Aaron Niu, Quantitative Trader at Grandline, a systematic multi-strategy hedge fund trading mid-frequency statistical arbitrage models on major cryptocurrencies and their derivatives, outlines some of the biggest challenges and opportunities facing emerging managers in the digital assets space…
HW: What are some of the biggest challenges your firm is facing in the current environment, and how are you overcoming them?
AN: While we provide investors with the unique advantages of the crypto market, while ensuring a harmonised risk-reward balance, our biggest challenge is the deeply ingrained perception of systematic risks in the cryptocurrency market among traditional finance (TradeFi) investors. Their apprehensions are rooted in the volatile nature of cryptocurrencies, the potential instability of centralised exchanges, and the shadow of regulatory uncertainties.
We continue to focus on investment research and the optimisation of our infrastructure- this year, we have strategically allocated more of our portfolio towards high-Sharpe, market-neutral strategies. This includes approaches like basis arbitrage, statistical arbitrage, and options market making, which have historically demonstrated resilience during volatile market phases.
We’ve been collaborating with our prime brokers and custodians to craft solutions that further mitigate counterparty risk. A venture in this direction is our exploration of a tri-party custodial setup involving Binance and a distinguished bank.
Moreover, we have re-evaluated our operational setup, we’re taking steps to establish offshore trading entities beyond US jurisdiction, to navigate potential regulatory shifts.
HW: What three key pieces of advice do you have for emerging hedge fund managers seeking to differentiate themselves in a crowded market?
AN: 1. Embrace adaptability: In an ever-evolving market, it’s imperative to remain open and independent-minded. Swiftly adapt to new knowledge and technologies, ensuring you’re always at the forefront of change.
2. Prioritise risk management: While risk control is crucial across all markets, its significance is magnified in the volatile crypto sector. It’s essential not to overlook this aspect, regardless of your investment strategy.
3. Dedication to research and alpha improvement: Continuously refine and enhance your alpha. Remember that capital allocation from investors can shift rapidly. Only by proving consistent value can you retain and grow your investor base.
HW: With increased competition for talent, how are you attracting and retaining the best experts at your firm?
AN: Our strength lies in cultivating a collaborative and supportive atmosphere. Through flexibility in roles and tasks, we guarantee that our team remains highly productive, dedicating themselves to their responsibilities. We have also crafted our compensation packages to incorporate various performance-driven incentives.
Additionally,we rally our team behind common goals, championing a proactive and problem-solving approach. This shared sense of direction bolsters individual commitment to the success of the entire organisation.
And when it comes to hiring,while we value specialized skills, we never confine our search to just that. We appreciate the multifaceted nature of talent, particularly emphasising soft skills…
HW: Are you leveraging technology to increase efficiency and reduce costs in your firm’s operations? How have you been putting this into effect?
AN: Since our October 2018 inception, we have navigated the complications of executing various strategies across a wide array of investor accounts and exchanges. To manage this, we have committed to harnessing state-of-the-art technology to enhance our operational processes.
An example of our tech-centric approach is our early adoption of Kubernetes, an efficient cluster management system.
We have also pivoted to a centralised low-latency data system to manage data collection from a myriad of exchanges and service providers. This strategy enables a holistic data collection, aggregation, and dispersion process, allowing our team to focus on refining trading logic rather than wrestling with exchange-specific deployment configurations.
HW: How are hedge funds managing liquidity risk, and what steps are they taking to ensure they can meet redemption requests?
AN: At the heart of managing liquidity risk is trust. We emphasise consistent and transparent communication with our investors. Depending on individual portfolio circumstances and specific agreements, we aim to fulfil redemption requests within a stipulated timeframe, which can sometimes be as short as a few days. We also prioritise prudent Money Management. And to ensure liquidity, a significant portion of our portfolio is dedicated to liquid and low-risk strategies, such as basis-arbitrage. This ensures that when an investor either redeems or subscribes, we can swiftly adjust positions without adversely affecting the overall performance.
We maintain a vigilant stance, continuously monitoring for systematic risks. Leveraging a range of metrics, our goal is to pre-emptively identify potential challenges, be it issues with exchanges or unforeseen black swan events like those witnessed in 2022. In response to such situations, we’ve established automated processes to efficiently handle fund conversions and transfers.
Aaron Niu, Quantitative Trader, GrandLine – Prior to joining Grandline, Aaron was a quant manager at Blackstone’s private equity company, lecturer at Columbia University, and head trader for a Defi AMM protocol.
