Two Prime Shakes Up Strategy: ‘If We’re Not a Crypto Hedge Fund, What Are We?’

The crypto investment manager has retooled its investor relations approach in response to the bear market: Blockworks exclusive

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Blockworks exclusive art by Axel Rangel

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Most everyone in institutional crypto trading these days has a simple mandate: Position appropriately for an extended bear market — and fine tune capital-raising efforts accordingly. 

For Two Prime, the sentiment has triggered a shift in how the digital assets-focused firm sells itself to prospective clients. And it’s even led to the notion that the hedge fund firm might no longer be much of a hedge fund firm at all.

Performance fees are out; liquidity and customized portfolios are in. The natural next step, the firm told Blockworks, is to increasingly concentrate on separately managed accounts and de-emphasize the operation’s commingled funds, at least when it comes to business development.

Two Prime — which has about $200 million in assets under management and has historically counted a number of sizable bitcoin mining operators as clients — now considers itself more of an asset manager than anything else. 

Adam Richard, the firm’s Miami-based head of capital formation, told Blockworks that such internal deliberations spurred a bit of an about-face when it comes to the marketing materials Richard shops to big-money potential investors. 

Adam Richard | Source: Two Prime

The effort, which has intensified in the wake of FTX’s bankruptcy, has resulted in literature that places security and tailor-made, “bespoke” strategies front and center. There’s also now a heavy emphasis on downside protection, of course.

“We took a hard look at ourselves and said, ‘Let’s focus less and less on the hedge fund and more on SMAs and hedging and almost delta-neutral strategies,” Richard said. “What we’re really doing here is straight asset management.” 

Added Richard: “If we’re not a crypto hedge fund, what are we?”

Two Prime clients want security and downside protection

The shift appears to be paying off, with Richard saying he’s been fielding a growing number of calls in recent weeks from big-money players interested in both hedging and levered beta products.

Two Prime imposes a minimum of $10 million per separate account, making the investment out of reach for most high-net worth individuals. Separately managed accounts are one-off vehicles with unique strategy mixes crafted for each investor. They are inherently liquid and do not impose restrictions on subscriptions or redemptions in the same style as hedge funds.

Richards has been speaking lately with a number of unidentified family offices and bitcoin mining rig operators, as well as larger players still, including the likes of pensions and endowments. 

As a downside protection specialist, Two Prime sees a silver lining in the ongoing market-wide debacle — one which shows few signs of abating soon. Its investment team offers strategies including crypto yield plays, customized hedges, levered beta and staking — as well as a number of delta-driven quantitative approaches. 

In the case of miners, consider what happens if bitcoin takes another plunge, down to $10,000 or $12,000. If it costs a miner about $14,000 to acquire one bitcoin, “you’re way in the red, and that’s going to be an issue,” Richard said. Two Prime’s hedging plays are designed to act as a buffer in such a case. 

“It’s quite refreshing, too, because now — suddenly — all these miners who have been telling me, ‘We don’t have a lot of bitcoin to be putting in a yield strategy’ — they’ve all come around to this and are like, ‘I think we want to hedge.’”

Added Richard: “So, why not get ahead of it now?”

Yield strategies have been Two Prime’s bread and butter. They make up about 40% of its overall assets under management. An increasingly attractive combination: combining a yield-bearing product with a tail risk option to protect against another market dive. 

Two Prime, run by Alex Blum, is headquartered in Denver. Its staffers are based throughout the US. 

The yield products, which center around digital asset derivatives that target long and short volatility premiums, are available in formats denominated in bitcoin and ether — as well as dollars or stablecoin cash equivalents, such as USDC. Dollar-denominated products are typically favored by TradFi institutions, while more crypto-native traders often prefer not having to bring cash into the equation.

The firm’s returns have been solid. Its low-yield derivatives strategy has gained 9.2% from inception in March 2021 through the end of November; medium yield has increased 14.5%; and high yield has booked a 20.2% gain over the same period.

Another of Richard’s selling points: Separate account funds are not commingled or loaned out — which played a key role in FTX’s implosion — and clients retain custody of their underlying assets. 

“That’s what clients want today: security,” he said.


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