How Two Crypto Hedge Funds Dodged the Market Crash

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The cryptocurrency space is having one of its toughest times in memory, with trouble brewing at exchanges and lenders, and token prices crashing. But one company managed to overcome the volatility.

Pythagoras Investment Management LLC has two funds that have been rare bright spots in a market that has been gutted by a number of scandals. Its Market Neutral Fund — a strategy that has no exposure to the price of any crypto at any time — and its trend-following Pythagoras Token Fund have each gained around 8% this year, according to the company. Meanwhile, the world’s largest digital token, Bitcoin, is down around 60% this year.

“We particularly outperform in bear markets,” said Mitchell Dong, chief executive of Pythagoras. “Our absolute return funds are positive whether the market is bullish or bearish – whether it’s a bullish market or a bearish market, we’re going to have positive returns.”

The Pythagoras market-neutral fund uses arbitrage, which means that it simultaneously buys the same crypto at different places and at different prices, therefore buying low and selling high. Meanwhile, his trend-following fund uses technical indicators to detect short-term trends in the crypto market, Dong said.

The crypto market has been engulfed in scandals in recent weeks as FTX, Sam Bankman-Fried’s once-high-flying crypto exchange, filed for bankruptcy, reminding investors of the implosions of other asset firms. digital earlier this year. The collapse of FTX has also dragged down other companies.

The Pythagoras arbitrage fund had 10% exposure to FTX before the stock market crash. The company says it requested a full withdrawal of funds and received around 7%, prompting it to hedge by shorting FTX’s native FTT token.

The story continues

The collapse of FTX caused cryptocurrency prices to plummet, with Bitcoin at one point falling below $16,000, a far cry from its highs of nearly $69,000 just a year ago. The coin is now hovering around $17,000.

Pythagoras fund strategies play on the fact that crypto, which is global and traded on many exchanges, is driven by retail investors, Dong said.

“The idea is to use quantitative and technical indicators to try to spot trends, up or down,” he said. “When you detect an uptrend you go long when you think the psychology of people is that they think it’s going up. And when the trend is down and everyone is selling you go short .

Dong, whose previous roles included managing hedge funds for more than 25 years and trading uranium and power contracts, among others, founded Pythagoras in 2014 after bitcoin caught his eye. “Buying and holding bitcoin comes with 90% drawdown. That’s not my risk-reward profile,” he said. “I want steady returns of 1-2% per month , without wasting months. It’s the target.

Pythagoras is not alone, other market-neutral stores have also seen positive returns this year. The strategy doesn’t look as appealing during bull markets, when coins tend to see strong rises, but in a bear market, they can stand out, traders say.

Earlier: Once Dull Crypto Strategies Now Shine in the Bear Market

“The reason we can continuously produce returns is because crypto is a young and very fast-moving market,” Dong said. “In crypto, every day is a drama and every week is an adventure. Every quarter there is a paradigm shift and every year is a decade in traditional finance. »

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