UK crypto hedge fund braves market storm with arbitrage strategy

UK crypto hedge fund braves market storm with arbitrage strategy

Nickel Digital Asset Management's arbitrage fund is down only about 0.6% this year, compared to Bitcoin's decline of about 40% and the Nasdaq's decline of 24%.

A London-based cryptocurrency hedge fund is staying afloat despite a sharp drop in digital asset prices this year.

Nickel Digital Asset Management's market-neutral arbitrage fund is down about 0.6% this year, while bitcoin is down about 40% and the tech-heavy Nasdaq is down about 24% over the same period. As of April 30, the cumulative performance of Nickel's arbitrage fund since inception in June 2019 was just over 30%, excluding all fees. The firm manages about $300 million.

Nickel's CEO, Anatoly Crachilov, attributes the positive performance to not taking directional views on the market and not using long or short bets on crypto assets. Instead, the firm relies mainly on price dislocations in cryptocurrencies. "What you're really exploiting is dislocation between spot and derivative markets," along with arbitrage across different crypto exchanges, Crachilov told CoinDesk.

Investors in the funds can't make massive profits during a period of rising crypto prices, but their capital is protected during market corrections, Crachilov said. "When [the] market goes down, I want to protect my capital, and that's exactly what this strategy delivers."

'Volatility is our friend'

Typical market-neutral equity arbitrage funds yield about 8% annually, according to Crachilov, who previously worked at Goldman Sachs and JPMorgan. He believes crypto funds can beat that figure in the short term as major market dislocations occur. In the longer term, as crypto markets become more efficient, Crachilov expects similar returns for his clients in the 8-10% range. Last year, Nickel's arbitrage fund returned 15%.

Nickel's arbitrage fund avoided Terra exposure, although Crachilov noted as a bright spot for the industry that derivatives markets remained "very orderly" during Terra's collapse. He cited that most exchanges remained open for trading, whereas in earlier years there was greater systemic risk to crypto assets and exchanges. The ecosystem has improved, he added.

As for the overall volatility of the crypto sector, Crachilov and Nickel's team of former Wall Street and hedge fund professionals embrace it.

"Volatility is our friend," he said. "When people complain that crypto is way too volatile - from my perspective, it's not as volatile as I would like it to be," Crachilov told CoinDesk.

It remains a choppy environment for crypto participants, as Galaxy Digital CEO Michael Novogratz pointed out in a tweet on Friday.

"Crypto is trading poorly," Novogratz wrote. "This will be a time to test people's convictions. We will find a bottom when we find it. The move away from trading markets is because we don't have corporate buybacks and giant pension shifts causing this pressure on equity markets."