Investing In and Hedging Crypto Markets (w/ Chris Sullivan and Raoul Pal)

Investing In and Hedging Crypto Markets (w/ Chris Sullivan and Raoul Pal)

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ASH BENNINGTON: If you love our crypto content or are looking to learn even more about crypto, be sure to checkout and subscribe to our new youtube channel after this video dedicated to all things crypto. Find new videos every week. Be sure to check the link in the description. RAOUL PAL: Chris, great to get you back on  Real Vision. It's been a while. I don't know  

if you and I have actually sat down  and talked on Real Vision before.  CHRIS SULLIVAN: No, sir.  But thank you for having me.  RAOUL PAL: Listen, we've got to know each other  over recent times. I'm just finding it fascinating   where this whole asset management industry is  starting to go. Just for people who haven't   seen it before, talk about a little bit about  your background, and what you guys are doing,   and then we'll just dig in a bit. CHRIS SULLIVAN: Sure. My background's  

more on the TA and trader side started in 2006 in  Morgan Stanley. Then broke out after the financial   crisis to form our own fund in 2010. We ran a  lot of fund all the way up until switching over   full bore crypto in 2018. My side is mainly  on the systematic allocations. I had to teach   myself code and design various trend following-- RAOUL PAL: Who teach an old dog like you code?  CHRIS SULLIVAN: Well, I'm not yet 40. Well, that's  a really good point to bring up because I think   my team is super unique and it includes rock stars  like Haim Bodek, [?]. I'm the humble servant of   the big guys. But I think our guys, we blend,  we're just old enough to have gone through that  

transition from ticket writing, which I even did  back in my day, at Goldman when Haim was there,   transition to the electronic and then the  high frequency and all that arms race.   I think our generation, call it 35 to 50, has a  unique experience in space in asset management   in general and in trading in general, that  likely will never be matched before in time.  None of the kids younger than me will ever to know  what it's like to open outcry on S&P futures, or   be at an actual trade desk, like Morgan  had a giant desk in White Plains.   UBS had a giant desk and stuff, and you know what  I'm speaking of. But now you have very few equity   traders on desks or bond traders on desks. It's  just an experience where the value out of the real  

time risk management and desk trading on top of  the tech end, whether it'd be CS or algorithmic   or machine learning, that hybrid experience that  we've had is really why we have a nice balanced   offering here that we first built for ourselves,  but now is scalable and repeatable, I would say.  RAOUL PAL: Why move from vol op into  crypto? They sound like different things.  CHRIS SULLIVAN: Well, yes and no. It's a loaded  question. In VIX trading during this last decade,   if you want to be long vol, you're about to see  money get smashed. We luckily ended up positive  

more than negative, but it just was a losing  effort out the gate to be hedging constantly for   the types of portfolios we're hedging, and people  allocate to vol funds not to have that negative   convexity but they want the positive convexity. I'm just doing that from 2010, really between   then and 2017, it was really difficult,  the VIX dropped all the way under 10.   That vol trading there really gets us excited  about crypto because what was a 90 vol, now  it's a 55 vol on BTC. That's very  exciting. A lot of alpha there,   a lot of risk management techniques you can  use to extract whatever thesis you have.  RAOUL PAL: When did you start the business or the  fund? When did you start this whole thing? And how   did you go about constructing it, because there's  no-- you were relatively early and there was no   tools in place to do any of this. Talk me  through that whole thing, when did you start? 

CHRIS SULLIVAN: Haim and myself and our  team, first, we're doing the basis ARBs, ---- RAOUL PAL: Hi, I’m Raoul Pal.   Sorry to interrupt your video - I  know it’s a pain in the ass, but look,   I want to tell you something important  because I can tell that you really want   to learn about what’s going in financial  markets and understand the global economy   in these complicated times. That’s what we  do at Real Vision. So this YouTube channel   is a small fraction of what we actually do.  You should really come over to  

and see the 20 or so videos a week that we  produce of this kind of quality of content,   the deep analysis and understanding of the  world around us. So, if you click on the link   below or go to, it costs you $1.  I don’t think you can afford to be without it. RAOUL PAL: any of this. Talk me through  that whole thing, when did you start?  CHRIS SULLIVAN: Haim and myself and our  team, first, we're doing the basis ARBs,   ETN over futures within the vol op structure,  doing some trade, redeem stuff in the ETF. It's  

just basic stuff that have made us a little  bit of money. We've invested in a Bitcoin ATM   company early on as a first GE type VC investor. RAOUL PAL: Which year was this we're talking?  CHRIS SULLIVAN: This is early 2017, before it  exploded. We started looking for a manager or  

