Michael Bodley

Two Prime is placing a bet on its ability to derive alpha by following sector trends as markets roil, via the formation of the digital assets investment manager’s latest vehicle.



Two Prime, which runs crypto strategies for accredited investors, kicked off trading for its trend-following product with proprietary capital within the last month, according to a source familiar with the matter and marketing materials obtained by Blockworks.&nbsp;



The strategy of the emerging fund, Trend Alpha Crypto 100, is an eponymous one, according to its marketing materials. Its intention is to “act as a liquid venture capital fund for altcoins&#8221; via a long-only approach that looks to snap up bargains out of a broad basket of distressed crypto assets, by way of its underlying algorithms. 



The vehicle, like most trend-following plays, is designed to move into cash when markets move against its long only mandate.&nbsp;



Two Prime Chief Investment Officer Nathan Cox confirmed the fund’s formation in an interview. Cox declined to comment on specific details, including his firm’s marketing efforts, citing private placement regulations.&nbsp;



A number of cryptocurrency-focused asset managers in the wake of the industry’s disastrous fourth quarter have turned to trying to capture trends, touting their own version of Wall Street’s long time retort to chaotic markets: Catch the next upside, and move into the safe haven of cash before whatever collapse is coming.



“It’s not a revelation in terms of what fund managers are trying to do here,” Cox said. “We have put our own spin on the trend.”&nbsp;



Two Prime for its Trend Alpha Crypto 100 “really started with this idea that altcoins have been an alpha generator for crypto investors, obviously, since the beginning,” according to Cox.



“They provide an asymmetric return for a lot of investors — [like venture capitalists who] typically do not have the liquidity that they want,” Cox said. “We saw an opportunity for us to fill a void.”&nbsp;



Cox has chosen an equal-weighted rebalancing mechanism, as opposed to organizing assets by their market capitalization. “It wasn’t a difficult choice for us,” he said. “Risk premia is generally more asymmetric, let’s say, at the bottom 50 [tokens] — if you want to take this [venture] mentality to crypto and apply a fund filter.”&nbsp;



Two Prime’s latest venture <a href="https://blockworks.co/news/two-prime-shak">marks the firm’s first foray into a strategy that doesn’t trade derivatives.</a> Macro factors, including interest rates and jobs data, are propelling the launch’s timing as risk-on assets are reentering the financial limelight.&nbsp;



The vehicle, according to its marketing materials, imposes fees of 2% and 20%, which are still steep by digital asset standards. It imposes a minimum investment of $1 million and has a self-imposed initial capacity of $120 million.&nbsp;



“The timing is critical,” Cox said. “Not to say we’re successfully going to call the bottom, but it certainly seems right now that the majority of risk is behind us — especially in terms of FTX.”



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

Two Prime

Two Prime Embraces Crypto Trend-Following Strategy

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.&nbsp;



For <a href="https://blockworks.co/news/two-prime-teams-up-with-bain-capital-backed-venture-fund" target="_blank" rel="noreferrer noopener">Two Prime</a>, 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.&nbsp;



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. 


<div class="wp-block-image">
<figure class="alignright size-medium"><img loading="lazy" decoding="async" width="300" height="283" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/12/Adam-Richard-300x283.jpeg" alt="" class="wp-image-41497" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/12/Adam-Richard-300x283.jpeg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/12/Adam-Richard-300x283.jpeg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/12/Adam-Richard-300x283.jpeg?w=273 273w, https://blockworks-co.imgix.net/wp-content/uploads/2022/12/Adam-Richard-300x283.jpeg?w=277 277w, https://blockworks-co.imgix.net/wp-content/uploads/2022/12/Adam-Richard-300x283.jpeg?w=232 232w, https://blockworks-co.imgix.net/wp-content/uploads/2022/12/Adam-Richard-300x283.jpeg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/12/Adam-Richard-300x283.jpeg?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/12/Adam-Richard-300x283.jpeg?w=1000 1000w" sizes="auto, (max-width: 300px) 100vw, 300px" /><figcaption>Adam Richard | Source: Two Prime</figcaption></figure></div>


