How Pareto Invests in the Volatile Digital Asset Market

As traditional financial and digital assets markets are slowly merging, Blockworks is taking a closer look at how fund managers are navigating the volatile market.

To find out how the five-person company, Pareto Technologies, is tackling the challenge, I talked to Junaid Ghauri, co-founder and chief investment officer. Pareto is an investment firm that has a multi-strategy approach that combines quantitative trading with macro global trading.

Before serving as chief investment officer at Pareto, Ghauri was the chief technology officer for Mark Labs. In addition, he previously founded Emerta and worked for government agencies like NASA and The Institute of Photonic Sciences. He has a masters of science in computational and applied mathematics from Johns Hopkins University, and provides comments for Blockworks Markets Wraps.

Chittum: How would you describe Pareto’s investment strategy?

Ghauri: We basically have two products. It’s the same trading strategy but it’s based in two different assets — a USD-based product and a BTC-based product.

The USD product is an absolute return USD strategy. The strategy is the same for both. It’s basically statistical arbitrage… . We are looking for self similarity in the market so serial correlation or auto correlation. Once we are able to identify serial correlation and what we call periodicity in the market, that’s when we deploy our trend-based system in that market. Essentially, it profits off of that volatility and those types of swing trades.

The way to look at [the BTC based-product] is that it’s an alpha strategy so it outperforms BTC. But really we see it as an absolute return bitcoin strategy. If the investor already has bitcoin exposure, our target is to return it in bitcoin for them. [There’s monthly liquidity, paid out in a way similar to what Celcius or Blockfi offers with their savings accounts], but you can say it’s higher risk as well since it’s being actively traded.

Chittum: What type of investors are you targeting then? What’s something that attracts those investors to your fund?

Ghauri: Not everyone is sold on bitcoin even to this day. You have a lot of folks who are naysayers — the bears of the market and such. There’s a pretty large subset of individuals and institutions who want to get in on the action with crypto, but don’t want to hold a large crypto position. They see the volatility and they understand that [it’s] profitable, but they would rather settle over US dollars [without] having the immense volatility.

Chittum: What are your portfolio parameters?

Ghauri: We maintain a relatively large cash position at this stage. … Even when the market is hustling and bustling, we still have at least a 50%, sometimes a 60% cash position. As far as I know, we have a larger cash position than most managers. Sixty percent is where we tend to keep it, even when we are heavily risked from our standpoint, we don’t have more than 40% or 50% exposure to the markets.

Chittum: How does Pareto set itself apart from its competitors?

Ghauri: From a structural standpoint, we set ourselves apart by having monthly liquidity. I don’t think it’s very common to have monthly liquidity for funds like ours. A lot of times it’s quarterly.

We actually predicate our risk-on [and] risk-off patterns on the basis of where we are in the month. For example, we tend to go heavily risk-on earlier in the month. Simply because that’s a good time for us to trade. As the month starts to wind down, we want to have a predictable range in returns…. By the time we reach the last 20 days of the month, we take extremely conservative positions [so] that there’s a very high likelihood of a win versus a loss. It’s sort of the cherry on top relative to what we already returned.

Another way would be having the ability to select your based asset…. Managers tend to commit one way or the other. You’ll have long/short bitcoin strategies that only target bitcoin alpha, then you’ll have absolute arbitrage strategies. We have both of those.

Chittum: How does Pareto pull value from market behavior and analytics?

Ghauri: Bitcoin, and really just the whole crypto market, is extremely correlated. Whatever bitcoin does, everything tends to follow. On varying time scales and with the proper tools, you can start to see how the correction of different alt-coins and bitcoins change overtime.

We developed a tool [called Manifold] that allows us to have a really good eye on the sensitivity analysis part of things. We can very quickly identify when there is synchronous correlation behavior happening across the markets. Based on that [behavior], we want to diversify.

Just to give you a practical example, when bitcoin drew down about 60% a few months ago, we were only down about 2.6% at the time…. We did this largely going back to our cash position but also going through assets that weren’t correlated. We’ve been able to maintain minimal variance fairly well across most market conditions.