Diversification critical to managing counter-party risk
As digital assets investors seek safe harbour, Lin Cheung, JKL Group's CEO talks through the key factors needed to mitigate risk and the outlook for opportunity…
What have been the biggest drivers of growth within your business?
"As a group, we have a broad diversification across business lines - asset management, Bitcoin mining, OTC and Lending - all of which generate strong cash flows allowing us to reinvest into future expansion", said JKL Group CEO Lin Cheung. “Having gone through the crypto winter of 2018-2020, it is clear to us that similar patterns are unfolding this time round. Same as in the previous market cycle, risk-averse mentality and sound liquidity management processes are key in ensuring the perseverance of business in the long run”, added Cheung. JKL Capital’s focus on risk management and volatility trading strategies made the asset manager agnostic to market sell-offs of 2022. JKL Capital’s flagship directional investment strategy leverages the firm’s proprietary quantitative trading system utilising over 200 trend following and mean reversion models. The strategy seeks to maximise risk-adjusted returns with a target volatility of under 20% (vs SPX 18%).
Which are the most significant challenges in the digital assets industry right now and how can they be best mitigated?
The largest risk events of 2022 by magnitude and by impact have been connected to insolvency concerns of some of the largest crypto firms. “Diversification is the most effective way to manage the counterparty risks. From diversification standpoint, we have multiple providers, and we can quickly shift our exposure when necessary – in particular shift our exposure away from risky counterparties”, commented Cheung. “On the other hand, we always engage with all the major participants in the market, as well as regulated entities. Through our resources and through constant qualitative and quantitative monitoring of our counterparties we are able to make well-informed decisions and take immediate action to identify and avoid any potential risks.”
What is your outlook for the expansion and development of this area of investing?
Tokenisation is a rapidly growing trend in the financial industry and is expected to see significant growth in the coming years. According to a report by ReportLinker, the global traditional asset tokenisation market is expected to grow from $1.3 billion in 2020 to $12.4 billion by 2025, driven by the increasing demand for efficient and secure methods of trading and managing traditional assets, as well as the increasing adoption of blockchain technology in the financial industry.
One of the new developments at JKL in 2022 was the incubation of an early stage project LENA Network — the newest Web3 liquidity provider. LENA protocol facilitates decentralised and permissionless borrowing & lending of all NFT collections, while also offering crypto liquidity pools for staking rewards, borrowing, lending, and more. We chose to incubate LENA in-house since we firmly believe that unlocking liquidity sealed in NFTs (think bluechips, lands, GameFi, SoFi, Art, and more) may be a great catalyst for the next bull cycle in the crypto space.
Another hot topic of 2023 with the potential to further revolutionise the industry is AI.
The data research team at JKL has spent over two years on research and development of a proprietary trading strategy leveraging the power of Artificial Intelligence and Big Data methods. The resulting system is capable of recognising potential trading opportunities based on prevailing market conditions and executes trades with adequate risk management. It is also trained to automatically adjust its approach as market dynamic changes over time.
Lin Cheung, CEO and Founding Partner at JKL Group – Prior to starting JKL Group, Lin spent over 15 years working in trading technology and operations at leading financial institutions. He began his career at Morgan Stanley as an equities trading technologist, later moving to JP Morgan. Lin graduated from the University of Hong Kong with a MS and BS in Computer Science.