The effort, which has intensified in the wake of <a href="https://blockworks.co/news/5-highlights-ftx-bankruptcy" target="_blank" rel="noreferrer noopener">FTX’s bankruptcy</a>, 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.”&nbsp;



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



<h3 class="wp-block-heading">Two Prime clients want security and downside protection</h3>



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.&nbsp;



As a downside protection specialist, Two Prime sees a silver lining in the ongoing market-wide debacle — one which shows few signs of <a href="https://blockworks.co/news/what-a-recession-means-for-crypto" target="_blank" rel="noreferrer noopener">abating soon</a>. 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.&nbsp;



“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&#8217;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.&nbsp;



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



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 <a href="https://blockworks.co/news/qa-how-two-prime-has-outperformed-bitcoin" target="_blank" rel="noreferrer noopener">firm’s returns</a> 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.&nbsp;



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



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

Hedge Funds

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

Ben Strack

<div id="highlights-block_61f1cc981bbfc" class="highlights">
 <ul>
 <li>Open interest for SOL futures contracts grew more than 400% in the past six months — from roughly $150 million in August to nearly $800 million this month</li>
 <li>Solana serves as a “natural hedge” to owning Ethereum, according to Two Prime Co-Founder Alexander Blum</li>
 </ul>
 
</div>



As Solana trading volume spikes, the cryptocurrency is poised to be the next institutional crypto investment, thanks to its fast transaction speeds and growing usage, according to <a href="https://twoprime.io/is-solana-the-next-institutional-crypto-investment/" target="_blank" rel="noreferrer noopener">a new report</a> by digital asset investment firm Two Prime.



“We’ve been pretty restricted to just trading bitcoin and ether because that’s where there’s liquidity, especially in the derivatives market,” Two Prime Co-founder Alexander Blum told Blockworks. “What we’ve seen is a bunch of anecdotal and quantitative measures that suggest Solana’s becoming liquid enough where we could take a real position in it in our strategy with derivatives.”



Founded in 2017, <a href="https://solana.com" target="_blank" rel="noreferrer noopener">Solana</a> is a layer-1 blockchain network focused on high throughput and low transaction costs. It uses a <a href="https://solana.com/news/proof-of-history" target="_blank" rel="noreferrer noopener">proof-of-history</a> consensus mechanism — a sequence of computations to verify the passage of time between two events cryptographically.



<div class="wp-block-image"><figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="1024" height="470" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-comparison-chart-1024x470.jpg" alt="" class="wp-image-16125" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-comparison-chart-1024x470.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-comparison-chart-1024x470.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-comparison-chart-1024x470.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-comparison-chart-1024x470.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-comparison-chart-1024x470.jpg?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-comparison-chart-1024x470.jpg?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-comparison-chart-1024x470.jpg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-comparison-chart-1024x470.jpg?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-comparison-chart-1024x470.jpg?w=1426 1426w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div>



Solana’s native token, SOL, had a market capitalization of roughly $29 billion Thursday morning, CoinGecko data shows, the eighth-highest.&nbsp;



Open interest for SOL futures contracts grew more than 400% in the past six months — from roughly $150 million in August to nearly $800 million this month, according to Two Prime’s report, SOL Rising: Is Solana the Next Institutional Crypto Investment?



“As these trades become popular, it generally supports spot prices and reduces volatility, as institutions need to own the underlying asset to sell futures contracts against their positions, moving ownership from short-term speculative traders, to long-term holders,” it states.



