Crypto Hedge Funds Just A Part Of The Opportunity For Aaro Capital
Much of the activity in the digital asset fund of funds space involves either selecting hedge fund managers of cryptocurrency-related strategies, or venture capital fund managers which invest in blockchain-based start-ups. Not many fund of fund strategies do both, and fewer also look to managers to provide them with exposure to public equities where digital asset technology can, is, or will, have a significant impact on the company or the industry they serve.
Peter Habermacher and Ankush Jain founded London-based Aaro Capital, a multi-manager-focused digital assets firm, in 2018 to do just that.
“We think that companies that implement and adopt digital technology like blockchain will enjoy a significant competitive advantage in the coming years,” said Habermacher. “We launched Aaro Capital because we want to get exposure to the entire digital asset growth story, not just cryptocurrencies, or blockchain technology. It includes public equities as well.”
Whilst Aaro Capital takes a thematic approach, the current remarkable performance of Bitcoin and Ethereum, the two flag-bearers for the cryptocurrency industry, means that the focus for now is building out the cryptocurrency hedge fund manager stable. Diligencing those managers, however, is very different to diligencing a hedge fund manager trading traditional markets.
“In crypto, track records barely extend beyond a few years. Plus, it’s very volatile, so it’s difficult to rely as much on the numbers,” said Jain. “The operational side comes in much earlier in crypto. We need to understand how they custody the assets, they need to have appropriate insurance in place, they need a robust valuation framework – and we need to know how they’re funding their businesses, because they need to be sustainable in the medium to long-term.”
Like many firms in the digital asset space, Aaro Capital spends considerable time educating potential investors. Firms like BlackRock, BNY Mellon and Tesla have all made headlines recently related to their respective cryptocurrency initiatives, and developments like these are certainly providing a tailwind for digital asset bulls. Bad press still follows cryptocurrencies and blockchain technology around, but Habermacher says that the connection with crime is misunderstood.
“The links to the Silk Road [the online black market shut down by the US Government] are still there – some people still think that blockchain-based technologies are only useful for criminals. But once you can link a name to an account there is no way to hide what that person has done. More generally, blockchain is one of the most auditable technologies that’s ever been created,” said Habermacher.
A lot of the current excitement in the digital assets space revolves around the DeFi – Decentralised Finance – space. Aaro Capital are keeping an eye on this space, too.
“DeFi is what many think is the next stage of evolution – cutting banking costs even further and increasing trust by replacing entirely financial intermediaries with smart contracts and code,” said Habermacher. “It’s very promising and certainly a part of our roadmap.”
The media coverage of the extraordinary pace at which the digital asset industry has evolved - and continues to evolve - focuses heavily on the middle and back office areas of running a digital asset investment firm - custody of assets and security of exchanges to name just two. Interestingly, Aaro Capital has observed an interesting change with regards to the make-up of the people who run these investment firms as well.
“Before Bitcoin’s collapse in 2018 there were definitely a lot of younger managers with not a lot of financial markets experience which made it more difficult to sustain themselves – you saw that with the number of closures around that time,” said Jain. “But in 2019 we began to see more managers with more experience of managing risk. The teams we are seeing have past experience of managing drawdowns or prior experience in investments that they are now applying to the crypto markets. It’s another evolution of the industry and one that more risk-conscious participants like us welcome.”
Aaro Capital has built an advisory team of professionals who have been in and around the Fund of Hedge Funds space most of their careers: Chairman Stuart MacDonald, previously of Henderson Global Investors and Aquila Capital; Peter Rigg, formerly CEO of HSBC’s Alternative Investments group; Tushar Patel, CIO and Managing Director of Hedge Fund Investment Management and Dr. Mattia Rattaggi, Co-Founder of SEBA Bank AG. The appointments are designed to help Aaro Capital be institutional-ready in the same way that they expect underlying managers to be.
Aaro Capital’s broad footprint in the digital assets space means that they need a way to map the industry and the risks, as well as the opportunities. The firm has – with the help of their advisory board – developed a set of indicators to that end; indicators which, currently, are all pointing in one direction.
“Our indicators help us predict traditional market cycles and crypto-based market cycles. With technology like blockchain, it’s all about predicting where it will be in five years, not right now,” said Habermacher. “And all of our indicators right now are green.”
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