Arca, a crypto fund, has recently achieved a significant milestone by reaching a five-year track record of managing outside capital in their liquid hedge fund. In an industry where one crypto year is equivalent to five normal years, this achievement is noteworthy. Over the past five years, many crypto asset management firms have come and gone, leaving a sense of survivorship bias. Jeff Dorman, the chief investment officer at Arca, reflects on his experience managing a crypto portfolio and shares five important takeaways.
Investing in crypto markets is highly challenging. The frequent booms and busts create a false sense of liquidity and make it difficult to accurately predict beta and returns. Risk models and assumptions need constant tweaking as historical data and correlations change rapidly. While early stage venture funds may not face these challenges, managing liquid funds requires constant adaptation.
Contrary to popular belief, 24/7 trading in crypto markets does not necessitate round-the-clock trading coverage. Overtrading can be costly in any asset class, and the fragmented global investing landscape actually provides more time to react to news and information. Knee-jerk reactions are often wrong, and it takes time for the true market reaction to play out. Therefore, correct interpretation of information is more important than speed.
The 24/7 nature of crypto markets also poses difficulties not seen in traditional markets. In traditional finance, there are natural resets when markets close, allowing for reflection and decision-making without price gyrations influencing the process. In crypto, these resets are rare. The example of the Terra/Luna events highlights the need for careful risk management and documentation. Mistakes can occur when there is no time to reset and think through decisions.
In debt and equity markets, quiet periods often lead to slow price increases. However, in digital assets, slower periods tend to slow momentum and negative price action becomes more prevalent. Shorting digital assets is easier and less expensive, making hedging and long exposure decisions more challenging. Active management is crucial in navigating these market dynamics, as passive index strategies struggle to keep pace with innovation and volatility.
Building a good team is fundamental for success in crypto asset management but also incredibly challenging. While traditional finance firms have established criteria for various roles, the attributes and qualifications for crypto roles are still evolving. During the early years of Arca, they hired individuals who were passionate about the industry and willing to learn any part of the job necessary for success. Finding the right candidates with the right skills and mindset remains a challenge in the crypto industry.
In conclusion, managing a crypto portfolio is a complex and ever-evolving task. The challenges of investing in crypto markets, the need for careful interpretation of information, the importance of documentation and risk management, the unique dynamics of short and long positions, and the difficulty of building a skilled team are all key takeaways from Arca’s five-year journey in managing a crypto fund. As the industry continues to mature, these lessons will shape the future of crypto asset management.