<div class="wp-block-image"><figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="1024" height="875" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-Open-Interest-Chart-1024x875.jpg" alt="" class="wp-image-16126" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-Open-Interest-Chart-1024x875.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-Open-Interest-Chart-1024x875.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-Open-Interest-Chart-1024x875.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-Open-Interest-Chart-1024x875.jpg?w=301 301w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-Open-Interest-Chart-1024x875.jpg?w=305 305w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-Open-Interest-Chart-1024x875.jpg?w=256 256w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-Open-Interest-Chart-1024x875.jpg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-Open-Interest-Chart-1024x875.jpg?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Solana-Open-Interest-Chart-1024x875.jpg?w=1416 1416w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div>



While OTC desks and DeFi Option Vaults offer access to Solana derivatives,&nbsp;



Most crypto derivatives exchanges do not. But Deribit <a href="https://cms.blockworks.co/exclusive-crypto-derivatives-exchange-deribit-planning-solana-futures/" target="_blank" rel="noreferrer noopener">confirmed to Blockworks</a> last week that it’s internally testing SOL options, with a launch slated within the first half of the year.



“With over 90% of options flow passing through Deribit’s exchange, this will bring increased access for non-US institutions,” the Two Prime report states. “If successful, it is likely that Solana futures and options products will follow BTC and ETH on the CME.”



<h3 class="wp-block-heading">More Solana products coming?</h3>



Osprey Funds <a href="https://cms.blockworks.co/osprey-funds-launches-solana-trust-amid-tokens-rally/" target="_blank" rel="noreferrer noopener">launched a Solana Trust</a> for accredited investors in September, and Grayscale Investments <a href="https://cms.blockworks.co/grayscale-launches-solana-trust/" target="_blank" rel="noreferrer noopener">brought to market</a> a similar product in November. The funds have roughly $15 million in combined assets under management.



The emergence of a strong derivatives market suggests the development of more Solana institutional products, according to the report.&nbsp;



Denver-based Two Prime offers a Digital Assets Fund, which uses a derivatives-overlay on a net-long bitcoin and ether portfolio to hedge out 50% of downside volatility, as well as a Liquid Yield Fund.&nbsp;



“Now that there is an emerging liquid derivatives market, the question is does [Solana] add anything that bitcoin and Ethereum don’t,” Blum said. “The answer is yes.”



Solana’s lack of gas fees and support for thousands of transactions per second make it attractive to portions of the NFT and decentralized finance (DeFi) market that Ethereum struggles to reach. The network serves as a sort of “natural hedge” to owning ether, he added.&nbsp;&nbsp;



The Solana network has processed more than 52 billion transactions, which is roughly 30 times more than bitcoin and Ethereum’s total transactions combined, according to the report. Solana has the fifth-largest DeFi ecosystem and has amassed the second-largest NFT transaction volume of any layer-1 blockchain.



“We think Solana holds unique potential for enterprise-grade financial applications, specifically the ability to handle an entire order book on-chain,” Matthew Sigel, head of digital assets research at VanEck, told Blockworks. “That means over the long run it may compete with other marketplace platforms like Nasdaq in a way which competing layer-1 chains won’t be able to do.”



While Ethereum remains the choice for “high-value” purposes like governance and staking, Solana has an edge when it comes to transactions, he said.



“Overall, smart contract platforms continue to take market share from traditional platforms such as banks and Web2,” Sigel said. “So, Solana and Ethereum can both co-exist together.”




<div class="tradingview-widget-container">
 <div class="tradingview-widget-container__widget"></div>
 <div class="tradingview-widget-copyright"><a href="https://www.tradingview.com/symbols/SOLUSD/?exchange=BINANCEUS" rel="noopener" target="_blank">SOLUSD Rates</a> by TradingView</div>
 <script type="text/javascript" src="https://s3.tradingview.com/external-embedding/embed-widget-mini-symbol-overview.js" async="">
 {
 "symbol": "BINANCEUS:SOLUSD",
 "width": "100%",
 "height": "100%",
 "locale": "en",
 "dateRange": "12M",
 "colorTheme": "light",
 "trendLineColor": "rgba(41, 98, 255, 1)",
 "underLineColor": "rgba(41, 98, 255, 0.3)",
 "underLineBottomColor": "rgba(41, 98, 255, 0)",
 "isTransparent": false,
 "autosize": true,
 "largeChartUrl": ""
}
 </script>
</div>




<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

blockchain

Is Solana the Next Crypto Investment For Institutions?

