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Putting risk management at the core of digital assets investing

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Alphabeth, a winner of multiple awards at the Hedgeweek Global Digital Assets Awards 2024, is a digital assets-focused hedge fund firm whose proprietary investment models combine on-chain and market data analysis. Operations Director Enmanuel A Rodriguez Davila outlines some of the firm’s current challenges and opportunities and what sets it apart from other digital assets hedge funds… 

Please describe, as a hedge fund, what differentiates Alphabeth from the rest of the options in the market?

Alphabeth excels with strong alignment between participants and managers, heavily invested founding partners, and professionalized operations. Since 2019, we’ve consistently generated “alpha” in both bullish and bearish markets. Our sophisticated quantitative investment systems and proven track record make us a standout choice in the market.

At Alphabeth, we differentiate ourselves by being a fund that originates and grows with the organic incentive of managing the managers’ capital. Founded on a firm belief in the fundamentals of the industry, we also possess a comprehensive understanding of the crypto sector from a global perspective. 

As managers, while we aim to generate alpha and add value, the most optimal way to achieve this is through a risk management that seeks to protect our investors’ capital first and foremost. From this foundation, we generate alpha for our investors. Ultimately, this approach has granted us a competitive edge.

What are three key attributes that distinguish your fund?

First and foremost, Alphabeth’s longevity in the market distinguishes us. According to last year’s PwC report, the vast majority of crypto funds are less than a year old. In contrast, Alphabeth has been operational since 2019, maintaining a verifiable track record that has delivered an alpha over Bitcoin exceeding 1000%. The exceptional aspect of our performance lies in our quantitative and risk management approach, rather than by assuming increased risk. Our strategic methodology emphasizes rigorous data analysis and comprehensive risk mitigation, ensuring consistent performance and stability even amid market volatility. This disciplined approach underscores our dedication to generating superior returns while upholding a conservative risk profile.

Secondly, we are a hedge fund with a unique approach. While we maintain a long-term bullish outlook on this remarkable sector, we recognize the significant risks and volatility inherent in it. Alphabeth allows investors to gain exposure to the industry through an all-weather fund strategy, ensuring exposure only when the mathematical expectation is favourable.

Lastly, our highly qualified team and dedicated client service distinguish us. Our team comprises nine professionals who are fundamental to our success. Combined with a group of investors who play a crucial role in Alphabeth, we offer 24/7 customer service, maintaining a highly exclusive fund. This commitment to excellence and personalised service underscores our competitive advantage.

How has our fund helped our investors navigate the crypto market in recent years?

While the most simplistic goal for anyone entering an investment vehicle might be to make money, our investors seek much more when they choose a professional fund like ours. At Alphabeth, we always put our investors first, with our primary mission being the protection of their capital.

The crypto market is extraordinarily complex and unlike any other, characterized by its high volatility and inherent risks. This complexity makes our transparency and rigorous approach even more critical. We are exceptionally rigorous and transparent in our reporting and communications. Our track record has earned their trust year after year, not only through the returns we’ve achieved but also through the alpha generated by our management. Additionally, we have effectively aligned their positions with our investment thesis.

To further solidify this trust, we implement management policies that strengthen the alignment of incentives between managers and investors. For instance, we only charge the performance fee when the investor has the right to exit, rather than doing so monthly, ensuring a high watermark. This approach underscores our commitment to our investors’ best interests and long-term success.

How would you describe the role your services played in helping your clients navigate the economic landscape of the past 36 months? 

This is an excellent question because it considers the timeframe for most of the awards we proudly accept today. The last three years have not been easy; We have witnessed numerous unprecedented black swan events that have turned all financial markets upside down. our sector was among the hardest hit. Various wars, inflation, the fastest interest rate hikes in history, and the collapse of the banking sector, among other events, were challenges we had to manage.

However, the Alphabeth team successfully implemented our investment strategy, which allowed us to confidently reassure our investors. Despite facing difficult moments and the presence of bad actors in the sector, we have demonstrated antifragility and a commitment to adding value while mitigating risks for our clients. Alphabeth and its strategy focus on generating value in any market environment. We aim to generate returns during bear markets, as even the least qualified can achieve returns in bull markets, at least in the short term. Our steadfast commitment to navigating these tumultuous times has solidified the trust and confidence our investors have in us.

How do you foresee Alphabeth’s performance evolving in the future? And the question everyone asks: what is your prediction for Bitcoin over the next 12-18 months?

