Welcome to the inaugural 256 Capital Partners Newsletter!
We are very excited to commence this journey to building the top-performing crypto asset manager in the world. 256 Capital Partners was formally launched on October 1, 2019, along with our first fund, 256 Capital Multi-Alpha Fund (Multi-Alpha Fund). The Multi-Alpha Fund is our fund-of-funds product that exclusively invests in liquid crypto hedge funds.
At first, we decided to launch the Multi-Alpha product as we had observed a lack of sophisticated products on the market and an opportunity to consolidate the ones that were, into a diversified portfolio. The second observation we gleaned from our interactions with numerous fund managers was that there were many young crypto-native fund managers who were running great, profitable and sophisticated strategies but had no proper fund setup nor operations that supported their backend. They needed the right partner to help scale their business. This came from a very personal driver as both founding members had the fortune of working one of the best performing crypto funds in the world in its seed stage – one as the second investor, and the other, the second employee.
This is our unique proposition to crypto fund managers. We understand and empathize with fund managers that setting up a fund is not an easy process. Fund managers have a duty to operate a profitable business (self), a duty to generate the best returns for their investors (them) and a duty to support the livelihood of their team (we). As we’ve been through this process several times by now, our goal is to build the right infrastructure and platform to help nascent fund managers scale their businesses to maximum capacity.
It might surprise you to hear this, but at the end of the day, we view 256 Capital Partners with a start-up lens. We may be moderately-well capitalized, but this is not something we intend to rest our laurels on. We are determined to constantly innovate on our products and remain ahead of the game. Crypto as an asset class is incredibly nascent and evolving rapidly. Our firm thesis is that we are very much at the beginning of the asset maturity cycle.
If you were interested to learn more about 256 Capital Partners, you can find our primer here.
Industry News
October was a relatively volatile and event-driven month for Bitcoin and the wider cryptocurrency world. Below are a few significant industry events:
China Embraces “Blockchain”: Xi Jinping made a sweeping announcement that supported the growth and adoption of cryptocurrency in China, which drove Bitcoin prices up by 40% within the next 8 hours. Since then, the CCP has been actively promoting Bitcoin as well as its own RMB-denominated stable coin (DCEP) in state-sanctioned newspapers and WeChat discussions.
Mining Legal Status: Mining and cryptocurrency trading have been effectively legalised in China. What this actually meant was just that cryptocurrency mining has been removed from lists of high-risk and potentially illicit business activities in China. We believe that this will trigger increased miner interest in Bitcoin, which will drive mining difficulty as well as mining costs up. However, if there are too many mining entrants and mining costs go up too much with unprofitable miners joining the game, this could increase selling pressure on Bitcoin within the next 3-6 months.
Libra’s Congressional hearing: On the other side of the world, the US Congress did not seem to have been as happy to embrace a corporate-controlled digital currency that involved pegging to other countries’ reserves, not just including the USD. In fact, Libra was met with such scorn and reluctance from the Congress that it is a wonder it will be allowed to launch alone. Zuck himself declared that if the project was not to be approved by Congress, Facebook would immediately retract from running Libra.
Global Macro Views
Our position is that as long as the global macro landscape doesn’t see a recession in the global macro environment, we should see Bitcoin continuing in a bullish course towards its halving.
Despite overall markets being extremely overstretched (many cyclicals are at or above cycle peaks), it seems more and more likely now that we will not see a macro correction over 2020 just yet. We continue to see reasons for there to instead be a grind towards increased market peaks. The reason is central banks have now completely undergone dovish capitulation.
However, even if we might not see a correction in the next year, our global macro thesis is that a huge regime shift is coming. We’re in a short-lived low-volatility period with nearly every single metric with which we measure markets at cycle extremes. We should note that central banks are careful to maintain this low-vol period, though some indicators are showing us that a recession or an outright regime shift looks inevitable eventually.
Probability of a Recession in the next 12 Months
The Fed has started rescuing overnight repo markets, having injected an estimated total of $275b into the overnight interbank lending markets in the past several months. This is concerning — during the aftermath of the 2008 financial crisis, only $800b was injected into overnight repo markets to rescue flailing banks over a period of a year. In 2019, $275b has been poured into markets in just three months.