<div id="highlights-block_61e563bed7a56" class="highlights">
 <ul>
 <li>Uncorrelated Ventures now owns 12.5% stake in investment manager</li>
 <li>The Two Prime Digital Assets Fund returned 742.8%, net of fees, in the trailing 12 months</li>
 </ul>
 
</div>



Digital assets investment manager <a href="https://twoprime.io">Two Prime</a> has partnered with financial infrastructure venture fund <a href="https://uncorrelated.com">Uncorrelated Ventures</a> as it looks to quicken its growth and expand its network.



Uncorrelated Ventures, led by former Bain Capital Ventures managing director Salil Deshpande, now owns a 12.5% stake in Two Prime.



“We were in no need of funding, and so the interest in it is just to grow our network more quickly into the institutional realm,” Two Prime Managing Partner Alexander Blum told Blockworks. “[Deshpande’s] background at Bain Capital [Ventures] and a few other well-known funds prior to that will help us increase our reach and growth as we start our second year.”



<a href="https://www.baincapitalventures.com">Bain Capital Ventures</a> is the venture arm of Bain Capital, a private multi-asset alternative investment firm with roughly $155 billion in assets under management.&nbsp;



Deshpande worked at the venture firm from 2013 to 2020 — and was a general partner at Bay Partners for seven years prior to that — before starting Uncorrelated Ventures. In the last 15 years, he has invested more than $350 million into roughly 50 companies, including those focused on traditional and decentralized infrastructure.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“Venture investors appropriately spend all their time seeking out alpha in their disciplines, but years ago I began feeling that even the beta of crypto might outperform the alpha of non-crypto, and that thesis has played out,” Deshpande said in a statement.</blockquote>



“Crypto beta-capture funds such as Two Prime’s have been valuable instruments in implementing these theses alongside crypto alpha.”



Blum co-founded Denver-based Two Prime in 2019 with Marc Fleury. Blum had previously founded digital investment group Atomic Capital, while Fleury had created open-source application server JBoss, which he sold to Red Hat — a company ultimately acquired by IBM — in 2006 for $350 million.



Two Prime Chief Investment Officer Nathan Cox was formerly the CIO for Prana Capital Group, where he developed and managed derivatives, futures and equity strategies for the firm’s volatility focused hedge fund.



The firm, registered with the Securities and Exchange Commission (SEC) as an investment advisor, has grown to more than $125 million in assets under management through its two funds and separately managed account offerings.&nbsp;



The Two Prime Digital Assets Fund, which launched in June 2020 and was opened to outside investors in February 2021, uses a derivatives-overlay on a net long bitcoin and ether portfolio to hedge out 50% of downside volatility. Net of fees, the fund has returned 742.8% in the trailing 12 months, compared to 466.1% for bitcoin over the same span, according to the firm.



The fund blends traditional statistical indicators with crypto-specific measures to fuel high risk-adjusted returns, <a href="https://cms.blockworks.co/qa-how-two-prime-has-outperformed-bitcoin/" target="_blank" rel="noreferrer noopener">Blum previously told Blockworks</a>.



Meanwhile, the Two Prime Liquid Yield Fund, which the firm launched on June 1, is generating about 17% annual percentage yield by utilizing vetted and code-audited DeFi stablecoin staking protocols, according to the firm.



Two Prime does not yet have plans to sell more of the company, Blum said. He noted that though the firm could look to add products over time, it’s currently focused on its existing offerings.



“Like everybody else, I’m interested in DeFi, altcoin fund or an NFT fund at some point in the future,” Blum said. “But we’re pretty focused on just growing our institutional investment base within these products.”



