Investing in transformative technology
Q&A with Manuel Anguita (pictured), co-founder of top-performing blockchain- and crypto-focused hedge fund Silver 8…
How did Silver 8 come to invest in crypto assets in 2015?
Much of the credit must go to my business partner and Silver 8’s other co-founder, Jose Suarez, who is responsible for the vision. Jose has been a serial entrepreneur and tech investor for the best part of 25 years, experiencing first-hand the development of the internet. I have a very different background as I’m a financial markets professional, mainly in the hedge fund arena. We met 20 years ago when I was starting my career with Goldman Sachs in New York and Jose was heading Walker Digital, Jay Walker’s (founder of priceline.com) innovation lab. I moved back to Europe, but we remained friends since.
Back in 2014, Jose asked me to take a serious look at bitcoin and the technology behind it. I was initially very sceptical as I really did not understand what the purpose of this new technology was, but Jose was persistent and encouraged me to read the materials he sent across. I followed his advice and soon became hooked in an intellectual capacity. I left everything I was doing and challenged myself to really understand how an open blockchain could function as an alternative source of trust to the traditional financial system. It took us almost a year to develop a conviction, but we finally invested the first dollar of our own capital in the summer of 2015.
What is your investment approach?
Although we initially focused on blockchain technology, the overall investment aim of Silver 8 is to achieve outsized returns by providing exposure to different technologies that, in our opinion, will be transformational for trade, finance and commerce. With this thesis in mind, we designed a flexible investment strategy that enables us to express our views via three different asset classes: digital assets (aka crypto-currencies), venture capital, and financial technology related equities, all under the same investment vehicle. These three asset classes allow us to get exposure to early, growth and more mature stages of the technology development cycle.
In terms of the risk profile, we started the fund with a very high conviction that blockchain-based digital assets were going to develop rapidly. Therefore, our fund had a bias towards early stage technology exposure, on the higher end of the risk spectrum. Although we remain primarily invested in blockchain related assets, we now also have exposure to other fintech areas.
We are primarily a research-oriented firm; we spend time understanding technologies and companies that can have a material impact that we can monetise for our investors. Having said that, in most of our positions we have an investment horizon of one to three years; we are not extremely long term oriented. In addition, a smaller portion of the book is dedicated to short term trading, given that digital assets markets are still imperfect and offer beautiful trading opportunities. We also have some venture capital positions that will likely take several years to realise. Therefore, our investment strategy is a base layer of fundamental convictions on top of which we keep degrees of freedom to be nimble when necessary.
What are your thoughts on 2018’s retracement and the current status of the blockchain space? What are the main potential triggers that could turn the market?
Digital assets experienced a phenomenal rally that started in 2016 and accelerated in 2017 to a level that, quite honestly, nobody expected. In fact, according to industry publications, Silver 8 was the top performing technology hedge fund in both years, and the overall top performing hedge fund across all strategies in 2017.
Behind this prolonged and outstanding rally there were a number of reasons, some of them firmly based on strong fundamentals and others that were derived from excessive speculation. In 2018, the market has corrected considerably from the previous indiscriminate excess. At the time of writing, the overall digital asset market has a total capitalisation of around USD300 billion, down from the USD800 billion peak reached in early January.
In our view, blockchain technology remains in the realms of early stage development, so we believe many of the consumer-oriented projects being launched are just a few years too early. We remain convinced that this technology is going to provide an alternative financial architecture, primarily for developing regions of the world, but it is still going to take several years until we see a consumer facing working deployment. We are still in the phase of developing a blockchain protocol standard, for which a number of projects are competing. As a consequence, we are quite selective on the exposures we take.
When dealing with assets with 100 per cent realised volatility, making short term predictions is a fool’s game, at least from our perspective. We would rather focus on technological developments, adoption metrics and market technicals (not so much technical analysis, but more understanding overall money flows). On the technology side, we are seeing promising projects and a very healthy growing number of start-ups and young engineers building up the necessary expertise. From an adoption perspective, the space is experiencing hype and doom cycles that reach higher bottoms after corrections (measured in terms of overall awareness of the technology). However, the technology is still lagging behind in terms of actual users, due to high barriers to adoption, primarily in terms of usability, security and regulatory clarity.
In terms of market flows, digital assets remain mainly a retail phenomenon, larger outside US and Europe. Nevertheless, the market structure is rapidly evolving, and we believe it is a question of time before institutional-grade products are developed. There are already several contracts for bitcoin futures listed in the US and a number of ETF and other products are awaiting regulatory approval.
Setting aside the noise and volatility, we strongly believe this is a market that is here to stay. Purely from a portfolio management perspective, digital assets offer a unique combination of liquidity and exposure to the asymmetrical pattern of returns of early stage technology. In our opinion, no other asset class offers this profile. Certainly, early stage technology is very risky in absolute terms, but it is also driven by return factors unrelated to the economic cycle; therefore, digital assets and traditional assets returns remain uncorrelated.
Does Silver 8 have any institutional investors? Who is the largest investor?
We have a number of institutional investors that include insurance companies, funds of funds, investment advisors and foundations. These currently make up about 40 per cent of the fund. The principals remain the largest investors with more than 25 per cent of the fund, and the balance comprises Family Offices and HWNIs. The majority of our investors are US-based, followed by South-East Asia and Europe.
What sets Silver 8 apart from other funds in the crypto realm?
When we started investing in crypto back in 2015, there were only a handful of funds with exposure to the space. Now, there are more than 300, the majority having been established from mid-2017 onwards. Being early participants has allowed us to develop deep expertise, especially in the operational complexities of this new asset class. With one of the longest track records in the industry, we’ve directly experienced its tremendous development, and we’ve had to adapt our procedures to all of its operational and technical idiosyncrasies.
Secondly, we’ve made every effort in assembling a product that is as institutionally inviting and friendly as is currently possible. From our documentation, to service providers, to legal & compliance, etc, everything has been prepared with this objective in mind. We want to offer a sensible approach to exposure within blockchain and wider financial technologies that is of institutional ilk.
Finally, Silver 8 relies on the combination of 50+ years of professional investing experience of our principals and the rest of the team. The length of tenure, combined with the mix of backgrounds, has allowed us to apply the standards of a professional hedge fund management approach to a new asset class with a strong technology component. We leave you with a thought that many funds have either a technology savvy leadership team or one that has financial markets experience; Silver 8 is one of the lucky few to have both sides of the coin.