Ben Strack

<div id="highlights-block_619566ae83a0b" class="highlights">
 <ul>
 <li>IDX said mutual fund wrapper allows more flexibility to manage the contract roll and the ability to close the fund to new investors </li>
 <li>Head of ETF and mutual fund research at CFRA said he expects ETFs to be the primary vehicle to gain bitcoin futures exposure through funds</li>
 </ul>
 
</div>



Crypto-focused quantitative asset manager IDX Advisors has announced the launch of the first US mutual fund designed to provide a risk-managed exposure to bitcoin futures.



The IDX Risk-Managed Bitcoin Strategy Fund (BTIDX) is different from other public offerings, as it specifically seeks to provide exposure to bitcoin while reducing the volatility and drawdowns, said Ben McMillan, the firm’s founder and chief investment officer.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“This is very different than a static, long-only exposure, which we believe does not make sense for many investors,” he told Blockworks. “We designed this product mainly for institutional investors and fiduciaries that are very risk-conscious and are looking for what we believe is prudent exposure to the asset class.”</blockquote>



The new fund expects to maintain bitcoin futures exposure of between 50% and 100% of the fund’s net assets, according to a recent <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/1643838/000138713121010948/idx-485bpos_111021.htm" target="_blank" rel="noreferrer noopener">regulatory filing</a>. Its managers may drop this exposure to 25% during “stressed or abnormal market conditions,” the document notes, but will not go below 25%.



The offering may allocate up to 10% of the fund’s assets in other bitcoin-related investments, such as ETFs, but will not invest in bitcoin directly.&nbsp;



The announcement came the same day that fund managers <a href="https://cms.blockworks.co/vanecks-bitcoin-futures-etf-set-to-launch-tuesday/">VanEck</a> and <a href="https://cms.blockworks.co/global-x-offers-different-type-of-bitcoin-futures-etf/">Global X</a> launched bitcoin-linked ETFs. While VanEck’s Bitcoin Strategy ETF (XBTF) invests primarily in bitcoin futures contracts, the Global X Blockchain &amp; Bitcoin Strategy ETF (BITS) invests in a mix of futures and the equity securities of blockchain companies.



Bitcoin futures ETFs from ProShares and Valkyrie Investments hit the market last month, with the former being the first of its kind to launch in the US. The ProShares Bitcoin Strategy ETF (BITO) has already grown to $1.4 billion assets under management.&nbsp;



McMillan said the BITO launch demonstrated an appetite for exposure to bitcoin in a vehicle offered by a registered investment company as defined in the 1940 Investment Companies Act, commonly known as the ‘40 Act.



The US Securities and Exchange Commission (SEC) <a href="https://cms.blockworks.co/profunds-launches-bitcoin-futures-strategy/">approved ProFunds’ bitcoin futures-based mutual fund (BTCFX)</a> in July. SEC Chairman Gary Gensler said in August that the agency would favor bitcoin ETFs filed under the ‘40 Act that were limited to bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME).&nbsp;&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“ProShares/ProFunds has both an ETF and mutual fund providing bitcoin futures exposure, and the ETF has significantly more demand and can be used by short-term traders,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “We would expect ETFs to be the primary vehicle to gain exposure through funds.”</blockquote>



ProShares’ bitcoin futures ETF is doing what it was designed to do, the IDX executive added, though the biggest issue with any futures-based product is the roll tax associated with maintaining exposure to the futures contracts over time.&nbsp;



“As a firm, we’re very experienced with navigating futures term structures,” McMillan explained. “One of the reasons we chose to launch this offering as a mutual fund — and not an ETF — is so that we could have more flexibility to manage the contract roll as well as the ability to close the fund to new investors if and when it makes sense.”&nbsp;



David Snowball, publisher of the Mutual Fund Observer, said that though managed futures funds are driven by research about their ability to outperform the market with little downside, many have seen poor performance.&nbsp;



Over the past three years, such offerings have returned 5.9%, with a Sharpe ratio — a measure of risk-adjusted return — of 0.39, Snowball added. Managed futures funds have returned 1% in the trailing 10 years, with a Sharpe ratio of 0.04.



“The vast majority of managed futures funds have been liquidated,” he said, “taking their dark records to the grave with them.”