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

Alexander Blum

Two Prime Teams With Bain Capital-backed Venture Fund

<div id="highlights-block_612fa8423bb7f" class="highlights">
 <ul>
 <li>Two Prime’s Digital Assets Fund I returned 488.6% net of fees in its first year of trading from June 2020 to June 2021</li>
 <li>Firm is looking to add products with different risk parameters, as well as a fund focused on decentralized finance</li>
 </ul>
 
</div>



As part of the latest installment of Blockworks’ Q&amp;A series with fund managers, I recently spoke with Alexander Blum, a managing director of <a href="https://twoprime.io" target="_blank" rel="noreferrer noopener">Two Prime</a>, about his firm and its investment offerings.&nbsp;&nbsp;



Blum, who founded Denver-based Two Prime in 2019, bought his first bitcoin for $9 in 2012. He previously founded digital investment group Atomic Capital, worked as a technology advisor for the Bill &amp; Melinda Gates Foundation and The World Economic Forum, and was also an economic development specialist for the Peace Corps.&nbsp;



Blum’s co-founder, Marc Fleury, had created open-source application server JBoss, which he sold to Red Hat, a company ultimately acquired by IBM, in 2006 for $350 million.&nbsp;



Chief Investment Officer Nathan Cox rounds out Two Prime’s leadership. He was formerly the CIO for Prana Capital Group, where he developed and managed derivatives, futures and equity strategies for the firm’s volatility focused hedge fund.&nbsp;



Two Prime’s flagship product, its Digital Assets Fund I, returned 488.6% — net of fees — during its first year of trading from June 2020 to June 2021, Blum noted in <a href="https://twoprime.io/insights/yearinreview/" target="_blank" rel="noreferrer noopener">an Aug. 24 blog post</a>. This significantly beat the return of raw bitcoin exposure, which amounted to 281.9% over the same span. The fund’s Sharpe ratio was 2.08 compared to BTC’s 1.89, he wrote at the time.



On June 1, Two Prime launched a second investment offering, the Liquid Yield Fund I, which is focused on delta-neutral, high-yield generation. The fund produces an 11.6% annualized return &#8211; net of fees &#8211; as compared to the S&amp;P Global High Yield Bond Index’s return of 5.37%, the blog post notes.



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



Strack: What are the goals of the Digital Assets Fund I and how does the firm accomplish them?



Blum: The goal is basically to outperform on a risk-adjusted returns basis and Sharpe ratio basis. [Marc and I] were doing that for ourselves as we saw the options market grow and then created that as a product for other investors subsequently.



Our CIO and myself have a public equities, public funds background, so we’ve taken a bunch of statistical indicators that we know from working at a firm trading VIX derivatives. So things like standard deviation movements over a certain timeframe or mean reversion over certain timeframes and then combining that with crypto-specific statistics like stock-to-flow model.&nbsp;



We’ve identified what we call volatility regimes, so different volatility behaviors like rising volatility, decreasing volatility and what we classify as high or historically low volatility, and can make pretty good trading decisions under those different regimes.



And then things like movement of bitcoin on and off exchange or miner hashrate and just blending those things into our own algorithm. &#8230;We’re trading options to kind of express those views on the market, so in times of high risk we’re basically trying to finance puts as inexpensively as possible … and then buying calls when we think things are going to go up.&nbsp;



Really, the complication is how to finance puts in ways that aren’t exorbitantly expensive, and that’s what we’ve done a pretty good job of to date.&nbsp;



Strack: What makes this offering unique to others?



Blum: I think some of the differentiating factors are really a focus on risk management before just trying to get 10,000% gains. It’s really the Sharpe ratio that we judge our success on. We’ve outperformed bitcoin, but more importantly, we’ve done that with less risk involved.&nbsp;



And then I think just the focus on what we consider a structured product or an emphasis on the derivatives side of it as an avenue or means for that risk management is unique.&nbsp;



Part of the consequence of that is liquid options or derivatives markets. &#8230;We’re not going far out on the risk curve to Radium or tokens nobody has ever heard of, but just doing this with highly liquid bitcoin and Ether that have a track record and some statistics to make decisions around. So to me that means it’s reproducible and understandable and not just ad hoc gambling.



