from a16z and all the various venture capitalist firms and you say, I'm going to incentivize people.

    Ali: [00:20:55] Who are these people? Most often it's hedge funds like ours who are mercenary capital, who go in there and use your platform if it's good and it's safe and we've underwritten the risk reward profiles and the smart contracts and we'll capture those incentive mechanisms. Those things can be 300, 500, 600% on top of whatever assets that we're holding. So as a hedge fund, we were holding Bitcoin, we were holding Ethereum and we were holding Aave, we were holding Compound in Uniswap. And our job was not always, how do I trade this, what do I go short against this, how do I generate return that way. It's where do I move this around to? Where can I take this token? At what chain is it most profitable? In which project am I going to deposit in and level of risk? Because the biggest risk in crypto, especially with these DeFi assets was smart, contract risk, getting hacked, getting rugged etc.. So that's why you choose a hedge fund for all those specific complex reasons of additional incremental return.

    Jamie: [00:21:48] Yeah, that's so interesting. And you bring up hacks just now, Ali and at time of recording it's October 2022 and I think September was a record month for hacks. I guess you don't see hacks as necessarily a bad thing. I mean, this is sort of the natural way of things in terms of the maturing of a business, so to speak. So perhaps, Gerrit, you can answer when you read about hacks that happened or the situations that happen with some of these algorithmic stablecoins. How does that make you feel? Clearly it doesn't demotivate you from what you're doing, but do you think the markets are right to respond in the way they do?

    Gerrit: [00:22:19] Definitely think that hack risk or just the mechanism not working like you would expect it to do is probably one of the largest risks in DeFi. And so the way that, similar to Ali, you have to evaluate the smart contracts. We reach out to the teams, we speak with the teams, you look at who has audited the smart contracts, and then you need to really understand, and let's say it's the case of an algorithmic stablecoin, you really need to understand the stability mechanism. For example, Ali mentioned the NEAR chain, very recently they decided they had a stablecoin on NEAR called USN and the stability mechanism did not work the way it was intended to during a period of high market volatility and it de-pegged and now they're basically shutting down that stablecoin and they're basically coming up with around $40 million to basically make the people who lost money on that hole. So there is obviously the hack which is there's an exploit in the smart contract and a hacker will come in and steal the funds. But there's also the risk that the smart contract worked the way it was coded, but there was some flaw in the actual mechanism.

    Gerrit: [00:23:24] I mean, you could even argue that in the case of the UST on Terra, the yields were unsustainable, but the stability mechanism really didn't work the way it was supposed to. These are all the types of things that we're looking at when we're evaluating where we'll be yield farming. I think the other thing that's very important is being able to get out quickly. And so this is where our tech edge comes in. If you're in a pool and things do start to go south, if you can get out more quickly than anyone else, then you won't be left with a bunch of worthless tokens, which is basically what happens if you're providing liquidity in a pool or you're providing liquidity for this token. And I think there were players in the UST space who did this very well. They had large positions. They were the first ones out, and they escaped relatively unscathed compared to everyone else who ended up with UST, which is now worth a few cents.

    Ali: [00:24:14] Yeah, it's gut wrenching. Every single time I see one of these things and the headlines are typically really large, I mean, the first thing you do is you thank God that you don't have any exposure there. And we've been very fortunate at Perceptive, never had any of these things. Knock on wood, we have a really, really good team with evaluating smart contracts and establishing what the incremental level of risk is for entering into a position. That being said, the contagion risk is something that's really hard to elude. Once UST and Luna was blown up, the entire market really had started to blow up. Every single one of these hacks, every time someone loses money, whether it's a person or an institution or a fund, more and more people get turned off by crypto. So it takes our thesis of crypto and DeFi, solving a problem and making the world more efficient and stretches out the timeline even further. People get turned off. They might not want to look at it. It hurts everyone, so it bothers me. I obviously don't like it. Part of our job as a fund manager is to insulate our investors from that, make sure that we are protecting their assets. We've done a pretty good job of that so far, and we'll continue to do so.

    Jamie: [00:25:13] And Ali, in terms of anyone listening who's a keen crypto investor, are there certain things that you could advise people of what to look for when analyzing a new coin or a new digital asset to try and spot the ones that they think will survive and those that won’t.

    Ali: [00:25:27] Yeah, most of these things are pretty well common known stuff in the crypto industry, but perhaps the podcast listeners, they might find this interesting. Anonymous founders have historically been a big no no. Historically. Every once in a while you'll see a really cool anonymous project. But for everyone that works, there's 100 that were a complete scam.

    Jamie: [00:25:46] So research the founders?

