New Hedge Fund First to Take Investor Checks via Token Options

A veteran derivatives trader is readying the launch of a cryptocurrency-focused hedge fund firm with a unique twist, according to three sources familiar with the matter and marketing materials sent to institutional investors obtained by Blockworks.

What’s different about the startup led by John Kramer — who last headed up over-the-counter and derivatives trading for digital assets firm GSR — is that the firm, Dual Finance, is giving its prospective limited partners the greenlight to make their contributions in derivatives. 

The unique arrangement, sources said, could be attractive to deep-pocketed investors accustomed to conducting due diligence on equity derivative strategies. The investment approach, made possible by sizable advancements in the depth and breadth of crypto options that have hit the market of late, also could have certain tax and liquidity benefits. 

“Normally if a team is paid in tokens, even over a lockup it’s possible individuals may be subject to income taxes in their jurisdiction on the market-to-market value at the time of receiving the economic benefit,” the marketing materials said. “This model is analogous to standard long term incentive plans for corporates, who pay employees and executives in stock option grants, rather than shares on the stock.”

It’s executed through the firm’s proprietary in-house token, which confers governance benefits and may transition into a decentralized autonomous organization (DAO) structure down the line. The initial fundraise is essentially akin to a seed private token round, with liquidity expected in terms of trading on the secondary market. 

Kramer is dubbing the token issuance as the “first and only” token launch without “having directly sold any tokens.” That could be a boon to savvy crypto native investors — of whom, sources said, make up a sizable portion of the firm’s likely day-one limited partners — who have long been skeptical of founder-friendly new tokens that don’t necessarily benefit outside buyers.

There is risk. 

“The principles Dual Finance will follow to achieve this are experimental and risky; they represent a paradigm shift in tokenomic designs, but if successful a potential blueprint for other projects to follow,” the marketing materials said. 

Tokens earmarked for seeders make up just 5% of the DUAL token under a total supply of 1,000,000,000. All tokens are set to be distributed via staking options — which is how the firm avoids selling tokens directly to investors who are not in the staking game. 

All told, the setup appears to play into Kramer’s background: Before GSR, he helped build out Consolidated Trading’s crypto investments and spent time trading equity derivatives at Wellington Management. Kramer is joined by co-founder Britt Cyr, a former classmate of his at MIT. Cyr has worked as a lead developer at Youtube, following stints with Google and Facebook.

Kramer, according to the pitchbook, specializes in illiquid crypto derivatives trading — a niche but expanding field — as well as devising bespoke lending products and related exotic, off-the-run digital assets. He oversaw all risk functions for a portfolio of more than 300 illiquid token derivatives with collective assets under management somewhere in the billions. 

The firm is additionally looking to hire a handful of engineers. Indications are the co-founders are closing in on terms with a couple, with the full day-one staff makeup contingent upon how capital-raising goes. It’s set to start trading sometime toward the end of the third quarter or the beginning of the fourth quarter of this year. 

Sources were granted anonymity to discuss sensitive business dealings. Kramer declined to comment.

Dual Finance’s flagship investment product, dubbed Dual Investment Pools (DIP) consist of structured products built upon various cryptoassets — and Kramer, sources said, has been hawking the structure as having substantial execution improvements to current digital asset DeFi options vaults (DOVs.) 

The firm also has a tokenomics twist, with Dual receiving referrals from venture capital firms to shore up the tokenomics of their portfolio companies in need of a tuneup, which join Dual Finance’s ecosystem as a result.

The marketing materials pitch the arrangement as enabling startups to “redesign their tokenomics.” 

The decentralized investment pools offer live pricing via an API, as well as customizable strike and maturity functions on options. The strike price of an option or derivative represents the point of sale, while the maturity indicates how long the two-sided trade remains open. In the case of Dual Finance’s flagship vehicle, investors would typically buy into a two-year option and would be able to exercise that trade at any time prior. 

The setup, which comes without management fees or a fund administrator, uses physical settlement of the crypto instruments. Another asset: options on staking, or a novel structured product Kramer designed to incentivize liquidity in decentralized finance (DeFi) protocols for a profit. 

The firm, sources said, is now closing in on a number of partnerships with market makers to carry this and related investment plays out. A number of incentives are in place to ensure their participation. 

When it comes to those protocols, Kramer and Cyr have already been working to get involved in governance — a growing field of interest to institutional investors dating back, recently, to Terra’s Anchor cryptocurrency. While activism has long been a strategy in the stock market, it’s much more new to crypto.

“It’s way easier — OK, maybe not easy, but there’s more alpha left there, than equities,” one source with knowledge of the launch said. “The window will close, but, for now, crypto is inefficient. And that’s a plus.”

Kramer is also working on a system to lend DIP’s collateral to certain limited partners, who must repay the loan by the expiry of the contracts. It’s designed to act as a hedge on the main strategy amid broad-based market volatility.

---

Get the news in your inbox. Explore Blockworks newsletters:

• Blockworks Daily: Unpacking crypto and the markets.
• Empire: Crypto news and analysis to start your day.
• Forward Guidance: The intersection of crypto, macro and policy.
• 0xResearch: Alpha directly in your inbox.
• Lightspeed: All things Solana.
• The Drop: Apps, games, memes and more.
• Supply Shock: Bitcoin, bitcoin, bitcoin.