managers, right knee, we have Q2 of 2017. I could  see it in the chart. We don't know much about it.   Read the whitepaper, got passionately involved  in the theoretical and the esoteric psychological   benefits of, oh, I can be my own bank and the  distributed ledger technology, but we knew what   we're good at which was crypto analytics. We hunted a few managers and did our due   diligence and we're just like, you know what, no  one we're talking to is doing it the way that we   would do it. But mid-2017, we started designing  a software to trade it, creating our own border   book. We aggregated at that time, six exchanges,  five points and created basically our own NBBO.  RAOUL PAL: NBBO? CHRIS SULLIVAN: National Best Bid in Offer,   old school term. Because we wanted to have a  midpoint price. Because of that fund, we had,  

very real tech access difficulties because  you had rest APIs. Those were unstable   and really, it was a cluster F to put together,  very manual. Even the signals were gray box,   we had models on Bloomberg terminal, we had a very  robust viewpoint that Haim built with aggregating   all the pipes, and then we had buttons to press,  very video game-esque, green for go, red for   sell. But once we figured that we had the tools  to actually trade effectively-ish, then we  

spun up the fund in 2018. We'd funded it large  scale our money, we're still 40% of AUM today.  RAOUL PAL: So, you set up a crypto fund that's  trading on algo models in 2018 and the markets   now plummet like a stone. How do you get on? CHRIS SULLIVAN: Well, thank God. As Haim put it,   we had ARB you could drive a bus through. We did  that mean reversion trading, and that gave us a   hell of a P&L for 2018. Very, very honestly, we  make 300 bps in a day and call it a day. Because  

you could basically just go back and forth between  the major venues at the time, Binance, Bitfinex,   Bitstamp, etc. and just know when to transact. RAOUL PAL: Did you take any   directional risk of that point? CHRIS SULLIVAN: Yeah. Well, I would   say roughly 25% was just buying the traditional  oversold signals on a daily basis and then selling   the overbought, just old school mean reversion.  And we just combine that with the arbitrage.  RAOUL PAL: And that worked in the crypto winter? CHRIS SULLIVAN: It did. 

RAOUL PAL: Astonishing. CHRIS SULLIVAN:   We had a lot of fun, and what where wasn't very  fun was when it compressed into that triangle   before dumping into December 2018. RAOUL PAL: Yeah, that was a scary time.  CHRIS SULLIVAN: yeah, and it was difficult  because the ranges had a lot of false breakouts. 

RAOUL PAL: Because this was I  think the Tether breakpoint.  CHRIS SULLIVAN: Correct. RAOUL PAL: That was when   Bitfinex had not funded themselves. That was  what was going on there and then they break.  CHRIS SULLIVAN: Yep. That was like, all right,  we're not getting caught just being a one trick   pony. That was really a bit aside, we got a lot  a little bit of attention to pad some investors  

in for Q1 2018. Let's diversify this into what we  want it to be. At that time, we didn't have any   exchange fees that were discounted for hedge  funds, and it was huge for what we're paying. So,   we got into doing market making and tagged on  additional strategies that were value add to the   portfolio itself that we knew we wanted to get to  because we've seen this before as you have going,   whether following RenTec or Citadel or two sigma,  those guys have really laid out how you do it   properly. That takes us all the way to here, where  we now have 11 systematic strategies going with   staking or the master nodes, really have an all-- RAOUL PAL: And that's all in one fund,   or is it separate into different  strategies, or it's just one?  CHRIS SULLIVAN: It's just one fund. RAOUL PAL: 11 different strategies  

going in one fund? CHRIS SULLIVAN: That's just   on the algo side. There are more strategies  than 11. We need to solve for intraday vol,   and then need to have two weeks to four-week  time horizons on the longer duration stuff.  RAOUL PAL: What does that do to the  volatility of the fund itself? Have   you dampened volatility but kept return?  How's it worked by adding all of this?  CHRIS SULLIVAN: Of course, as soon as you  get fancier, you give up some of the beta.   What we look at is obviously through Sharpe, we  also want to calculate the daily against MVAR.  

