How a Crypto Quant Company Shrugged Off the Bear Market and FTX Exposure

[ad_1]

Crypto quantitative trading firm Pythagoras Investment Management LLC weathered the turmoil of 2022 in a rare position. Corporate funds were up 8% for the year, even with exposure to the implosion of crypto exchange FTX. However, market turmoil halved the company’s assets under management to less than $40 million as wary investors pulled out.

In a chat with CoinDesk, Pythagoras Founder and CEO Mitchell Dong discussed the company’s cutting-edge strategies, how risk mitigation changed after FTX, and why there are still has hope for the future of crypto.

Market neutral fund strategy

The market-neutral Pythagoras Arbitrage Fund edged up 0.1% in December, but ended the year with a net gain of 8.8%, according to an investor letter shared with CoinDesk.

We’re just looking for the gaps, said Dong, who has more than 25 years of hedge fund operating experience. We look for opportunities to buy low and sell high simultaneously whenever the software detects an opportunity to do so.

The trend-following Momentum fund fell 0.4% in December, but still ended the year with a net gain of 8.1%. The fund takes long and short positions depending on what the technical indicators show.

FTX Exhibition

The main threat to Pythagoras Arbitrage Fund is counterparty risk. In order to perform instant transactions, the company must keep money on the exchanges. Pythagoras diversifies its assets across at least a dozen exchanges with no more than 10% of its funds with a single brokerage, Dong said. Prior to the collapse of FTX, Pythagoras had 10% of its assets with this exchange.

Dong and his team immediately requested a full withdrawal from FTX, but only 7% was recovered before the exchange suspended withdrawals. The remaining 3% loss was covered or offset, first by shorting FTT tokens the native token of the FTX exchange, then taking advantage of a temporary discount on Bitcoin and Ethereum futures contracts on the Chicago Mercantile Exchange (CME) which were 3% to 5% lower than comparable prices on Binance.

The story continues

Pythagoras has since tightened its exposure to exchanges, now favoring those with the best technology and the best credit rating and the lowest counterparty risks.

Current Crypto Climate

Dong spoke to the biggest investors in the companies that sought takeovers and had wanted to pull out until the dust settled. These investors have a long history with Pythagoras and have indicated their intention to return to the crypto fold in the future.

The bad news is that we’ve had redemptions, Dong said. The good news is that there is less competition, more price dislocations and trading opportunities. Previous professions that had been deleted are back.

Read more: VC Pantera firm’s 2023 crypto predictions point to the future being DeFi

[ad_2]