State of crypto asset management in 2019

How to invest your money safely?

Asset management is a service for investors that allows them to outsource trading decisions. You give your money to an experienced trader, they use those money to generate profit, and that profit is divided between you & trader (of course, you get the largest part of the pie). It sounds amazing in theory, but is it true in practice?

Let’s take a look at performance of active asset management companies (“hedge funds”). According to report from PwC, the median fund returned -46% in 2018 vs a Bitcoin benchmark of -72%. So an average hedge fund manager did better than regular hodler, but still showed a loss. Meanwhile, the median quant fund returned +8%. So a quant programmer did much better than a discretionary / fundamental fund manager. Praise to the coders!

It’s curious to see that quant funds constitute just 37% of all funds (other 44% being discretionary and 19% being fundamental). Looks like the minority outperformed the majority yet again. However, of all quant funds, 14% don’t have the ability to take short positions. That means during the bear market, they contributed to the losing side of quant fund returns distribution (remember: +8% is median, so some quant funds underperformed).

Summary: it is possible to use asset management services & achieve positive returns, but you’ve got to invest in quant funds & pick them wisely (see “Best practices” below).

Other providers

Besides hedge funds, which actively trade with your money, there are other companies that also provide financial advice.

Index funds

Index funds hold a basket of assets with predefined ratios (e.g. 50% Bitcoin, 20% Ethereum, 5% Dash, …). Since they only manage your money in a passive way (buy & hold), their performance is equal to market performance.

Index funds tend to do better in bear markets and worse in bull markets. This happens because they mostly hold well-known assets, and in bear markets well-known solid assets fall slower, while in bull markets, less-known speculative assets rise faster.

Index funds also charge a management fee, which is kind of ridiculous, considering that you can construct the same portfolio yourself. They do save the headache of managing private keys, but remember — not your keys, not your money!

Venture capital funds

Venture capital funds invest in crypto-related projects by buying equity instead of tokens. They also don’t actively manage your money, but they help the companies they have invested in by making introductions. These introductions help to secure partnerships, or hire talent, or find customers. Essentially, the best VCs are actively pushing their companies to the top.

Venture capital funds strategy is based on fundamental analysis, which tends to work OK in traditional markets & not-so-OK in crypto markets. The situation may change in future, but currently crypto is mostly about speculation, so only those projects that have speculators as customers are doing well (e.g. Binance, which has traders as customers).

Since venture capital funds are long-only by definition, they do worse in bear markets & better in bull markets. This happens because in bear markets, the negative sentiment pushes down even the stocks of truly profitable companies, while in bull markets, the positive sentiment launches the stocks of all companies to the Moon, and of the truly profitable companies — to Mars.

Pump groups

Pump groups are designed to take your money. The pump operators buy the tokens beforehand, and sell them to you at the top. Don’t listen to their advice for the love of Bitcoin, or you will lose it.

Mic drop.

Paid groups

Paid groups are different from pump groups: their operators only provide personal outlook on the current market situation. They don’t profit if you make a losing trade. However, they don’t profit if you make a winning trade either, so they are not exactly incentivized to provide good advice.

Some operators are actually trying to help you become a better trader. Others are just enjoying the fees they take from you, providing made-up advice with utter confidence.

There’s no statistics about the performance of paid groups. However, if the operator is a consistently profitable trader, why wouldn’t he disclose his trading history & open a hedge fund? This way, he’ll be able to make more money from fund performance fee, and the investors would have better guarantees. This logic makes me skeptical about paid groups as well.

Best practices

Statistics say that your best chance of making money with asset management services is to invest in quant funds. You can further improve your chance of picking a winner by following the best practices:

Check trading history: ask the hedge fund manager to provide a read-only API key that shows a profitable trade history. If they can’t provide an API key citing security issues, run away : they’re lying to you, because a read-only API key doesn’t allow you to make any trades & doesn’t allow you to withdraw. If they provide a CSV export but not the API key, run away : they’re editing the CSV export to remove bad trades. In short, your message to the fund manager should be “API key or GTFO”.

: they’re lying to you, because a read-only API key doesn’t allow you to make any trades & doesn’t allow you to withdraw. If they provide a CSV export but not the API key, : they’re editing the CSV export to remove bad trades. In short, your message to the fund manager should be “API key or GTFO”. Always control your deposit: never send your money to fund manager & send provide the “trade-only” API key. This way, he’ll be able to make trades, but he won’t be able to withdraw your money from exchange.

Agree on max drawdown (max percentage of initial capital that you can lose): don’t allow the fund manager to trade all your capital away. Continue to monitor the fund performance: even the best-performing strategies can fail, and when they fail, they do it spectacularly.

If you follow those rules, you’ll be fine. At least, your bottom line will be higher than for most other investors.