BlockTower Capital’s hedge fund of cryptocurrencies was trudging along. Then, unexpectedly, it more than doubled its returns this year as most investors and companies languished from the coronavirus-stricken economic downturn.
The fund – loaded at its August 2017 inception with $140 million in assets – has returned 33% in just the first four months of 2020, two BlockTower investors said. The four-month return beat in that period bitcoin (up 20%, according to the CoinDesk Bitcoin Price Index), the S&P 500 (down 10% in the biggest drop since the 2008 recession, according to Federal Reserve Bank of St. Louis data) and hedge funds broadly (up 21.4% in crypto and down 4.5% out of it, according to Eurekahedge average return profiles).
Despite the havoc coronavirus wreaked on markets, the fund did better in those four months than the stock index did in any full year since 1997. And as a result of the climb, the fund returned 73% for those who invested from day one and held on through to last month, the investors said. The lifetime return trounced the S&P 500, which returned 18% over the same 33-month period. However, the fund trailed bitcoin, which gained 217%.
Before this year, the fund rounded out a respectable if less spectacular 30% lifetime return for investors, according to a return sheet reviewed by CoinDesk, matching the S&P 500 but underperforming bitcoin’s 162% gains.
Those two and a half years ending in 2019 were choppy as well. The fund swelled 254.5% in 2017, lagging behind the mean return that year of 1,708.5% for crypto hedge funds but surpassing the 8.4% achieved by regular hedge funds, according to Eurekahedge data. Bitcoin by itself fared better than the BlockTower fund that year, gaining 1,296%.
Then, in 2018, the BlockTower fund's holdings contracted 62.8%, compared to losses of 71.8% at Eurekahedge-indexed crypto hedge funds and 3.8% for other hedge funds. Bitcoin fell 72.6%.
Finally, last year, the BlockTower fund rebounded 12% versus a Eurekahedge average 15.6% return for crypto hedge funds and 8.7% for regular hedge funds. Bitcoin outperformed them all, climbing 88.2%.
How did BlockTower Capital stage a roaring comeback in the throes of an economically ruinous global pandemic? The firm declined to comment on the record, but another source familiar with BlockTower said, without going into exact strategic calls, that the hedge fund has been deploying spot, derivatives and algorithmic trades to capture returns from extreme movements, market dislocations and sudden volatility like the recent market upheaval.
Beyond bitcoin, on which BlockTower lost $1 million over missed call options that bet the price would soar to $50,000, the hedge fund trades multiple liquid and illiquid cryptocurrencies, according to the return sheet. Illiquidity implies that the coins have low trading volumes on exchanges or token agreements precluding sales to third parties ahead of retail investor buy-in.
The hedge fund “looks across the spectrum of crypto-assets” and switches between holding and liquidating bitcoin, ether, four ether competitors and other coins, said the source. “It really depends on the day, and on the market regime.”
Team building
The shake-up in returns could be a harbinger of what is to come with Wall Street pros entering cryptocurrency investing. BlockTower Capital has been poaching bulge-bracket banking executives left and right to refine its trading strategies.
Last year, Elizabeth Ralston, previously a Goldman Sachs vice president, was hired as BlockTower’s legal director. The year before that, in 2018, Citi accountant and BlueMountain Capital hedge fund manager Michael Bondar took over BlockTower’s operations, and Steve Lee, a Goldman Sachs Tokyo and Singapore portfolio manager, was placed in charge of BlockTower’s Asia investments.
The hires were made by BlockTower’s co-founders at the urging of one of its investors, who said they became concerned when “they had one [trading] position that was way too big, percentage-wise, of their portfolio.”
“They went and got good people out of the finance world,” said the investor.
BlockTower was co-founded by Goldman Sachs vice president Matthew Goetz, BlockTower’s chief executive officer, and Susquehanna Investment Group trader and University of Chicago endowment fund manager Ari Paul, BlockTower’s chief investment officer. Michael Bucella, the second Goldman Sachs vice president at BlockTower, joined as a partner when the fund was conceived.
Prior to the apparently revamped portfolio strategy, the hedge fund’s returns zigzagged from month to month, in keeping with the erratic cryptocurrency markets. The best month, April 2018, gained 49.6%; the worst month, March 2019, lost 30.9%. Returns decreased for 17 months — one in 2017, 10 in 2018 and six in 2019 — and increased 0.9% on average over 29 total trading months.
Constraining that volatility were one-year individual and three-year institutional investor withdrawal limitations for the fund’s limited partners, which include family offices and venture capital firms like Andreessen Horowitz and Union Square Ventures.
The fund has managed in 2020 about $60.8 million, factoring in investment returns, withdrawals, subscriptions and fees. BlockTower Capital's individual investors put up at least $1 million, and institutional investors at least $3 million.
BlockTower Capital’s lock-up periods are tall asks next to the quarterly redemption schedules of Polychain Capital’s crypto-asset hedge fund, which trades bitcoin, and Pantera Capital’s alternative coin hedge funds, which don’t. Both funds weather comparable volatility.