Now that advisors have several methods for accessing cryptocurrencies and other digital assets alongside and on behalf of their clients, asset managers are launching innovations to offer differentiated access to crypto.
So it is with recently launched crypto products that not only provide access to the token’s price movement in a U.S.-domiciled product wrapper, but also claim to offer built-in risk mitigation. Two such products – one from CBOE Vest, the other from THOR Financial Technologies in partnership with separately managed account (SMA) provider Eaglebrook Advisors –use technical signals to trade in and out of crypto or crypto futures on behalf of their investors.
“Thus far the biggest story has been just accessing this space, but one of the challenges, especially for professionals committing assets to the space, has been extreme volatility,” said Karan Sood, the CEO of CBOE Vest. “Bitcoin’s long-term average volatility is just short of 100%.”
The mutual fund solution
CBOE Vest’s strategy purports to offer some bitcoin-linked returns while controlling for the volatility by allocating to something with a cash-like return during drawdowns.
“Our strategy, at its simplest, will seek to vary the exposure to bitcoin futures in response to the volatility experienced by bitcoin futures,” said Sood. “If volatility is high, then the fund will decrease its exposure to bitcoin futures. If volatility is low, the fund will increase its allocation. So it’s a dynamic allocation to bitcoin futures adjusted on a daily basis.”
CBOE Vest has several products that provide similar risk-adjusted exposure in different product wrappers and asset classes.
An SMA answer
THOR’s partnership with Eaglebrook has integrated its trading algorithms into SMAs offering advisors direct access to bitcoin and other digital assets held offline in cold storage at Gemini Trust. THOR’s algorithms control volatility and its technology enables streamlined client onboarding, trading execution, rebalancing, portfolio and tax reporting.
The strategy, which launched in November 2021, moved out of bitcoin at $62,000 to a 100% cash position, sparing its investors much of the token’s price decline, said Brad Roth, founder of THOR Financial Technologies.
“We use our technology just like we do in equities, as of right now when we get a volatility signal we’ll convert to a cash-like position,” said Roth. “Right now, our client is doing what it meant to do. During the recent drawdown we were just sitting there flat.”
THOR launched last year and has grown to over $1 billion in assets under administration (AUA) across its model portfolios.
While CBOE Vest builds products targeted towards financial professionals, Sood said that thus far most of the interest in plain-vanilla bitcoin futures products has been from self-directed investors.
Financial professionals have greater demand – and appreciation – for regulated investment vehicles like exchange-traded funds (ETF) and mutual funds, said Sood, because they are more likely to suit the best-interest requirements by which they are often bound.
“There are other challenges for intermediaries because they are managing these assets in a multi-asset portfolio, and nothing comes close to delivering the kind of volatility – or, historically, the kind of returns – that bitcoin has delivered,” said Sood. “You would think that most want to offer clients enough access to bitcoin to have the returns move the needle as a portfolio, but that often will result in accepting a certain amount of volatility as well.”
But skepticism abounds
Some practitioners in the crypto-for-advisors business are wary of such risk mitigation strategies.
“I wouldn’t say they’re a bad idea,” said Dan Eyre, the CEO of BITRIA, a firm providing advisors access to cryptocurrencies on behalf of their clients. (BITRIA was rebranded from BlockChange late last year.) “The way most investors are looking at digital assets are as an investment they can make that offers a very strong upside, but also a lot of volatility risk.”
Eyre suggests that investors just hold cryptocurrencies directly instead.
“If you look at any two years since the digital asset ecosystem emerged, there’s no period where if you held the investment you would have lost money on it,” he said. “Most actively traded risk-mitigation strategies don’t actually outperform just holding an investment. Yes, we see a lot of volatility, but that’s okay because most of it is upside volatility. If you try to call tops and bottoms, even through an algorithm, you could miss out on some things while generating a sizable tax bill.”
Sarson Funds, a crypto asset manager and education provider for advisors, has launched its own risk mitigation products.
John Sarson, the firm’s CEO, leveled criticism at the risk-mitigation trading strategies as overly complex.
“Wall Street wouldn’t be Wall Street if it didn’t take a straightforward investment and attempt to wrap it in many different packages ‘to meet investor needs,’” said Sarson. “While some of these products will make sense, others will make more sense for the issuer than they end up making for the client. Algorithmically derived investment programs may work sometimes, and other times will almost certainly let their users down. At Sarson Funds, we believe that using call writing programs with volatility-adverse investors in bitcoin makes a lot of sense.”
Sarson’s call writing program, most prominently featured in its Crypto & Income strategy, uses the volatility of crypto to create monthly income using covered calls. That income stream helps buffer against down or sideways markets.
Eyre also advocates for fundamental analysis in digital assets for investors seeking additional alpha.
“There’s a good chance that fundamental analysis will perform technical active trading in most cases, but if you do want to do active trading, there are hedge funds you can go to that do that better than anyone else,” he said. “If you were really trying to limit the risk of volatility, if the client is very concerned, then maybe digital assets aren’t for them. There’s nothing wrong with that.”
While Sarson favors a covered-call strategy, he acknowledged that there’s room for several different risk mitigation strategies in the space.
“For investors that otherwise view cryptocurrency as ‘too risky,’ these products add great value by managing risk and bringing a client into this emerging asset class,” said Sarson.