A trivial story. I trusted money to a fund manager, and all my money disappeared. What is interesting is that the “disappearance” occurred within a few days after my request to redeem from the fund. Fund’s NAV per share resembles Nassim Taleb’s turkey weight chart.

I was sold after the word “arbitrage”. Early in my career I used to do equity arbitrage myself, so I had confidence in this market-neutral investment strategy. The other parts of the Fund’s strategy were “Trend and counter-trend trading strategies”, “with minimal correlation”. The founders of Cryptolab Capital Dmitry and Rostislav impressed me as smart and trustworthy guys. MSU and Stanford alumni, a team of quants in California and Moscow, and so on.

https://cryptolab.capital/#executives (they deleted the page)

I invested in June 2019, and the nice performance ended. The fund’s NAV was twitching back and forth, but by the end of February 2020 it remained at about the same level where I got in. That’s when I decided to take my money back.

On March 8, I send an email: “I want to unsubscribe”.

March 10, GP calls: “I have unpleasant news; our Fund has just suffered a loss of 20%. But we know how to make it back. Do you still want to unsubscribe?” — “Of course I do! “.

March 12: “Sorry, but today our Fund lost 100% of assets and will be liquidated.

Here is the managers’s description of events: on March 7 the algorithm named “Stakannik” began to accumulate long position in XBTUSD. By the end of March 8th, the algorithm brought the position up to 3X AUM. The next morning, managers decided to manually cut the position. But liquidity has evaporated. By the end of March 10th, they managed to reduce it by only a third. On March 11, they tried to reduce the position by placing limit-price sell orders that were not taken. On March 12, the market began to fall even faster, managers tried to sell at market, but this time BitMex exchange rejected market orders. As a result, the exchange auto-liquidated all positions.

The administrator confirmed that there was no withdrawal of funds; all the money was genuinely lost.

Of course, I signed the form that I accept risks and know that I can lose everything. But I didn’t need a fund to buy bitcoins with leverage. I gave money to participate in the investment strategy that I couldn’t execute on my own. However, instead of a set of uncorrelated algo-strategies, GPs put all assets in a leveraged long in the highly volatile instrument. Such mistakes are common for unexperienced investors. And such mistakes a not common for experienced institutional asset managers. It just didn’t add up.

It turned out that the other two GPs of the Cryptolab Capital, Alex and Roman, are “experienced people”.

https://www.youtube.com/watch?v=AwJyzbZOt4c&t=50s

Alex Butmanov presented himself as a seasoned asset manager. He claimed that his firm, DTI Algorithmic, developed algo strategies and managed “more than $100 million” on clients’ accounts at Interactive Brokers. It sounded solid. But several former investors of Butmanov claim that he fraudulently charged clients’ accounts, forged signatures, and was banned at IB. I checked with Interactive Brokers, they vaguely confirmed that by saying “you would not be able to appoint Alex Butmanov as a manager now”.

There are investors, who claim that they trusted Butmanov money, but he did not manage them, and spent on his own needs. Other investors claim that Butmanov pitched them high returns of algo-startegies, but then invested almost 100% into a single small cap stock or OTM options, which lost value fast. There are few instances when people got their money back. Some are suing him. Unfortunately for investors, Russian courts have a complicated logic. “It was established that Butmanov did not return the money. But it was also established that he did not have a license to manage money, therefore, he was not a real investment manager, therefore, he did not had the right to accept money, therefore, this was not a “risk hedging agreement”, but a gambling bet between two equal parties. Case closed!”.

I found four cases against Butmanov’s Dream Team Investments (former name of DTI Algorithmic) and Butmanov himself (in Russian):

ZAO Forrest House, misappropriations of funds, 2015

NefteTechnologii Ltd, misappropriations of funds, 2016

Virozets, did not repay the loan, 2015. (In this case Butmanov forged an IOU note)

Otkritie Broker, did not repay the dividends, 2017

I know of about 10 investors who think they were defrauded by Butmanov out of millions of US Dollars. Some of them say that there are dozens of victims. Most of them do not want publicity because of the reputation risk. Police can’t investigate the facts of misapplication of funds, not to mention investigating the rouge trades. Regulator, the Central Bank of Russia, does not seem to care.

I have a suspicion that such a spectacular blow up of the fund and such remarkable personalities managing it is not a coincidence. I suspect that to siphon investors’ money out of the fund and into the own pockets is a simple trick for them. They either write themselves a free option, by putting clients’ money at risk of annihilation and earning huge fees if that bet works. Or they earn money by placing bets against a client’s position when it needs to be liquidated. Or both.

If you are an investor of Cryptolab Capital or know about Alexander Butmanov, please contact me via DM or email me at cryptolabblowup@gmail.com