The management fee on the fund’s investor and institutional share class is 199 basis points. The fund will initially be available through select platforms, including Fidelity, Interactive Brokers, Pershing, AXOS, Matrix and SEI.



The firm’s next fund launch will likely be its Risk Weighted DeFi Strategy, which will be a private placement trust seeking to track an index calculated by S&amp;P Dow Jones.&nbsp;



“The innovation happening in the broader digital assets ecosystem, including [decentralized applications] and other [layer-1 protocols], very much reminds us of the internet in the ’90s,” McMillan said. “It’s a space we’re very excited about as asset managers and as developers.



To read Blockworks’ Q&amp;A with McMillan last month, click <a href="https://cms.blockworks.co/idx-offers-risk-managed-exposure-to-bitcoin/">here</a>.

Bitcoin

IDX Advisors Launches Risk-managed Bitcoin Strategy Mutual Fund

<div id="highlights-block_6172c1ecdef55" class="highlights">
 <ul>
 <li>IDX starting to see more investors who may not have embraced digital assets now realizing they cannot be ignored, co-founder says</li>
 <li>Firm opting for mutual fund wrapper for proposed bitcoin futures strategy rather than an ETF</li>
 </ul>
 
</div>



As part of the latest installment of Blockworks’ Q&amp;A series with fund managers, I recently spoke with Ben McMillan, IDX Digital Assets’ co-founder and CIO, about his firm and its investment offerings.&nbsp;&nbsp;&nbsp;



IDX Digital Assets is a quantitative asset manager that focuses on helping primarily institutional investors make bets across equities, fixed income, commodities and digital assets.



McMillan explained that the Phoenix, Arizona-based company currently offers risk-managed bitcoin and ether indexes and trusts. The interest in these offerings has evolved as the crypto market has matured.&nbsp;IDX is seeking to add more offerings for investors, such as a trust focused on decentralized finance, or DeFi, and a bitcoin futures mutual fund. Although ProShares began trading the <a href="https://cms.blockworks.co/proshares-bitcoin-futures-based-etf-to-begin-trading-tuesday/" target="_blank" rel="noreferrer noopener">first bitcoin futures ETF in the US</a> this week, McMillan contended that the mutual fund structure may be better for a bitcoin futures-based strategy.



Keep reading to learn more about the firm and its strategies.



Strack: What are the goals of the IDX Risk-Managed Bitcoin Strategy? How does the firm achieve those goals?&nbsp;



McMillan: We’re really looking at all the data we can get our hands on. We run our own bitcoin node so that we can get data on wallet velocity, wallet size, wallet buying behaviors. We look at price data a lot. One of the appeals of blockchain in general is that it’s a very transparent data set.&nbsp;



We’re taking a different view as opposed to just strictly asset managers. We’re very quantitative, so we spend a lot of time in resources modeling the data, and then we’re also very active on the development side. So I think that is a differentiating factor for us as asset managers, that we’ve got a lot of perspectives into the space.



The models themselves are largely taking price as an input. It’s not just as simple as trend following. We’re looking at a lot of different ways of evaluating price movement and the path of price movement and volatility.&nbsp;



Pricing volume is very robust data and ultimately that’s where market participants make their bets, so we highly weigh that as an input. From there we’re evaluating not just the strength of the market as in this recent rally, but really also the weakness. Because we’re very risk-focused, for us the objective function is one more of controlling the downside as opposed to trying to maximize the upside.&nbsp;



That’s what allowed us to go completely flat back in April avoiding a 50% drawdown and then again back in September, avoiding a 20% drawdown — determining that the environment was starting to wane and shift from a favorable state to a less favorable one.



Strack: Who is interested in this offering?&nbsp;



McMillan: A lot of the early adopters of bitcoin were high-net-worth individuals or family offices, so they were much more comfortable taking a [venture capital] type of approach where 90% drawdowns are more typical.&nbsp;



When you’re starting to talk to fiduciaries — wealth managers and the like — that just makes the asset class untenable, so our approach is a much more holistic risk-centric approach as opposed to just kind of buying bitcoin or digital assets indiscriminately.