One way to predict a recession is to look at the inversion of the US Treasury yield curve (10YR - 3M). As we see below, the US Treasury Yield Curve inverted first in May 22 and stayed inverted for five months, where it then fully un-inverted in September, steepening from there. These conditions are ripe for predicting a coming recession in the 12 months coming.
Increased QE coming
Despite markets being at all-time highs and recession signals flashing more intensely, Central Banks are still continuing to favour expansionary policies increased QE, with a >50% potential of a fourth rate cut in 2020. Some analysts say the Fed has tampered with the 10yr-2yr rates so that it was inverse only for 2 days before reverting back. This is short-term bullish for most risk-on assets, given that it implicitly means that the Fed is still willing to pour money to keep markets alive and bullish for the next year or so.
Likely to Maintain a Low Vol Environment
The below chart shows the fluctuations between high volatility and low volatility regimes over the past 100 years, measured by S&P 500 1-month realised volatility. Historically, low volatility regimes last for up to 10-20 years at a time.
What this could mean is we will likely stay in a low vol environment for the next few years due to increased central bank intervention. The end game is when central banks start defaulting on their debt.
Extreme Greed in Overall Markets
Overall, markets are still greedy. As a cautionary tale, remember that markets have never crashed when everyone was bearish.
To reiterate our thesis, we’re in a short-lived low-volatility period with nearly every single metric with which we measure markets at cycle extremes.
The global macro landscape is an important pulse for us to keep track of, given that there are many unknown unknowns for how Bitcoin will perform in an environment that is not absolutely bullish. What this could mean for Bitcoin amongst a huge range of possibilities is that as central banks start defaulting on their bad debt, the demand for a hedge against central bank insolvency and against fiscal irresponsibility will skyrocket. This could also mean that during an inevitable regime shift, when most risk-on assets will sell off strongly from their ATHs, Bitcoin could also do the exact same.
Crypto Volatility Positioning
Given that 256 Capital Multi-Alpha Fund invests in funds that employ long-volatility strategies, we closely monitor the crypto volatility environment and relevant price action to ensure that the strategies we invest in are performing as indicated.
BTCUSD 1-Month Realised Volatility Picking Up
On a rolling one-month basis, Bitcoin volatility is currently in a mid-range at an average of 70%-75% after rising up from lows below 50% at the start of October.
This should be good news for our long-vol strategies that one-month volatility seems to be on an uptrend.
Fund Landscape
The market for Funds has been very difficult across Q3 2019. Our friends at Vision Hill Research have put together an index to attempt to track the performance of crypto fund managers. To provide some context around labeling, VH-ACI represents a composite index of the three categories of strategies: Fundamental (ACIF), Quantitative (ACIQ) and Opportunistic (ACIO).
As you can see, the performance for Fundamental and Opportunistic fund managers is very correlated to BTC movements, while Quantitative funds seem to have a far more contained amplitude in their swings. We attribute these returns to Alpha and Beta respectively - Fundamental and Opportunistic strategies rely on generating returns from Beta exposure, while Quantitative managers arguably have some more alpha generators which enable them to generate returns that are less correlated to market movements. For this very reason, we named the fund “Multi-Alpha Fund” - we want to invest in multiple funds that have defensible alpha-generating products to build a diversified portfolio, not tracker funds or funds investing/trading on beta.
We will dive deeper into how we assess the fund landscape and what we look for in funds when it comes to building our portfolio in a separate post.
Final Words
This is our first newsletter so if you have any feedback around our structure or if there are topics you think would be worth covering, please do not hesitate to reach out to us.
Across the rest of November and December, we will be in Sydney and Malaysia respectively, followed by a short stint in Shanghai so should you happen to be in those areas, hola our way!
Best,
Cindy & David
The information contained or attached herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. This presentation may contain forward-looking statements that are within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. This email is for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product, service of 256 Capital Partners as well as any 256 Capital Fund, whether an existing or contemplated fund, for which an offer can be made only by such fund’s Confidential Private Placement Memorandum and in compliance with applicable law. Past performance is not indicative nor a guarantee of future returns. Please consult your own independent advisors. All information is intended only for the named recipient(s) above and is covered by the Electronic Communications Privacy Act 18 U.S.C. Section 2510-2521. This email is confidential and may contain information that is privileged or exempt from disclosure under applicable law. If you have received this message in error please immediately notify the sender by return email and delete this email message from your computer.