Another great month due to the volatility of the basis throughout the month. Absolute yields haven't bounced back to the lofty heights seen at the start of August, but we remain well placed to capture value from any volatility that results, whether cryptocentric induced or otherwise.
Another good performance in July (2.67% after fees) as the digital asset yield structure remained volatile in a month mirroring June in many ways. We believe crypto as an election issue will remain a persistent source of volatility for markets and feel well placed to take advantage of those changes in sentiment as they evolve.
Another solid performance in June (1.88% after fees) as the digital asset yield curve remained volatile. There were no significant events to speak of, just a steady flow of trading between exchanges and yield maturities, enhancing our alpha extraction. We continue to increase volumes on the CME and look forward to strategy enhancements on Deribit and OKX exchanges shortly.
Digital Asset Funds Management’s Digital Income Class (previously know as Opportunities Class) won the Hedgeweek Global Digital Asset Award for Relative Performance of the Year – Digital Assets Fund (Trailing 24 Months).
The trading environment in May paled in comparison to April as we saw a steady increase in the dated futures yields without any commensurate uptick in the volatility. With the yields at loftier levels at month end than where they started we expect the near term performance of the strategy to remain solid. We returned to trading on the CME as the yield differential between there and the other exchanges tightened. Further system enhancements have been deployed during May, with more in the pipeline over the coming months.
Digital Asset Fund has reached a 3 year milestone! The 'Investor Letter' takes you through the successful journey of Digital Asset Fund since its launch in 2021.
April provided the most fertile trading environment for the strategy since DAF's launch in May 2021, with a 9.4% return after fees. A nice birthday gift for our investors! Coming into the month we observed an ultra high yield environment in the digital asset space and significant variability across exchanges. The yield remained consistently volatile but also trended lower which, combined with a few sharp liquidations, contributed to the strong overall return. Of note, given the structure of the yield curve in the crypto native exchanges, we made the rare decision to minimise our CME exposures and optimise our capital usage. In due course we will look to resume trading there. Additionally, we began trading a broader array of derivative instruments in OKX and will roll that out to other exchanges in the coming weeks.
The fervent trading environment has seen yields continue to make new recent highs, albeit with relatively subdued short term volatility keeping trading profits suppressed. The fund continues to have a material amount of carry marked into the curves - if history is anything to go by we will realise this when the market inevitably deleverages. The most notable market dynamic is ETH yields outperforming BTC at times, in particular the short end. Fundamentally we would expect proof-of-stake ETH to trade at a relatively flat yield to USD, suggesting there are some participants expecting an ETH ETF to follow in short order.
Overall February was a good month for the strategy. Whilst the headline return was moderate, the position has a large amount of embedded carry that should be realised in the coming months. Volumes were good, although not to the same level as we saw in January. We’re beginning to observe a shift in the CME landscape as traditional market participants now have access to the yield arbitrage between holding a long spot ETF position vs selling a future. This was long mooted and is now occurring. What this implies for the longer term trading of the CME futures for the strategy is still not wholly clear but will unfold in the next few months.
January proved to be the best month for the strategy since the heady days of 2021. This was due to a combination of factors: multi year highs in long dated futures yields, significant sustained volatility, liquidation events, consistently high trading volumes and the popularity of the BTC ETFs. With implied yields remaining favourable, the impact of the BTC and potentially ETH ETFs in the market and the BTC halving in April, we expect to see a continuation of the friendly trading environment. Additionally, on the trading system side we expect to go live with a suite of new instruments across the bulk of exchanges we trade on, leading to more opportunities.
Volatility increased and basis (the spread between spot and futures) widened, indicating more leverage being added into the crypto markets, to levels we haven’t seen since late 2021. Conventionally this has been a good trading environment for the strategy and December and January to a larger extent have proved this again.
The unidirectional move provided less trading opportunities than we’d hoped. Coupled with the increasing futures yields (12% in March 2024 for example) that we continue to sell into meant the overall performance was modest. We expect that this yield environment will be conducive to a more profitable future return profile.
Leverage started to return to the market for the first time since prior to the FTX collapse, a full year ago, all the way back in November 2022. This was evidenced by the widening basis in the futures, particularly Bitcoin, and specifically in the Chicago Mercantile Exchange (CME) where we see institutional interest piquing.
A relatively dull month on the trading side with limited volatility in either token. CME is becoming an ever more influential venue for price discovery, evidenced by their increasing share of the derivatives market.
Overall a busier month than we’ve encountered for some time. Whilst overall movements in spot and basis were range bound, we did enjoy a particularly violent sell off on the 18th. This occurred during the period where the CME Futures were closed in early Asian trade, a generally illiquid time. We were able to capture many of the opportunities that presented themselves in that 30 minute period, and this episode contributed to over half the monthly return. The move itself was largely driven by technical actors in the options market and we saw all the futures dislocations in Deribit, the principal options trading venue.
July continues on from prior months with CME yields remaining bid over centralised exchanges. The suite of support services continues to expand in the crypto space. We’ve had tentative discussions with providers that aim to provide prime brokerage or trading bridge support to help streamline our capital efficiency and market access
CME yields continued to be bid over centralised exchanges over the course of June, with short date yields printing as high as 30%. We expect the CME to continue being indicative of institutional positioning after the implicit endorsement from BlackRock’s ETF application - the June23 BTC roll market was the most active we have ever seen into expiry along with open interest approaching all-time highs in the active contract. We have the infrastructure available to take advantage of these opportunities and continue to explore options to reduce the friction required to capture them.
On the trading side there wasn’t a lot to note. As a potential consequence of the continued SEC clampdown on crypto exchanges, the CME becomes the venue to where institutional money prefers to hold crypto exposure. With yields not insignificant, the carry cost may become a factor.
