Atitlan is a London based and FCA regulated wealth manager, providing liquid, diversified and market-neutral Crypto-quant investment solutions. Its raison d'être is to demystify Crypto by providing clear, attractive, risk-tenable returns from a diversified, quant-only portfolio of strategies. Its flagship fund, YRD Diversified Alpha Fund [YRD], is an institution-grade, liquid, and market-neutral Crypto-quant investment vehicle.
Yuval Reisman, Atitlan’s Founder and CEO, and his team have been making Crypto-investing accessible to Family Offices since 2017. We spoke with Yuval, his CIO Barnali Biswal and Shahar Larry, Atitlan’s Head Writer, about the role of Crypto in the global financial and innovation ecosystem and why Family Offices should get involved. Think of this as a “how-to” guide to cryptocurrency: the benefits of investing, the risks to avoid and the tangible next steps you can take to diversify into the digital arena.
“Cryptocurrency matters. It is an important financial and monetary tool fostering a vibrant tech ecosystem and driving real, value-creating innovation that will affect all of us in the coming decade.” Barnali Biswal, CIO, Atitlan Asset Management
Cryptocurrency is something widely spoken about within the Family Office community but rarely understood. Can you offer a brief explanation of cryptocurrency?
YR: Perhaps a good start is to introduce crypto’s underlying technology – Blockchain. Blockchain is a ledger. This is not a metaphor. It is literally a list of transactions, not unlike other ledgers managed on a spreadsheet. It differs from traditional transaction recording methods in that it does not require a central intermediate, e.g., a bank, to validate and guarantee the records. It is distributed, i.e., identical copies of it are kept in thousands of computers all over the world. It is immutable and encrypted (hence the name Crypto) which means it cannot be re- or overwritten.
It is a remarkable technology that is being used in many industries, from insurance to media, real-estate to healthcare, and of course financial and money markets. Which is a good segue back to Crypto. Crypto assets can be roughly divided into two buckets: those that only store monetary value (e.g., Bitcoin) and those who have other additional utilities such as Ethereum that can be used to build software products.
SL: Crypto is indiscernible from money or securities. Securities, such as stock, do more than just reflect value. They have governance functions. Similarly, Ethereum has additional utilities on top of reflecting monetary value. The fundamental nature of the Ethereum Blockchain is the same: a transaction ledger. However, the term “transaction” is expanded. Instead of just recording the transfer of money, each transaction also transfers machine-code. This code is used to run blockchain-driven applications for a variety of use-cases as Yuval mentioned. This matters because if we think of Crypto as a security, the floor-value of the security should be tethered to the economic value created by the underlying venture. With Ethereum this connection is even stronger, as the more developers use it for developing new technologies, and the more users use these applications, the higher that value is.
BB: You can think of the whole ecosystem along three axes: Technology, Finance and Product. Technology is the Blockchain, Finance is where most of the headlines, talk and Twitterverse gathers. The ethos of that space is to minimise the cost of capital in order to maximise the rate of return. Product is Web3, digitising legacy products and inventing new ones. Within our framework we will be speaking about the Finance axis.
How do you navigate volatility? Something Family Offices tend to steer away from.
YR: The short answer is textbook. On the trading front, we hedge, just like in traditional markets. On the risk side, we diversify. The thing is that history repeats itself. In the 1970s, options were invented. Then in the 1980s hedge-funds. 1990s was short selling and the 2000s about high-frequency trading. All of these things seemed prohibitively complicated at the time and most people shied away from it but for those who did not, they were able to make a fortune. Crypto is just on the cycle of ‘something new’.
New markets are many times volatile. Crypto is abnormally volatile because of its unique trading and market characteristics. This will not change soon. However, it represents an unmanageable risk exposure only in the case of discretionary, direct investment in crypto assets. Since correlation dynamics are complex, diversification is not trivial. Let me put it simply, if you control risk effectively with true diversification, and minimization of human bias, volatility becomes a fertile ground for arbitrage and value-dislocation opportunities. To be clear, controlling risk does not mean risk is eliminated, as we have recently seen. This is not for everyone. Nevertheless, the risk parameters we work in are in the same ballpark as those found in traditional financial markets, while returns are an order of magnitude higher.
