The simplest form of investing in a new tech/assetclass/market is getting long the underlying. Buy indices or large cap tech or buy commodities or even interest rates easily. Crypto on the other hand has a perplexingly high number of choices, which for a nascent asset class is somewhat of an exception so early.
The commodities or foreign exchange markets started slowly and with very few choices initially and then grew as the means of getting exposure got vetted and built a track record.
Equities took a while before branching out from large caps and the Dow to the thousands of variations in Mutual Funds and ETFs over 5 decades. The ease of the of the access of crypto though does hold a partial answer to the wide array of choices. The closest parallel has to be the late 90s equities bubble formed by the plethora of Nasdaq/tech stocks as the internet took off. The same technology that powered the actual companies’ growth in the space, powered the actual investing channels: The rise of electronic brokerages available on a desktop and eventually on the mobile.
Crypto has a parallel in Ethereum which essentially rocket shipped the number of launches of new coins and underlyings a la the internet ‘98-’02 and this time, everyone built a casino, everywhere, to capture the value. To increase volume and monetize early winners of Bitcoin and Ethereum holders a thousand coins were launched on said casinos.
As the market has evolved in to blockchain layer 1s, layer 2s, infrastructure, exchanges (CEXs) and decentralized exchanges (DEXs), financial services (borrow/lend) and more and more specializations, we’ve gone from 5 blockchains to 1000s of projects. this is a perfect storm of entities wishing to grab a piece of every would-be investor’s wallet.
So, what is the best way to access this without large negative consequences when even long-only is fraught with peril?
The answer is simple but not trivial:
Use a framework to access this markets and build upon each strategy allocation with iron-clad best practices. We’ve spent a long time in capital markets (22+ years) and here we present our framework
Desire:
A reasonable return per unit of risk as defined by drawdowns (not just so called volatility), that beats most asset classes consistently
Challenge:
- Difficult without access to the best market participants (hedge funds, special vehicles) who are closed to the general public and non ultra high net worth
- Difficult to replicate or requires a large amount of time and resources to do personally in addition to the knowledge and experience in the space
- Access to complex tools and risk management systems as well as monitoring
All these limit the entry of most investors in to a space that has been targeted with negative headlines and an aggressive regulatory regime
Solution:
The most ignored form of market “edge” paradoxically comes not from doing more or doing it ‘smarter”. It actually comes from doing less. Most long term edge that has been consistent in markets has been from taking less to no leverage, consistent participation in markets at attractive levels and pruning portfolio assets as they get larger. Easy to say, hard to do as the constant battle between fear of missing out pulls in investors when they shouldn’t and causes them to panic when they shouldn’t. The solution therefore relies on making these choices systematic rather than subjective. This is the heart of all consistent market beating returns over the past century. The framework required to do this starts by breaking our return target into buckets or pods.
One pod allocates capital consistently over long periods to long-only. This is fairly obvious to investors in the equities and commodities markets and most do this seasonally. Add a Bitcoin allocation as well for long term stacking and call this whole pod a 25% allocation. Do obvious things like risk management to take profits and invest in liquid interest bearing cash/bills /bonds to build a liquidity wallet to invest in new opportunities as they come by or re invest in increasing digital asset exposure to Bitcoin.
The next pod is risk-free bonds for income and a liquidity wallet as explained above. Having deep pockets when there are pullbacks (almost guaranteed in any asset) is the best way to increase portfolio performance and over 10 years is a prime driver of compounded returns. Lets say this 25% of the pod and at current 5% rates at least its not completely getting wiped out by inflation.
The next pod is real assets and in all probability most people have exposure to this via their home or if very lucky an investment property as well. The sector is massively rates dependent and is more a patience game over years rather than quarters. Allocation to this is what is available or present already so we won’t go into this in any detail.
The final pod is one of the most important ones, market neutral. What this strategy or what we call way-of-life (!) does is it aims to make returns uncorrelated to broader market performance. Given that more than 80% of the time assets are not going up as the pareto principal holds up well, it’s important to protect the nest-egg by generating returns by not being beholden to easy money macroeconomically or watching portfolio levels dramatically fall. This also gives you comfort in sticking to the longer term thesis of capital deployment as the pain in volatile times becomes a source of returns! An allocation of 25% here enables a significant return and timing opportunity to insulate your overall portfolio of long-only and real estate assets. In a way, market neutral returns that are exposed to volatility positively are the super power or edge that most investors should have, but rarely get access to. We aim to change that.
That’s it. That’s the simplest prudent approach. Getting any more complex this should only be attempted if you’re a capital markets professional or a professional investor and have years of experience.
We speak about how we generate market neutral returns in our deck and implement derivatives to create asymmetric payoffs. Get in touch if you wish to hear more.