Everything we do is systematic, and our models are just constantly evaluating the favorability of bitcoin and tactically adjusting exposures so that our clients don’t have to worry about that or think about that.



Strack: How has the interest among investors evolved?



McMillan: Back to 2019 all the interest was early adopters. All the interest was RIAs that were already kind of bought into the bitcoin story. Most of them typically already owned bitcoin, and they just wanted to put some in their high-net-worth client accounts.



2020 was kind of a watershed year for institutional adoption of bitcoin, and March 2020 and the Covid crisis was really the catalyst there.



Last week I had a conversation with a Swiss CIO, and he said [he is] still skeptical as to the value prop around bitcoin and whether or not it’s really worth anything. He [said], “But I understand that I have to have a solution for this space because all my clients are asking about it, and they all want exposure. Long-only exposure doesn’t solve the problem for me, but this [strategy] does.”



So now we’re starting to see a level of adoption where even people who aren’t necessarily fully bought in or fully understand the value proposition of bitcoin or digital assets realize it’s something that can’t be ignored. It’s really been interesting to observe that evolution over the last 18 to 24 months.



Strack: What prompted you <a href="https://cms.blockworks.co/idx-plots-bitcoin-ether-futures-mutual-funds/" target="_blank" rel="noreferrer noopener">to file for</a> a bitcoin futures mutual fund earlier this year? What other products is the firm looking to offer in the future?



McMillan: Based on SEC guidance back in May of this year as it related to ‘40 Act mutual funds, it made the most sense to make this as easily accessible to the broadest audience possible.



We firmly believe that offering a risk-managed approach that’s index-based in digital assets is really a great way for a lot of investors to gain exposure to this asset class in a prudent fashion, and the mutual fund using the futures achieves that.



We’d also like to file for a risk-based Ethereum futures mutual fund as soon as possible. That’s largely going to be a function of that market maturing a little bit in terms of liquidity, and then we have a risk-weighted DeFi trust coming to market. That won’t be a mutual fund; that’ll be a private placement trust.



Strack: Why is the firm looking to launch a bitcoin futures strategy as a mutual fund instead of an ETF?



McMillan: Mutual funds have two distinct advantages when it comes to managing liquidity versus ETFs. One is that mutual funds don’t have to provide intraday exposure like ETFs do, so it’s a little bit easier of an operational burden. We had a little bit of a concern about whether or not authorized participants would be able to efficiently be able to make markets … in the CME bitcoin futures.



Secondly and more importantly, mutual funds can cap assets, which we would fully intend to do. The CME bitcoin futures are liquid, but a lot of that liquidity are concentrated in the front-month contracts, it’s a market in which you have to roll contracts monthly as opposed to quarterly which is more standard across the commodities complex. What that means is the roll costs can be a little bit higher so we spent a lot of time modeling that.&nbsp;



It gives a little bit more flexibility as an asset manager to cap funds at a certain AUM … and really not be forced, like ETFs, to just kind of take capital on and then be indiscriminate buyers of bitcoin in every market cycle. That’s really something we wanted to avoid.&nbsp;



That’s something we have our eye on as bitcoin futures ETFs come to market. It’ll certainly have liquidity, but it’s also almost certainly going to add some distortion and potentially some non-trivial volatility to the market.



Strack: What are you most excited about in the crypto space going forward?



McMillan: DeFi is hugely democratizing. I tell people blockchain technology, in general, is transformative on a level like the internet was in the early ’90s. And that’s why I’m really excited about the DeFi trust.



We’re also seeing a lot of people — more on the institutional side — that may have been a little skeptical about bitcoin, but they’re jumping straight into Ethereum or DeFi. I think the fact that some of these DeFi protocols have real economics associated with them makes it a little bit easier of a thought exercise for investors to get comfortable with.&nbsp;



And when you look at what’s going on in the DeFi space, really in any open-source revolution … the innovation is like the big bang. It expands in all directions at once, and so the rate of innovation is just huge, and a lot of amazing things are happening out there. And that’s one of the reasons we’re very active in the development space. It helps us as investors to stay on top of the trends.



I’m old enough to remember people being skeptical about email being a fad. Ten years from now, or maybe five years from now, we’re all going to look back and just be laughing that anyone ever thought blockchain was a passing fad.



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