2025 and Beyond: Crypto Asset Opportunities for Institutional Investors | EBC10

Transcript

Good Good afternoon every everyone. Thank you for joining this panel. Um today we're speaking about um the outlook 2025 and beyond and crypto assets uh opportunities for institutional investors. Um I have the pleasure of moderating this panel um with Roman and Tara, which are other two hedge fund managers. So, um I'd like to introduce myself first quickly and then I'll let them um take over.

My name is Inigo. I am the managing partner of AMV Investments. We run uh digital assets um strategies. We're a hedge fund. We're Cayman-based. And we do market neutral and quant long short systematic strategies. Tara? I So, I'm Tara Macaulay. I'm the CEO and founder of Faros Fund. Uh we started in 2018, but prior to that I was the co-founder of Alameda Research. So, uh we um at the we've run uh 600 million in market neutral strategies across the space down long down the tail of tokens.

Hi. It's a pleasure to be here, Inigo, Tara. My name is uh Roman Gonzalez. Uh uh we launched it uh crypto 100% crypto fund here in uh Spain, the first 100% crypto fund regulated uh here but by an European uh let's say co-regulator. And I've been following the space for 10-plus year, and we are willing to give with our fund a long only a sponsor to the crypto asset industry. Nice. So, we have two different panelists. They both run uh digital assets uh strategies, but Tara, you run market neutral. Roman, you're a long long biased fund, right? Uh you trade

different counterparties, different uh I think you face different problems on a day-to-day basis. So, hopefully we can have a very engaging conversation. So, first question I'd like Roman to respond, please. Um How are hedge funds and other institutional investors approaching the inclusion of crypto in their portfolios? Yeah, I think I think it's happening what what I call the lift off 0%. So, the institutional investors are starting to explore really explore this asset class.

I think this was kind of a joke for them in the past. But nowadays, because you know, the big players have come in the in this this year with the launch of the ETFs, they're now thinking that 0% maybe it's a risk and active exposure to crypto. Uh maybe they're exploring and making the due diligence of what which kind of products and how can can they be exposed at least, let's say, 1% or maybe 1.5%? Why I say one 1.5%? Because that's the percentage of the cryptocurrency market cap in terms of all the liquid assets in the world. So, if you are lower that than 1.5%, you are really underweight

the space. Hopefully that percentage will be higher in the future. For sure. Yeah. I mean, I think there's a a huge opportunity now where we've seen that, you know, the 60 portfolio 60/40 portfolio has underperformed horrendously in the last year. And so, we've now seen a lot of interest from institutional allocators, family offices to kind of diversify their exposure a little bit more. We've seen that everyone is trying to increase their allocation to alternative investments, to hedge funds, and particularly wanting to protect their capital base from downturns with fears of a recession and what rate cuts might do. So, I think now's really the time that we're starting to see a lot more uptick.

Do you think there's any specific strategies that are more suited to any certain type of investors, Tara? I think it really depends on the investment goals. So, I think, you know, for just pure diversification benefits, like Ramone was saying, 1 to 3% is an allocation as a floor that kind of would help almost any portfolio. Uh then, I guess on our side in market neutral, we're really seeing allocations from people who want kind of steady returns, all-weather returns, and particularly when they want something that is very liquid that they can get in and out of. And so, we've seen a lot of growth from alternative asset allocators.

moving on to risk management and security, which I think it's a key topic for for hedge funds, right? Uh and more more in this industry or asset class, um which are do you think are the biggest factors when managing risk? And how do you mitigate them? So, in crypto, counterparty risk management is the name of the game. That's the main thing that you need to do. You also need to manage, of course, liquidity and your your trading risk, particularly if you're using leverage, because this is an incredibly volatile asset class. Um you know, when we have a lot of people come over who've traded volatile assets in in TradFi, sometimes I'm still like, "Wait, but have you seen meme coins?" Uh so.

Uh closer. Um and Uh that's loud. But um on the counterparty risk management side, there's really a long way to go. And I think this is an area where there are unique risks in crypto, and we've had to develop sort of crypto-native solutions to these. So, we have seen an explosion in off-exchange settlement solutions after FTX blew up. Uh some of but in many cases, these are crypto-native firms that don't really have a balance sheet. So, in some of those cases, you're just swapping your exchange counterparty risk for counterparty risk to a very small custodian or technology provider. So, I think what we really need to see is kind of a big sort of institutional firms with that have the balance sheet to back it who can provide custodian services to really move the needle in space.