April marked continued favourable trading conditions for the DAFM strategy with yield dislocations persisting between crypto native exchanges. CME continues to attract institutional interest . A majority of the opportunities have been seen in BTC, with ETH mostly a sideshow. We continue to work on deploying stablecoin denominated futures into the broader DAFM strategy in addition to exploring custody solutions that mitigate counterparty credit risk. The team adhered to collateral quotas, having no more than 12.5% of funds on deposit per crypto native exchange.
A similar trading environment to February as market participants that left the market post FTX are slow in returning. This increased illiquidity is generally a positive for the DAFM strategy and we’d be happy for it to persist. The main opportunities we see remain in the CME vs crypto native exchanges where different types of market participants reside. Institutional vs retail predominantly. Development work continues, we aim to integrate stablecoin denominated and margined futures into the trading system in the coming months
We saw similar market conditions to January as the fallout from the FTX implosion continues to wash through the industry. Leverage continued to return the market, observed via higher implied yields in the futures and perpetuals, as they rose to levels we hadn’t seen since the middle of 2022. Higher implied yields are the best marker for profitability of our strategy. Trading spreads stayed relatively wide and liquidity still hasn’t meaningfully returned. We continued to observe institutional funds coming back into the market via the CME. We maintained tight control on individual capital quotas at exchanges, keeping no more than 12.5% at any exchange during the period.
Leverage crept back into the market with the move higher in spot. We saw this in both futures and perpetual yields across all the instruments we trade. This was coupled with wider spreads and thinner liquidity as market participants withdrew post FTX to provide the most fertile trading environment for our strategy since 2021. Notably, we saw significant interest in the CME, where we observed a marked shift in positioning from institutional money as they cut shorts and turned long for the first time since mid 2022. We maintained tight control on individual capital quotas at exchanges, keeping no more than 10% at any exchange during the period. We note that there’s been a distinct change in sentiment from crypto native exchanges post FTX, where there’s a much higher degree of transparency around assets held on exchange, and also in exploring novel methods for removing counterparty exchange risk by holding client assets in third party and escrow accounts. Something we wholeheartedly embrace.
The FTX bankruptcy created the most illiquid market environment we’ve seen all year, as market makers stepped back from derivative markets and counterparty credit risk was at the front of everyone’s mind. The paradox was that volatility remained relatively muted. DAFM implemented tight controls on outright exposure that we’d run in crypto native exchanges as we monitored the observable inflows/outflows. This inhibited our trading activity at times, particularly in Binance, but we were still able to take advantage of opportunities that these markets presented to post a solid monthly return.
A quiet start to the month, which was then dominated by the collapse of FTX. Unfortunately related to this was the destruction in value of exchange coins that we held in order to qualify for reduced trading fees, causing further fund underperformance. The post FTX crypto landscape provided a fertile trading environment, with high volatility across venues. In the week after the collapse the principal driver of profitability was the large and volatile spreads between the CME and crypto native exchanges. As the opportunities of the CME against crypto exchanges waned, we saw other opportunities between crypto native exchanges as they took turns in trading more expensively relative to each other.
October was a particularly uneventful trading month, in hindsight, the lull before the storm. Spreads to the spot price, and the volatility of those spreads remained in tight ranges, providing a barren landscape of trading opportunities. For the first time in crypto’s history there was more volatility in traditional markets than crypto, with USD interest rates the main driver in the traditional markets.
The Ethereum Merge provided a complex trading environment with very little certainty around how the “Forked” Proof of Work token would be created and how it would trade once implemented. Additionally, there was ongoing conjecture around whether the Merge may get delayed all adding to a difficult market to price dated Futures dependent on that information. Bitcoin was largely sidelined during the month with little interest on either side and no leverage to speak of coming into the market. This manifested in a very flat and stable Forward curve. Not an ideal market environment for our strategy.
It’s all about the Merge and our positioning around this to ensure no surprises from the myriad of complex instruments that we trade, whilst simultaneously trying to take advantage of this event. The expected PoW token drop on the split from PoS has created distortions in the markets, resulting in yields of greater than negative 100% APY in the short term.
It was a month where the Crypto markets seemed to take a breath after the tumultuous events of June. Crypto Markets rallied overall but there was little conviction in most participants and that kept leverage/yields muted, and thus trading opportunities limited. The announcement of the Ethereum Merge date came into focus and the staking rewards on offer in ETH 2.0 has been another factor depressing yields.
The Digital Opportunities Class posted its 14th consecutive positive monthly return and was ranked 6th in the Barclay Hedge monthly performance ranks.
Yields remain depressed however we were able to take advantage of the volatility more so than other months this year. We continue to add to the suite of products and evaluate additional exchanges that the algorithm can consider in its trading decisions. With the perpetual improvements to the system we remain as confident as ever that we can take advantage, in a risk neutral fashion, of any opportunities that the market presents and add to our 14 consecutive positive months in all market conditions.
With the collapse of Terra and the extreme volatility we took an even more cautious approach to our risk parameters. Whilst the magnitude of opportunities of previous corrections didn’t eventuate we were able to trade 24/7 without incident and record 13 straight months of positive results.
Despite challenging conditions, pleased to see the Digital Opportunities Class performing positively. This fund was ranked based on the data in BarclayHedge’s Managed Futures Database
April marks the one year anniversary of our fund and we are very happy to have returned 55.87% to investors in the first year without a negative month. We want to thank our investors for trusting us with their capital in the early stages of the fund.
Strategy tweaks and some pickup in market activity hint at more favourable conditions.
Jonathan Shapiro of the Australian Financial Review wrote about us on 22/10/2021.