What's our actual modified value at  risk? Because if that is decaying,   or the attributes of the risk reward profile isn't  what we're looking for, then we got to retool it.  Here, we're really looking to play offense  and defense simultaneously. We've had a few   periods even in the most recent month  to date where there's outperformance,   more often on the down than the up.  It's nothing we designed really can grab   anything that defi or NFTs are doing. RAOUL PAL: Are you finding that  

you're smoothing the downside volatility  or generally profiting from it, whatever,   probabilistically and then more than 50% of the  time, it seems to be working but the downside   is pretty good and you capture a decent slug of  the upside. So, you're slightly smoothing the   volatility but creating a better Sharpe. CHRIS SULLIVAN: Yes, better Sharpe,   lower beta exposure to Bitcoin itself and  the indexes themselves. What it gives us,   since we designed this for my partners primarily,  is the experience that we're looking for as   long-term investors. What do you want to do? You  want to compound. You want to take advantage on   drawdowns in any systematic fund. Then we want to  do cash to the upside as responsibly as possible.  RAOUL PAL: What kind of peak to  trough drawdown will you stomach,   because you have the space has a lot of drawdown,  and it's a very volatile space. So, you've come  

out of the traditional world of which you would  have never had to deal with, A, the returns, B,   the volatility and all these things, how do you  think about peak to trough drawdown? Are you just   trying to ignore it? How do you deal with it? CHRIS SULLIVAN: No, I mean, not ignoring it. We   had a really nice event to highlight the different  last March. That was brutal to see it go down 59,   I think we're down about 22 or 21 a quarter.  That was where real time stress test.   At that point, maybe the hedges that we  have in place now or the magnitude of them   were not in place to the degree that they  are now, so that event would only cause--   I hesitate to speculate but call it 12% or 13%. RAOUL PAL: How did it compare versus what your  

VAR said it should do, because there's reality  and there's the model? How did you do it, because   it just didn't do that badly, down 22 is  not bad considering you're always invested.  CHRIS SULLIVAN: I would say it was 200,  300 bps worse than we had expected.  RAOUL PAL: All right, that's not  bad. So, you talk about hedging,   how the fuck do you hedge anything in this market  as well? It's the common thing people go to   me and like, do I need to open a Deribit account?  How the hell do I do that? What does this mean?   How do these futures contracts are all  trading crazy rich? Okay, how do you do it?  CHRIS SULLIVAN: It's not easy. That's why we  spend 99% of our time running it and re-analyzing   constantly. That's why even the acumen level  that my team has, which doesn't get much higher,  

it is very, very challenging and exciting, that's  why we're very passionate about it. But it starts   really, when you're doing systematic, because  we come from the long/short side. Automatically,   when we're designing a model and stress testing  it or running it through Keiko data or Bloomberg,   whatever system we're using to stress test and  back test, the setting for short becomes cash.  With the products ETH futures, BTC futures,  obviously, that's the lion's share of it. We   also do options in the OTC space with  our market maker friends that we have   a lot more confidence in than some of the DEX. RAOUL PAL: What are you doing in the option space,   you're just buying premium or  you're market making premium?  CHRIS SULLIVAN: Well, we do both. We  do market making on the premium on  

exchanges. On the OTC side, we're selling colors,  old school. Our fund takes the position of off   exchange assets and custodians, it's a mixture of  staking and net long. On that net long, we wanted   to perform and be hedged, selling 30 vol colors  and rolling them is just a simple way to do that.   Then we take the proceeds, reinvest and double  compound. Similar to staking, accepted annualized  

yield for selling colors quite a bit higher, it is  based on the basis on futures. Then reinvesting,   adds another couple 100 basis point to it. RAOUL PAL: Then how are you dealing with the   custody MPB and leverage and all of that stuff? CHRIS SULLIVAN: Our fund does no leverage. We   ascribe to Mr. Munger and Mr. Buffett, ladies,  liquor, leverage. We're all married, so that   limits ladies, none of us are alcoholics,  that's good. Then we don't use leverage.  RAOUL PAL: I'm not sure of alcoholics trading  crypto. CHRIS SULLIVAN: You can't, it's 24/7. 

RAOUL PAL: Cool. CHRIS SULLIVAN: If you are, you fail,   and we'd be out of business and you and I wouldn't  be talking. So, the fund doesn't use leverage,   nor does it intend to. I think looking at this  more top-down, I would argue whether it's CME or  

more traditional platforms coming out with more  options, I do think that the effectiveness for   larger capital to come to work, that would be  door opened again if the hedging elements can   be increased. But the problem with that is,  okay, you issue all these option contracts,   that doesn't mean liquidity is going to come. RAOUL PAL: Now, although the OTC market,   Galaxy ramping up, I was speaking to those  guys in Asia now, interviewed on Real Vision,   there's a whole bunch of people  starting to make pretty active decent  markets and they look like they're pretty deep in  Asia most of the year and essentially, vol sellers   in Asia, that gives rise to this two-way market. CHRIS SULLIVAN: Right, and we're vol buyers. It  