    Ali: [00:25:48] Yeah. And more research than just look them up or just skim through their LinkedIn. People are getting really, really good at creating artificial personas and using AI to generate images and create an entire online persona that doesn't exist. Anonymous founders tend to run away with money. That's like a very common thread in the crypto space, so be careful of that. Also, be careful of projects that are creating problems in order to solve. There are plenty of times where traditional centralized, not decentralized financial markets, FinTech companies are solving problems and they're solving them very efficiently. And we might not need a decentralized tool to fix it. If someone is promising to fix a problem that doesn't inherently make sense that we know that there are already good and perfectly usable solutions for, it's most likely a money grab. Finally, the token itself. Just because a project makes sense and you like the founder and everything seems interesting, shy away from projects where the token doesn't have any true inherent value within the ecosystem. This is very common and this is a trap that a lot of my friends reach out to me on: hey, look at this really interesting entrepreneur, look this is such a cool problem. It makes all the sense in the world. He's solving it. And then I ask, well, how is the token going to make money? What are the tokenomics? What are the revenue streams that will be attributed to you as an investor in this project? And oftentimes that's where people get stumped. So careful of anonymous founders. Be careful of projects that don't need to exist and then be careful projects that do need to exist, but don't spit out any value to the actual investors where the value gets accrued to a corporation or a founder or some sort of equity insiders.

    Jamie: [00:27:17] Gerrit, any thoughts?

    Gerrit: [00:27:18] I would also add look at who's done the audits for the code. There are some blue chip auditing firms, and you generally want to make sure that any smart contract for a project has been audited by a number of them. So that would be another thing I would add, and I would agree with everything Ali said.

    Jamie: [00:27:34] So a quick question for you guys on fundraising. How do you go about fundraising at the moment? Are there crypto allocators out there? And are they people that you have conversations with?

    Gerrit: [00:27:43] Right now, it's mostly friends and family and professional connections in our network that we're launching with.

    Ali: [00:27:50] We started very similarly, obviously, Jamie, and we had the blessing and the fortune of just being early and surviving. You had asked a question that we didn't touch on earlier about leverage. The overwhelming majority of people that have survived since 2017, when I look around at my peers, have been the ones that have shied away from leverage. You're looking at an asset with exponential return profiles. You kind of have to be a maniac to introduce leverage, let alone significant leverage with other people's funds on top of these return profiles. Those who have survived tend to have pretty good track records. Investors are attracted to long track records. You kind of just have to be in the space for long enough and the assets did what they did. So stay away from leverage. Have a good track record. We started off obviously with friends and family. It's grown since. There are significant number of allocators, fund of funds, even specific crypto fund of funds that have injected capital into us. We've spoken to traditional hedge funds, really large traditional hedge funds that want to put on a specific trade or we have access to certain things that they might not have. So they have invested in our fund as well. Anyone who's looking for returns, we have two funds, right? We have a long directional fund that is long biased and looking to get exposure over a long horizon. And the goal of that fund is to ten exit. And then we have a market neutral fund that does something very similar to what Gerrit does, is looking to generate incremental yields 1 to 2% per month every single month, protect principal and give exposure in a non-directional way for those who are looking for crypto exposure but it's not in their mandate to take on when they can't stomach the volatility of an asset like that.

    Jamie: [00:29:19] And are you comfortable saying what the fee structure is there and are these funds open right now?

    Ali: [00:29:24] Yeah, these funds are open. We can't advertise them publicly, obviously. Yeah, most investors pay 2 and 20. We structured it very, very standard right down the line and that's about as much as I can say about the funds in a in a public manner.

    Gerrit: [00:29:36] Yeah. I've looked at a lot of pitch decks and 2 in 20 seems pretty much standard in the space.

    Ali: [00:29:41] In 2017, when I launched my first fund, there were decks going around of people charging 3 and 30, 4 and 40. And people were raising money. You couldn't access some of these things. You just couldn't. There's no way you could do it. Today, access has been commoditized. You can download a Coinbase app on your phone and you can do a lot of things. But back then, those who wanted exposure, especially with someone who had any decent track record, they were willing to pay really ridiculous fees. Today it's pretty standard, traditional, long short model of 2 and 20.

    Jamie: [00:30:09] So I just want to take a step back out of macro, if I can, and look at it within the context of the other asset classes because I'm interested in your view about how cryptocurrencies, particularly Bitcoin, trades versus real estate and fixed income and the other asset classes, because now we've been seeing high yields. The US Treasury is making new highs. Bitcoin and cryptocurrencies are getting more bucketed as risk assets and therefore less attractive considering where yields are today. So if you could just talk a little bit about how you see crypto in the context of the other asset classes, particularly as people are looking to diverge their portfolios and put more of allocation into crypto?

    Gerrit: [00:30:49] There's been much more correlation between digital assets and other assets in recent years or in recent months than historically. Your point about Treasury yields, for us, I think launching a market neutral, less risky yield farming fund. One of the biggest competitors to our fund is Treasuries, right? Because if people just want to get very low risk yields and with one year Treasury yields, I think around 4 or 5%. That's a competitor for funding for us right now. I don't really have a very strong view going forward how crypto is going to trade relative to other assets. Our focus is really just trying to get yield in a safe way, out of DeFi rather than taking any sort of directional view relative to other assets.