Yeah, our studies are a only one. So, and we are using crypto ETPs around Europe. So, regarding risk, our main risk is the custody, which is the custody solution for each ETP. The beauty about Europe is we have some diversification between different custodians, different ETP providers, let's say 21 shares, Fidelity, and so on. They have selected different institutional custody solutions like BitGo, Xapo, and not only Coinbase custody. That's what's happening with the ETFs in the US. So, custody is the main risk, one of the main risk in crypto. For us is is is almost the only risk because we are

doing a spot, we don't do derivatives, we don't have any counterparty risk because we all do physically backed ETPs. And I know it is different from the strategies that you are managing, Tara, but in my personal opinion, with a big big chunk of the money that you want to develop into the crypto space, you should keep it simple. So, let's do a spot, maintain the position. I think we are going to have 40 plus percent annualized returns in the coming 10 years. That's a lot of a lot of money to to be made. It maybe it seems low for someone here, 40% annualized returns for 10 years, but that's multiplying your capital

28 times, and that's that's a lot. If you have the the patience the patience for sure to to suffer all the volatility and many 50 plus percent drawdowns we we will have in the future. For for us, it's really about thinking about risk-adjusted returns. So, because the liquidity is there on say Binance and a lot of these offshore unregulated exchanges, we need to trade on those platforms. The launch of the Bitcoin ETFs has been a game-changer for us because it now means that we can do a lot more trading on a sort of regulated market as well, but we still want to go to all these other venues where we know that there's a bit more counterparty risk. We just need to know that we're getting an outsize return to justify

having capital exposed to those venues. So, we'll tend to split our capital and our trading across lots of different exchanges, across the regulated space and the unregulated, and just kind of try and control exposure. And so, we'll dip in and out depending on where we see the opportunities. So, that doesn't mean that we're not going to trade on say a number 10 exchange that's only been around for a year. We might just only 2% of our capital base, and we'll only do it when the opportunities are very good, and when we think that that exchange is kind of, you know, in in a good position. We monitor a lot of different sort of on-chain data, deposits, proof of reserves. Exchanges have also become a lot more transparent with their financial information, which can help us underwrite the risk there, and we can feed that into our risk model and think

about whether the returns we're seeing it justify that. So, I mean, performance is huge uh from a fund perspective, if you compare it to traditional investments or other alternative investments, uh you know, CAGRs are very high, are superior, Sharpe ratios are also higher, uh but institutionals are not here yet, right? We've been waiting for them for over, you know, 3 5 years now. We always say that they're they're knocking at the door, but they're not here finally.

What is preventing them from from entering the space at scale, Roman? I think they they are still scared. I mean, they they as I told you, may maybe it's it's because they they are still in the background of their minds seeing this space as a joke, maybe. I'm sorry for for tell you that, but for sure this this is changing. As I told you, I mean, they really are doing the due diligence. They are exploring how, because when you've been like out of the space for 10 plus year, and you now want to enter, The due diligence is huge. As you know, the properties of this asset class are kind of different of the traditional

one. So, it's it's difficult to manage all that at the beginning, but we are receiving plenty of institutional potential investors that want to explore the asset class with us. And what they need is is education. So, Sir, I I might say the institutions are actually here. A lot of them are just quiet and doing very small test allocations. You know, we've talked to we've done diligence with pension funds, US endowments, all kinds of institutional investors across the space. And often when we talk to those people, they're very well-informed.

They've been spending the last year or two investigating the space and learning it. Uh but I think one of the things that is holding them back is reputational risk. You know, there's been high-profile frauds in the space. And so, I think that we need to internally, uh you know, be on our best behavior and sort of be what we be the products that we want to see that are institutional-grade and quality so that we can build more confidence. Um and I think the institutions are allocating to this space, uh but they just need to scale up over time, build relationships over over many years, and see the space mature. Yes, I agree. I think it's not only reputation, but also uh the space might be a little bit immature for them to scale. Um probably we need better custodians uh and more better uh regulatory

clarity, basically. Yeah, and on our side, like a lot of institutional investors, they want to see at least a 3-to-5-year track record, at least 100 million in AUM. They have concentration restrictions, and you need to be able to pass their operational due diligence. So, I think, you know, we have a 7-year track, and we've been we've been able to pass through that. But I think it's a big hurdle for a lot of smaller funds to climb to be able to start getting some of those institutional allocators. And for those firms, they want to be able to deploy in the hundreds of millions to even think about it. So, they need a couple of different funds at that scale so that they can really, you know, move the needle there.