BB: Our mission is to make something that is ultra-complex, simple for a traditional investor. We offer diversification but a question we answer is, diversification of what?
Diversification of volatility and extreme correlation. As the world is more globalised and digitised, risk assets are heavily interconnected. Because we are market neutral and because we do not invest via one single style, we bring a specific uncorrelated alpha that is largely decoupled from any specific asset class. We do this via algorithmic quantitative strategies. Why do we think this thesis holds water? Because of the design of this asset class. Crypto is digital so being quantitative is critical. If you are dealing with something highly automated, highly technical, you are better off taking most of the human element out. Also, our past performance from the last five years reflect that.
We often hear of the negatives associated with digital currencies. What are the benefits of investing for Family Offices?
SL: People tend to underestimate risk and overestimate return; we know this from the work of Tversky and Nobel laureate Kahneman in the 1970s. I think that in volatile markets this effect is much stronger. When the return can be very high we tend to lose sight of the potential risk.
I like to say that greedy people should shy away from Crypto. Greed focuses on the huge possible upside, while obfuscating the associated risk. That is a recipe for bad decisions.
Crypto is often demonised in the press for its high-risk and volatility but a lot of the noise is completely unrelated to the market itself. Take fraud as an example. Fraud exists in every market and is in fact much more prevalent in traditional financial markets than it is in crypto. We do not hear about it that often as a lot of the risk is mitigated by insurance companies, which we all pay for most of the time in hidden fees. The negatives in Crypto are not an act of God. They can be counteracted if one knows how. If you take a more volatile market, you must understand that risk is the most important thing we need to look at and ask, can we take this market and normalise it, bring it to the point where the risk it represents is tenable? The return might not be negative 70% or positive 80% but they are still much better than traditional markets.
I think the main benefit for Family Offices is the ability to tap into a market within a framework of risk that is manageable to them and I would say my trust in it stems from the fact that the underlying economy is strong and productive. I know the people working in it and the innovation it produces. I think once you shed the negative elements associated with it, the core of the underlying economy is productive, innovative, progressive and helping mankind – it’s not all games.
This is an emerging market, it is solid, the core is strong and you can access it with manageable risk. When the financial axis is strong, it offers liquidity into the market, liquidity drives innovation, innovation drives value creation, value creation drives returns and drives more liquidity in the market. That’s the cycle we are running here. If the core of the innovation, technology and product is robust then the liquidity will generate the progress, that progress will generate the value, the value will generate the return and so forth. That is the upside of investing in this market.
What are the common misconceptions of people who have been successful with digital currencies? How true is it that luck is just as important as skill set?
YR: Many people who have made a fortune in digital assets were lucky. They invested early and sat on it which is not a very rational thing to do because if you buy something and it goes up 30% you are happy to go home. Many of those who came in early and became millionaires were not experienced investors and in many ways, their fortunes destroyed their lives. It was almost like winning the lottery. There are however a lot of people in the asset class who come from traditional finance and have a view on the market which is professional and sober.
SL: Warren Buffet visited Las Vegas when he was very young and later said that after a couple of months of being there and seeing the way people gamble, that he was going to be extremely rich. He understood from a young age that a professional analysis of the market is always superior to rolling the dice and seeing what happens. What we are advocating for is that the market itself has volatility but some of it can be adjusted, managed, contained and approached from a perspective that is palatable to those who have a professional appetite to finance.
What is your biggest success story?
YR: It’s our track record which is superior to any other asset class including Equities, Ethereum, Bitcoin and others.
SL: I spent the last year investigating and comparing our results to common indices, commodities, traditional markets, S&P and Nasdaq. We’ve been consistently better than any other index or traditional finance environment I have seen. Even in the last few months that have been quite turbulent to say the least and returns have been negative. I keep looking at our generally flat performance in a market that is tanking. As an economist, I can’t help but think – this is the definition of an alpha. If everyone else is losing 15% and you are flat, you are proving your investment thesis. Stay the track.