Strack: Who invests in the Digital Assets Fund?



Blum: We’re a private fund, and so it’s restricted to accredited or qualified purchasers in the United States.&nbsp;We can also accept foreign investors, and they need to comply with whatever regulations are relevant to their jurisdiction.



We have a blend of RIAs that put their clients into our products, and then high-net-worth individuals. &#8230;We have ongoing conversations with larger banks that everybody would have heard of. That’s a longer diligence and onboarding process, but that’s kind of the trajectory that we hope to be moving in.



Strack: Why did you decide to launch the Liquid High Yield Fund 1?



Blum: At the time there were massive spreads on contango in crypto futures markets versus spot, so we said this is a pretty good way to capture 20 or 30% annualized yield. …[We] spoke to some of our investors as well who expressed, yeah, if you can take minimal risk and outperform like a high yield corporate bond or a junk bond that’s getting 5 or 6%, that sounds pretty attractive.



By the time it was registered&#8230;the yields have been significantly compressed or have even gone negative in some cases. At that point we had our own money invested and outside investors as well, and so we started looking more closely at DeFi as another way to get low-risk yield or relatively low-risk yield.&nbsp;



So now we’ve been doing a blend of basically trading that same sort of future basis trade and then supplementing that with some DeFi strategies &#8211; basically just stablecoin staking for high yield &#8211; and that’s been producing pretty well for us.&nbsp;



But the main goal is, there’s a ton of yield here. If we can produce something that’s equivalent or lower-risk to a high-yield corporate bond we seem to have a pretty good appetite from our investors for a product like that.&nbsp;



Strack: Who has been participating in that fund?



Blum: It’s obviously more like a debt or fixed income product as opposed to the [Digital Assets Fund I], so it’s kind of a different bucket of money and a different bucket of investors.



Similarly, it’s accredited and qualified purchasers only, and right now it’s small RIAs to medium-sized RIAs. A couple venture capital funds that have just cash sitting idle waiting to be invested, they’re interested in yields, and then high-net-worth individuals. We’re trying to move more toward institutions.



It’s pretty different investment goals to get 500% returns versus 15 or 20%, and so it’s been more conservative people that have cash on hand for the yield fund that are looking for things … that are risk-free as opposed to a bond or a Treasury note.



Strack: How might Two Prime look to expand its offerings?



Blum: With our Digital Assets Fund, as we see other cryptocurrencies start to have a liquid derivatives market … we’d add them into that fund.



We’re in the process of becoming a SEC-registered RIA, so that will allow us to do a more diverse set of stuff. We’ve discussed just taking the same statistics we use now to make trading decisions but changing the risk parameters. So we could do a 40% yield fund with puts [with] slightly different trading behavior. Same with the Digital Assets Fund &#8211; we could do one with half as much volatility and a better Sharpe ratio and probably lower returns, and so that might be one thing we get more specialized in.&nbsp;



I’m most excited about DeFi, and so I think a DeFi fund is the hot thing right now and potentially something we can do. … And then as an RIA, I think we’d love to potentially start more of a venture style fund that’s either investing in private sale tokens or investing in the companies behind them.&nbsp;



Strack: What excites you most about DeFi?



Blum: One is just the level of innovation and new stuff happening. It also has a clear analogue to regular, public or capital markets now in that … we can replicate these rent-seeking services but just put a smart contract in the middle and allow a collateralized loan or a derivatives product or a fixed income product &#8211; but just do it without a middleman, more efficiently, more quickly, with more liquidity.&nbsp;



&#8230;If you can get over the trust and technical barriers to that, it seems to have innately better features in some cases than what’s available today and has more accessibility and democratic access to it than highly regulated accredited-only equivalents.&nbsp;



It just seems to open up market access, allow for innovation and do it better, and that seems like not just a tiny incremental improvement, but something exponentially better that can usurp the existing way these things are done today.

Two Prime

Newsletter

Blockworks Research