Quantitative Hedge Funds Benefit From Cryptocurrency Turmoil

A small group of hedge funds are profiting from the turmoil in the digital asset market that has already wiped out billions of dollars of the total value of cryptocurrencies.

Some computerized funds — which use algorithms to predict and trade price movements in crypto and other markets — have benefited from rapid declines in assets such as bitcoin and luna. , while many other investors suffer huge losses.

Among the investors taking advantage of these bets are former Lehman Brothers and Morgan Stanley trader Jay Janer, who is the founder of KPTL Arbitrage Management in the Cayman Islands.

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Its Appia fund, which bets on rising and falling crypto futures prices as part of its strategy, benefited from the $40 billion crash in cryptocurrency luna last month. The vehicle quickly placed short positions – betting on falling prices – to take advantage of the crypto token’s rapid decline. Luna went from over $80 to almost zero in a few days.

“We’ve made a lot of money with Luna,” Janer said. “The model followed what was happening in the market. It started to crash and the model came in.

Janer estimates that her fund has recouped about two-thirds of Luna’s price decline. He had also bet against bitcoin, the largest cryptocurrency, and another token ether, before switching his short bets to smaller coins.

“It’s great to have such a moving market,” he added. “I don’t know of any other market that moves so much.”

His fund is up about 20% this year, while hedge funds have lost an average of 2.9% in the first five months of this year, according to data group HFR. London-based asset manager Atitlan Asset Management also benefited from taking a small short position in luna futures through its algorithms, which look for tradable market patterns.

This year has been extremely painful for many crypto investors. Bitcoin has lost 70% of its value since its all-time high in November last year, and the total cryptocurrency market cap dropped from about $3.2 billion to less than $1 billion during this period. †

Singapore-based Three Arrows Capital is one of the leading hedge funds to experience such declines – failing to meet margin calls earlier this month after betting on digital currencies changed.

But falling prices have provided a lucrative trading opportunity for many quant hedge funds, who don’t know whether prices are rising or falling as long as there is a clear trend in one direction to trade.

In recent years, many large quant hedge fund companies have diversified into niche markets such as crypto futures as they seek to avoid overcrowding in traditional markets and improve returns.

Leda Braga’s Systematica Investments is among those making money selling bitcoin and ether, according to a person familiar with its positions. The $6.7 billion Alternative Markets fund is up 15.9% this year. Systematics declined to comment.

And the London hedge fund Florin Court also benefited. Founder Doug Greenig, a former chief risk officer for Man Group’s AHL unit, revamped the fund in 2017 to focus on more esoteric markets such as crypto, shipping and Chinese peanut kernels, rather than traditional sectors.

“Our crypto shorts have been strong markets for us lately,” said Greenig, whose fund is up about 15% this year. “There has been a very clear downward trend for months.”

laurence.fletcher@ft.com

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