What must Family Offices be cautious of when diversifying into digital assets? What additional checks and balances can you offer them?
YR: I have several. First, keep focused and try to avoid erratic investments. Second, remember that risk is not your enemy. The mismanagement and dislocated valuation of risk is the enemy. In fact this gap between actual and perceived risk is the main source of our alpha. Third, do your due diligence (or if you can’t make sure your proxy does). I’ve been doing this for five years. I used my experience to continuously improve and refine our due diligence. Four, do not disregard reputational risk. Crypto markets are still under-regulated and it is up to the “buyer” to discover about the people on the other side, their credentials, experience and reputation, as well the regulatory and oversight framework. This was one of the drivers behind our move and the significant resources we invested to become FCA regulated.
SL: You can learn from mistakes, you can have due diligence, you can look at reputational risk, you can look at the teams and the people and it will still happen. I can almost guarantee that this will happen to us or someone else. It happens all the time. The solution is to make sure your processes are robust but also flexible enough to allow you to learn from your mistakes. The solution is also diversification and not just in the sense of diversifying your portfolio allocations but selecting multiple managers, multiple strategies, multiple avenues and even exchanges. Every risk element in the diversification chain has to be mitigated.
No matter how secure your guide is, he or she can still find themselves in front of a sophisticated crook. So the only way to do this is to spread all of your risks all of the time. Three words: diversification, diversification, diversification. If someone tells you they have an iron-clad, fool-proof methodology for avoiding this – walk away.
Among your Family Office clients, what would a typical digital currency allocation look like for a FO investor as a percentage of their portfolio?
YR: This is a single digit percentage, less than 5% certainly. Even then most of it goes to long-hold or smart beta products which are easier for the gatekeepers to assess. Now after the markets have received a hit, people have moved from beta to alpha – more of our world which requires more speciality and due diligence. Hedge funds are changing their PPM to allow trading of Crypto so I see the movement.
What do you envision the digital currency space to look like 10 years from now?
SL: I don’t know if this is wishful thinking or a true prediction, but I expect crypto to be normalised. I think crypto is money and the distinction between fiat and crypto is unnecessary. Once you realise there is a real economy underneath the currency or perhaps a lack thereof under fiat, you understand the risks of money. Just like any other economy, it behaves in the same way. I expect it to be normalised, I expect pay cheques to be paid in crypto, I expect the mass market to adopt it in the next 10 years. I expect some banks to be adaptive enough to adjust to the change while others suffer the consequences.
Many people think of the transition to or perhaps the inclusion of cryptocurrency as evolution. Evolution is often attributed to Darwin and the survival of the fittest but I think in his third or fourth edition because of eugenics appropriating his theory he added a preface in which he underlined that he meant survival of the fittest in the sense of adaptive. The ability to adapt to change, not necessarily the strongest, is critical.
Crypto will find its way into traditional finance, the distinction will disappear and it will be another means of transaction. Going back to the internet of transactions, blockchain is the most significant innovation period as it allows people to trade information, to transact and collaborate. Nothing worthwhile in humankind is ever done alone. Everything is based on collaboration. With a very strong infrastructure for collaboration and a financial market built upon it I see nothing but it is succeeding.
Tangible next steps for Family Office investors:
- Be serious: Take a considered, professional, and risk-adjusted approach: Risk tolerance and open-mindedness. Investing in Crypto, over and above the financial returns, is impact investing for the long term. It matters. However, you must do the legwork before diving in. An opportunity, even a once-in-a-lifetime opportunity, is always tethered to the risk
- Be humble: Do not reinvent the wheel. We invest in quantitative strategies that have been around for decades. Our speciality is applying these strategies to crypto assets in a way they are otherwise applied to FX or Equities.
- Get off the fence: Start small. Dip a toe. Most Family Offices in our network start with less than 5%. Build your confidence as you see the results.
- Be cautious: Overestimate risk, underestimate return.