Absolutely. Um another topic which is interesting is DeFi, right? Decentralized finance. Um, what what I know, Tara, you've been you've done a little bit of DeFi at least in your in your funds. So, we don't trade directly in DeFi. We mostly use DeFi lending and borrowing cuz we're FCA regulated. We'll we'll take the view that we can't trade anything where everyone's not KYC, so we can't participate in AMMs. Um, but I mean, DeFi we we always think that, you know, DeFi is where the the wild west of crypto is happening right now. There's a lot of outsized opportunities, but also a lot of new and evolving risks. Um, so there are lots of funds playing in that space that are generating very exciting returns. Uh, but DeFi is so new, so there's not a long track record in that

space. So, we kind of take the view that, you know, we'll take a data from that ecosystem to feed into our pricing models that to trade on centralized venues, but we won't actually go in deeply now. But, it's it's growing and in many ways I think you can say DeFi is perhaps the killer use case uh for crypto. It's definitely resulted in a lot of growth in the ecosystem, and so I'm excited for that to continue. Roman, do you think DeFi will play a role in in, you know, in the strategies of institutional investors in the future? Yes, for sure. I mean, once we see maybe tens or hundreds of funds, I mean, many of them will be focused on DeFi, market neutral, and all kind of strategies inside the crypto space.

But, as you know, we are all a long only fund, and we now are investing in the projects. We have projects like Uniswap in portfolio. Uh, yeah, we are really bullish on both DeFi and Ethereum. In my opinion, uh there's been kind of pessimist thoughts about both space, Ethereum and DeFi, in the last couple of weeks, months. But, yeah, we are we are super super bullish. We maintain a huge percentage in Ethereum in portfolio. More than 23% of our portfolio is in Ethereum. And a small percentage is in into projects like Uniswap. And in with this project you see real revenues. You see real revenues in real protocols that are really being

used in the in the ecosystem. Why why has the ETF of ETH why hasn't it been as successful as as the Bitcoin one? Have you seen the ETH BTC price chart? It's just been trending down over 2 years. Yes. So I think um I think that also there's been a a strong narrative built around Bitcoin and how that can fit into a portfolio. And it's a much harder sell for ETH. And without the price action to justify it, I think it looks a lot less appealing to investors. Um I think the other thing for us certainly, so we trade a lot of the Bitcoin ETFs, that's been fantastic for us, but we don't do ETH for as much. Uh and it's because it's more capital efficient to trade Bitcoin. The higher volatility in ETH means we can't uh you know, we have to margin it at a higher level. And so we

need higher yield from those products in order to deploy in in that space. And we're just not seeing the same like a premium in ETH compared to Bitcoin to justify that. Nice. So we have a couple of minutes left uh to wrap it up. Just two questions. Uh the first one for uh Tara. So looking ahead into 2025 and beyond, um what's your forecast for institutional adoption of crypto assets? Do you think it's here? Will it take more time? I think it's going to progress in fits and starts, but we are so early still.

Like when we talk to you so many people, they're dipping their toes in 0.1% or they're not even to So I think we'll see, you know, 10 trillion in market cap. I think stablecoins are going to reach uh you know, in the multiple trillions uh because I think stablecoin growth, particularly with yield-bearing stablecoins, is very exciting and easy to explain to institutional investors. And so I really think that crypto volume is going to continue to grow 5, 10x in the over the next couple of years. It might just be not a smooth lineup. Nice. Um uh Roman, are there any trends, uh, blockchain solutions, or is there any innovation that you're seeing that can or will reshape the future of institutional investing?

You mean inside the crypto space? For sure. Yes. Yes, of course. Yeah, I mean Yeah, but there are plenty of opportunities out there. Uh, we we focus more on narratives because sometimes people are not investing only in the token, but also in the narrative. So, the thing, DeFi narratives are are pretty hot for us right now, and and we try to to make some positions in our fund. We have little exposure to projects like Sui. Of course, we have Solana in portfolio. But, I would like to sum up I would summarize this talking about Bitcoin because sometimes it's really underweight in our minds and in our portfolios, all the kind of infrastructure and and and and position around blockchain. But,

it feels to me that nobody's talking about the real technology, and with the real technology, I'm talking about Bitcoin, Ethereum, and so on. So, Bitcoin for us is a is a technology. It has some properties that the world didn't know before 2009, and it's difficult to replicate Bitcoin in the future for in in my opinion. It has more than 98% of the proof of work in the world, and now it's done. It's it's uh, it's there is no second best in terms of proof of work. So, you have to have in mind that position in your portfolio.

My last question was going to be if if you're bullish or bearish, both of you, but I think you've already responded to that. Well, I might be maybe I'm like short-term bearish, long-term bullish. It's kind of always the way. Understood. You're full bullish? Yeah, the the the the indicators that we follow on chain and certain, uh, sentiment indicators are are have been so bearish in the in the past couple of of of weeks, Uh, now we had a little bit of a rebound, but I think the coming months this this is going to explode. And the beauty and and the interesting thing fact about crypto is like you have to be prepared because most of the returns are done in only 6 7 months. So in a in a little

Have to be deployed, yes. Yeah, yeah, that's right. It's time in the market rather than timing the market like with everything else. Absolutely. Well, thank you very much everyone for joining the panel. Thank you Taran Raman. we'll speak soon. Thank you.