is right now and between Galaxy for example, we  can have as a QIV. We have visitors with them,   again, old school style. We've got shared wallets  with the custodians, to go back to your question,   and we actually have been doing this long  before we tuned a strategy to the custodian.  A lot of our staking is done at one custodian's  really, really good at it. One of them is just   running masternodes. They're very, very good at  that. Then a couple of the US custodians, they're   good at holding the shared wallets with our market  maker friends that we trade options with. So, we  

basically tuned the strategy to the counterparty. RAOUL PAL: How do you-- sorry, million questions.   And how do you allocate? Because I just  think it's fascinating. How do you allocate   amongst the various strategies? What makes  you decide you should have a strategy?   What makes you decide how much capital or  risk capital to put into a particular strategy   at any particular point? CHRIS SULLIVAN: It starts first--   well, I can get in a strategy genesis and walk  you through that process, but I guess I could   frame it first top-down allocation. Every month,  we're rebalancing in our investment committee.   How does that look? Based on the strategy  matrix, what was the correlation between the   strategies? What was it to the index? What  were we expecting, and then how did it do?  So, with that, we rebalance on this weighting  ought to be higher, this weighting ought to   be lower, but only within a few 100 basis  points, because we might try and anticipate   this strategy should do well in this environment  and then of course, you're always wrong. So,  

that's the point of having all the strategies. What's sexy about what we've built is   that it compounds into a period, which works  against you, obviously if you're losing. We   basically have in each container, it's completely  siloed from one another. So, we can really see   what the risk reward is of the strategy real time.  What are the daily returns? What's the attribution   of the risk reward, how's it looks for--? RAOUL PAL: So, you separate them in a P&L level,   so you don't pull your P&L and your risks? CHRIS SULLIVAN: Right. And we found that some  

of the hybrid strategies because you've got these  broad categories, like trend following, what does   that even mean other than buy, when it goes up,  sell. We've got some hybrid systems that seem   to work since they're reactive algos, we don't  have data going back decades. So, using some more   tricks of the trade from a trader's perspective,  and some pairing of reactive algos give us a   little more edge than the more traditional market  neutral or stat or long/short. We've still had on  

the set our long/short market neutral side that's  predictive, but the reactive side has a lot less   risk to it. Tighter risk controls, etc. RAOUL PAL: When you say you run the strategies, is   this just different algos that you've developed?  Or is that different teams you've got developing?   How the hell do you develop all these algos and  the skill sets and all these different things?  CHRIS SULLIVAN: Because our team has-- one aspect  of our teams go to the stock market neutral side,   one aspect is going to HFT market making. RAOUL PAL: If the stats-- I'm sorry, again,   a million questions, stats are  all the market neutral is like--   so like it might be, one oil company against  another and there's a relative relationship on   an intraday basis, you're doing it amongst coins. CHRIS SULLIVAN: Correct. What this team is really  

excited about, and I'll give you a little lift up  the skirt on our last investment committee meeting   last week, we're getting into a deeper modality  of cross currency. Because what I'm personally   getting sick of, and I know it's mine, and other's  benchmark, I don't want to trade this with fiat   for much longer. I just don't.  That's not why we got into this.   My tolerance for doing that is waning. We are rigorously testing both in BTC, ETH,  

especially layer-two against ETH that has its  own sex appeal. Then some of the native tokens   that we've rigorously test against Binance  like BNB, that's an incredible type of market   in itself. What's not there for me to do that at  an institutional level is the depth of liquidity   right now. But we are preparing for that moment. RAOUL PAL: How do you decide what tokens you're   trading? It's fine, all well and good, Bitcoin, a  bit ETH. But then there's this huge world of stuff  

that's correlated, you don't really care because  a lot of the time horizons are short stuff. You're   not buying into the concept behind it, you're  trading it. When does something become tradable   for you do you think it's worth doing the work on,  to get it into the model and set up the execution,   the PB and all the other shit you need to do. CHRIS SULLIVAN: That stuff takes six months to   do that per coin, to be very honest. Because we've  got your traditional auditor and admin and they've   got to approve and sign off and everything and  that's as bureaucratic as any other process. But  

