Crypto uncertainty prompts unorthodox fund strategies
By Conner Guidry – As interest in the markets for crypto currencies and digital assets continues to grow, some hedge funds and members of the buy side are venturing into this rapidly changing ecosystem. Black Square Capital, a Washington DC hedge fund investing exclusively in the crypto space, believes crypto investment strategies must adopt an element of creativity to stay competitive and remain safe from extreme volatility that has affected the industry in recent years.
According to Black Square portfolio manager Chris Yoo: “As of now, there is no right way to invest in the crypto space. There must be a certain element of creativity because most crypto projects don’t have simple cash flows.”
Maxim Nurov, a former banking lawyer and current fund manager, started Black Square in early 2018, after witnessing the growth of crypto assets over the past few years. Yoo joined the team soon after, having previously worked in Fixed Income at JP Morgan. Nurov says: “There is huge potential for digital assets because they an efficiently diversify traditional investment portfolios.” Both Yoo and Nurov are highly confident in the future for these assets, but they believe in using a slightly unorthodox approach towards investing.
In regards to crypto strategies, the fund uses a multi-faceted investment approach when looking at digital assets they plan on investing in. “We use a three layered investment strategy that balances quantitative and value investing,” says Yoo.
When analysing crypto currencies, Black Square looks at assets with underlying technologies and solid infrastructure. Through Initial Coin Offerings, the fund can invest in crypto tokens backed by specific technology and tangible systems, but currently focuses on the liquid market. These instruments have been extremely popular in recent years; however, they do contain a high element of risk.
Yoo says: “We take a venture capitalist perspective. We look at the teams, the product, and what type of problem it is trying to solve. We have internal benchmarks and if the asset passes that benchmark, we proceed with a fundamental analysis.” Yoo claims the process is very complex and intricate. “We look at the underlying economic model for crypto projects and how they will create value in our analysis. If the price today is lower than our projected level, then we take an active investment approach.”
When asked about the shortcomings of the crypto industry and the previous market crash, the two say by actively investing in particular assets on a basis of importance and sustainability, the fund could weather market volatility with minimal losses.
“A lot of funds in the crypto space are very passive which was a good strategy at the time, but after the crash most funds lost up to 80% of their total gains,” they comment.
In regards to liquidity, Nurov says that by investing in assets with a considerably high market cap, the fund can mitigate liquidity issues, and be better protected from pump and dump schemes that have recently affected the market: “When investing, we only look for liquid assets with enough volume that the market price cannot be easily manipulated like some of the new initial coin offerings that are extremely volatile.”
Despite negative sentiment from several executives in financial services, the two are extremely confident in the digital asset landscape because of its high potential. Nurov remarks: “There is no evidence to suggest digital assets are correlated with the risk of equity markets because investors are buying into the infrastructure and applications of the underlying systems in these tokens.”
Yoo believes that the market also has huge potential benefits for amateur investors: “A lot of investments like these were always restricted to larger players, but now some of the assets our fund is looking at are available to the average Joe. Through initial coin offerings, everyone can have access to these newer and broader investments.”
Black Square is launching at the end of August and hopes to have USD100 million in AUM by December.
While regulation is still limited in the crypto space and few institutional investors have entered the market, there has been substantial growth in market capitalisation for the industries top valued assets. Nurov believes that once the market has some sense of regulatory clarity, larger players will participate and the industry will grow exponentially.