Quants Ride Into Crypto Wild West in the 500% Bitcoin Comeback

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Three years ago, Doug Greenig stopped trading the momentum of the S&P 500 to bet on everything exotic from Malaysian palm oil and Chinese plastic to Colombian interest rates.

Today, the founder of $820 million Florin Court Capital trades in some 350 alternative markets -- and none have felt as wild, lucrative or cutting-edge as Bitcoin. As it soars past $22,000 for the first time, Greenig and a growing number of his peers are trying to exploit systematic rules like trend-following and price arbitrage in the booming world of crypto.

“It’s the perfect asset for trend models,” said the former chief risk officer at AHL, now part of Man Group Plc. “An asset where the fundamental value is harder to pin down may be more capable of generating sustained trends than assets where everyone can quickly agree on what they’re worth.”

Florin Court, which trades a large number of assets in addition to Bitcoin, is up 0.9% this year, Greenig said.

JPMorgan Chase & Co. and Nomura Holdings Inc. reckon momentum-chasing robots have been a force driving the world’s largest digital currency in this record-breaking year.

Quants Ride Into Crypto Wild West in the 500% Bitcoin Comeback

Fragmented liquidity and a top-to-bottom trading range of more than 500% this year are proving both a friend and foe to exotic quants seeking to exploit the crypto Wild West -- without getting killed by Bitcoin’s famous volatility.

Specialized funds attempted to trade digital currencies with the kind of systematic methods used in stocks and bonds back in the 2017 mania, but with mixed success. Now more are being drawn in as the crypto world starts to mature and investors from Stan Druckenmiller to Paul Tudor Jones embrace it as a portfolio diversifier.

With crypto still a rarity on quant portfolios, data on the industry is scarce. According to a May report from PricewaterhouseCoopers LLP and Elwood, the most common crypto hedge fund strategy is quantitative, accounting for about half of the $2 billion industry as of 2019.

Quants see a big opportunity in theory since their trading rules should apply across assets, based on the belief that humans are prone to behavioral quirks. Trend-following, for example, is built on the notion that humans have a tendency to follow the herd in everything, from single stocks and oil to Bitcoin futures.

Quants Ride Into Crypto Wild West in the 500% Bitcoin Comeback

It’s not proving so easy in practice, though.

Just ask Peter Kambolin, who’s run his own quant hedge fund for two decades. The founder of Systematic Alpha Management started a tiny crypto fund in 2018 that crashed in the market drawdown last year. Now, he only trades a few million dollars of the asset class in managed accounts.

When he went all-in on Bitcoin this year, it was based on a judgment call rather than any systematic signals.

“We saw the impact of massive printing of cash by governments around the world and so we made the decision that mostly likely Bitcoin will benefit,” he said from Miami.

Kambolin has now added a mean-reversion signal to his momentum models so that he won’t get whipsawed by sharp reversals.

Quants Ride Into Crypto Wild West in the 500% Bitcoin Comeback

Similar to their pitches on the old Wall Street, more hedge funds are experimenting with strategies like Kambolin’s to protect clients from sell-offs -- even if it means failing to match digital assets’ blockbuster returns. Bitcoin has rallied 215% this year, while cryptocurrency hedge funds are up 136% through November, according to a Eurekahedge index.

Cambrian Asset Management, whose executives hail from the likes of Millennium Management and Winton Capital, is also hoping some downside protection will help the firm lure Bitcoin-curious family offices and institutions.

To achieve that, its new crypto fund sets a high bar for expanding its wager and a low one for dialing it down, says co-founder Martin Green. That means going into Bitcoin’s 25% slide in March, for example, it was fully hedged. The fund with $35 million is up about 120% gain this year, according to a person familiar with the matter who asked to not be identified because the returns aren’t public.

“We want to be the designated drivers of the party,” Green, a tech executive, said from Mill Valley, California.

To many quants that left their steady paychecks for the crypto world, the wild ride and market inefficiencies are part of the appeal. That’s the case for Sam Trabucco, a former trader at high-frequency shop Susquehanna International Group, now at crypto trading firm Alameda Research.

At the proprietary trading startup trading up to $2 billion a day, automated programs take advantage of price gaps across exchanges. When data at one bourse gets glitchy, the startup tries to detect that early and make money from those being fooled.

“The crypto markets are more volatile and the platforms are less trustworthy at some level,” the 28-year-old Trabucco said from Hong Kong. “There are a lot more low-hanging fruits that exist if you’re strategic.”

©2020 Bloomberg L.P.

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