    Ali: [00:31:37] So we do a lot of directional view, Jamie. And for a very long time when I told you I was that obsessed guy in 2017 who wouldn't shut up about crypto, I was telling the whole world about how inflation is coming, inflation is coming in. Bitcoin is going to be our savior. This is the opt out button, the global opt out button for global currency debasement. Every single central bank in the world is in a race to debase their assets faster. And for the first time in the history of humans, we have an opt out. You don't have to participate. I took it on the chin because here we are, finally what I was saying is true, but not how it actually played out. Bitcoin is viewed as a risk asset. Like all other assets, it took a huge tumble. I'm not ready to concede that I was 100% wrong, maybe wrong on the timing, which in the fund world is just as bad as being wrong directionally. We're not going to debate the merits of should Bitcoin be traded as a risk asset or not. I still believe that at a certain point we're going to wake up to the notion that in a rising rate environment, in a world where the world economy is in turmoil and is collapsing, we should theoretically see Bitcoin outperform. You kind of saw an inkling of that during the COVID days.

    Ali: [00:32:41] Bitcoin was one of the first things to get crushed as soon as the pandemic was happening. But as soon as we started to hear murmurs of a vaccine, as soon as we started to hear things just slightly, the notion of possibly getting better, Bitcoin led the market out and it was the leader before all tech stocks, before everything. I think the same is going to happen here. It's hard to fight famine, war, semiconductors. It's hard to fight everything bad happening at the same time. But as soon as we see an inkling of potential reprieve from all this, I think Bitcoin specifically will be the leader out. So we're trying to make sure we have our laddered orders out there. We're legging into positions trying to scalp the positions that we really like to buy them low, turning around them a little bit and building a position because once it comes back, it comes back very aggressively. It comes back extremely aggressively and people get caught on the wrong side of it. The worst thing you can do is miss the upside because you're afraid of an additional 20, 25, 30% downside. I know that might seem crazy to you and people in the traditional financial markets, but these assets can whip around way more aggressively. We're thinking 10 x 20 x multiples from where it is today. So we're not so shy of another 20, 30% downside risk here.

    Jamie: [00:33:48] And last question, really, I like to think of ourselves at the Hedge Fund Huddle as a holistic podcast. When I was a fund manager, I predominately traded the US market, so I was 9.30 till 4. Now, the trouble with you guys is you're pretty much 24/7. So in terms of a work life balance, are you able to just step away or are you kind of just looking at your phones and seeing where prices are all the time? How do you get that balance? Because I'm not an expert, but can you get access to trading Bitcoin every minute of every day?

    Gerrit: [00:34:14] We have a geographically diverse team because who knows when the next de-peg is going to occur in an asset, right? And so we have a team in Europe, Asia and the US and we're all. We're all watching the market a lot of the time, but we can also sleep knowing that there's a member of the team that's sort of on another part of the planet who has their eye on the markets while we're sleeping.

    Ali: [00:34:34] I wish I could do more of that, Jamie. It's been definitely a huge, huge issue. I have wife, we have two kids and my kids are very small. I have an eight month old and a three year old. And no matter what, it's just so hard to step away because it's a 24/7 cycle. It's not that I'm necessarily trading 24/7. Things are happening. People are sending me articles, things are launching, places are moving, and it's hard to step away even when on your vacation, even when you're doing anything. It takes a conscious effort to try to unplug, rely on your team. Gerrit said it perfectly - having a team that you can rely on, having a team that you're comfortable with, that can carry the load with you is extremely important because there's no way you can stay in this space for five years like I have now without relying on others. It's an obsessive, scary, volatile asset class. And if you don't have the stomach for it and if you can't unwind and de-peg from the daily need, the desire to constantly refresh your feed and see where the prices are, you can get caught in a really bad downward spiral.

    Jamie: [00:35:35] But it's an exciting world and that's why people should invest with you guys so they don't have to watch the markets and they can let you do it. So guys, just before we go, what's the best way if people want to learn more about you or your funds, what's the best way for them to get in touch with you?

    Ali: [00:35:48] For me, @alicryptonite, that's my Twitter handle, Ali Hassan on LinkedIn and Ali@perceptive.captial. I'm fairly active on Twitter, so if you send me a message on Twitter, I'll most likely respond.

    Gerrit: [00:36:03] Yeah, for me. Gerrit van Wingerden @ LinkedIn or Gerrit@mercury.capital.

    Jamie: [00:36:08] Guys, I can't tell you how much I've learned from just this podcast, and I really hope we can continue the conversation. So good luck with everything and thank you so much for joining us.

    Ali: [00:36:16] Thank you.

    Gerrit: [00:36:17] Jamie. Thank you, Jamie.

    Jamie: [00:36:18] Thanks very much for listening. And if you like what you heard, please give us a follow wherever you get your podcasts. The information contained in this podcast does not constitute a recommendation from any Refinitiv entity to the listener. The views expressed in this podcast are not necessarily those of Refinitiv and Refinitiv is not providing any investments financial, economic, legal, accounting, or tax advice or recommendations in this podcast. Neither Refinitiv nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast and any and all liability therefore, whether direct or indirect, is expressly disclaimed. For further information, visit the show notes of this podcast or refinitiv.com.

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