At Alphabeth, we focus more on the first question than the second. While we deeply believe in bitcoin, ether, and the crypto sector, and in the long-term bullish thesis, the price of bitcoin is not our main concern over a 12-18 month period. To share an anecdote, in the last six years at Alphabeth, the partners have almost never engaged in formal discussions about price expectations. Our focus is on what we can control, which is improving our investment system to be more efficient in any market environment. We can’t control the price or the variables that affect it, so it makes no sense to waste time and resources making predictions.

In short, to answer your question directly, I believe Alphabeth’s performance will be very positive over the next 18 months, as we always aim to generate alpha through effective risk management.

How have you adapted to the changes in the financial sector, and how do you evolve in such a dynamic environment, particularly with the increasing popularity of ETFs ? Could you share some specific strategies or approaches that you have implemented to stay competitive and relevant in this context?

The crypto sector is the most innovative and rapidly evolving industry. At Alphabeth, we adapt our quantitative system to include new technical, regulatory, liquidity, and institutional dynamics.

For example, we have adjusted our risk management system to better handle volatility. With increased institutional participation, volume and volatility have changed, prompting us to enhance our risk management efficiency. We view the launch of ETFs as excellent news for the sector, providing validation and legitimization for institutional investors. However, while this changes the dynamics, it’s important to remember that ETFs are passive management vehicles. In contrast, Alphabeth employs active management, working to mitigate market risks. This active approach allows us to generate even more alpha compared to these investment products, which historically have shown a discount or lower performance relative to their underlying assets over the long term.

Any interested person can see this reflected in our strategies by looking at our graph against Bitcoin on www.alphabethcapital.com.

How do you see Alphabeth evolving in the future? Also, what key risk management policies and strategies would you recommend for investing in cryptocurrencies professionally?

As of today, Alphabeth is a private fund with no ambition to change its exclusive structure by raising more capital from retail investors. We are 100% dedicated and committed to managing and continually improving our investment strategies. The future may hold changes, but we would only consider growing if it represents a qualitative and more institutional leap for Alphabeth, ensuring significant benefits for our group of investors and the team.

For professional cryptocurrency investment, we recommend the following key risk management policies and strategies:

Remove fear and greed: Strive to keep emotions out of investment decisions. Maintaining a rational approach helps in making sound investment choices.

Long-term perspective: Focus on long-term gains rather than short-term fluctuations. Patience and persistence are crucial in navigating the volatile crypto market.

Invest based on fundamentals, not speculation: Make informed decisions based on the fundamental value of assets rather than speculative hype. In Spain, we often say, “que el último euro se lo gane otro,” meaning it’s better to leave the final bit of profit for someone else rather than risk everything.

Which are the most significant challenges facing the industry currently and what role can technology play in helping private markets professionals – in the front and/or back office – manage them?

Without a doubt, one of the clearest opportunities in the sector is the significant lack of management tools for funds like ours that can operate under reliable, cost-efficient, and transparent systems. We hope to see more projects emerging every day that enhance these much-needed solutions.

To share an anecdote, when we started structuring the fund in 2018, there were absolutely no services available for accounting, financial, and administrative management of the fund. As a result, all administrative management was created, developed, and launched by us. We developed a highly efficient system, and I’d like to take this opportunity to acknowledge our outstanding administration and development team. Their efforts have been instrumental in overcoming these challenges and ensuring our fund operates smoothly.

Are there ongoing or planned regulatory shifts for crypto firms to be mindful of?

While numerous regulations have emerged in the crypto industry over recent years, most have focused on service providers like custodians and exchanges. Significant uncertainties remain regarding the regulation of funds and professional investment vehicles. We anticipate forthcoming regulations in this area and are fully prepared to adapt, which will ultimately benefit the professionalisation of the sector.

We view the crypto sector, particularly bitcoin, as a force for positive change, aiming to reduce the severe friction present in the current financial system. This can ultimately lower costs and improve efficiency. Clear regulatory guidelines are essential for this integration, as evidenced by the approval of bitcoin and ether ETFs.

We also hope that the development of the regulatory ecosystem will improve conditions for funds and ventures to grow with clarity. For example, more jurisdictions should provide clear frameworks for establishing such structures, and traditional financial entities like banks should adopt the sector and enable crypto integration for the industry’s and investors’ benefit. This is crucial for enhancing the transparency and security of the sector.

 


 

Enmanuel Rodriguez, Co-founder, Director, and Operations Manager of Alphabeth Capital – With a background in business management and extensive experience in wealth and fund management, Enmanuel has been a key player in the cryptocurrency sector since 2016. At Alphabeth Capital, Enmanuel oversees strategies, business development, operations, and client relationships, driving the firm’s success as a leader in the crypto hedge funds industry.

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