I think from our perspective, because a few of  our team members are-- oh, Jesus, you would say,   we have a little bit of a code purists, chain  purist's bias. So, I would say, if something's   going to be qualifying for all of our systems plus  a net long exposure, like a bit on ETH, then we   have to really stick to the quantitative being the  lion's share of how we would rate and rank them.  But we do very much employ the qualitative.  We're vetting team, we're vetting code,   we're reading the code audits. All of that stuff  is very important for especially on the defi side,   what constituent might be added. But  there's a threshold that note token,  

we would add beyond the top 50. We're right now  at 28, our portfolio is constrained to 30. We're   old school in terms of cost. RAOUL PAL:   My guess is that nobody's probably wrong because  everybody's doing something in this space. But  

not many people are looking at the early stage  stuff and trying to build models around, whether  it's network adoption, or whatever it is that  gives you the 100x at this point in the cycle,   there's got to be signals that come  that you're probably able to figure out.  CHRIS SULLIVAN: Yes. It's both  qualitative and quantitative.   We're exposed to a lot of pre use case  projects and also consulted to underwrite them   for others. We are underwriting them  for ourselves, whether or not we spend   something up within the structure is to  be continued. Wink, wink. But I think  

we've got enough of hybridization on the systems  to where we can get ahead of this for a small   portion of the portfolio. Where the asymmetry of  that risk reward is just too huge to ignore, we're   going to get the signal real time and the stuff's  going to be 79% to 91% accurate on that signal.  RAOUL PAL: And that's a longer-term  time horizon, or is that shorter?  CHRIS SULLIVAN: Yeah, that's where it's like,  all right, this is going to eventually get   to where we need to be in that long, we  need to have some tusk, and whether we   identified those opportunities before anything. RAOUL PAL: That sounds like that's a separate   side vehicle as well. Because a lot of people  will be interested in that kind of specific  

exposure at the right point in the cycle. CHRIS SULLIVAN: To say, however,   we are very afraid and cognizant of being  a master of none, and do not intend to   offer any other product than this. RAOUL PAL: So, you just put it all   as part of the master fund and let it  generate its form of alpha within it.  CHRIS SULLIVAN: It's diversity of strategy,  to have things winning when others are losing   and others lose their money. RAOUL PAL: It's that millennial  

approach and others. CHRIS SULLIVAN: It is. RAOUL PAL: So, Millennium is a call it a 5 vol   fund that generates 8% return. What average vol  do you think you have and your average return over   the cycle? Not over the cycle, per year? CHRIS SULLIVAN: It varies, but I would   say we're not too much higher vol than that.   Maybe 25, 30 vol intra period with  a 60 mid-60s return annualized. 

RAOUL PAL: So, 25, 30 vol with a mid-60s average  return from that volatility? CHRIS SULLIVAN: Yeah.  RAOUL PAL: So, that's still a  significantly different Sharpe ratio,   and that's what I want to get into is  how correlated is that to Bitcoin itself?  CHRIS SULLIVAN: We're only running a point  four, point six correlated, we are correlated to   vol. RAOUL PAL: You're correlated to vol, okay. CHRIS SULLIVAN: Where it becomes negative on--  RAOUL PAL: Vol rises, you  make par returns, generally?  CHRIS SULLIVAN: Yes. RAOUL PAL: Because it's skewed,   you don't really care actually. CHRIS SULLIVAN: The space between those.   Because that would compound faster. And you know  the space better than most, when this vol rise,   you need to go in both directions,  but usually on the way up. Here,  

we've had vol compressed to multi-month lows,  but we've had enough on the intraday spreads   to make our fund money and compound that. So, that's why having a multi-strat spray.   Our HFT strategy is up 11 last month. I would  not have thought that. We designed it to be   only a couple 100 basis points. But as long as  there is both the day vol, and then the spread,   we have the ability to make money. RAOUL PAL: There's a lot of complexity  

to what you have to build. CHRIS SULLIVAN: Yes.  RAOUL PAL: It's a different cost structures  I can figure out because it's so early. The   fees that you pay, the custody services,  all of this. Are the fees still the same   in this industry as it is in the traditional hedge  fund industry where they've been getting crushed,   then they've got to be higher, right? CHRIS SULLIVAN: Yeah. You're talking about   the fund's fees or the fees we pay to operate it? RAOUL PAL: The fund's fees, what you charge. 

CHRIS SULLIVAN: Yeah, we're 2 and 30 on that  basic share structure. Most of the stat ARBs and   Millenniums, etc. and those comps is 3 and 35.  We went under that. I think from our perspective,   if you were to comp, it should be 5 and 50  to be honest, you just can't stop of that.   The operating expenses almost quadruple  of the funds we ran before and that was--  RAOUL PAL: Yeah. So, I was thinking and the  operating expenses got to be super high for this.  CHRIS SULLIVAN: Yeah, and that's before. We don't  really compare ourselves. We reinvest the funds.   Investors discover that real quickly when they do  due diligence, like holy shit, you guys are not   paying much in trading fees because you've  been around a long time. But, yeah, having  

multiple 16 core servers cost money, having all  the differentiated custodians having 12 trading   venues. All of that has an expense to it on top  of the usual stuff at the fund's side. We're not   isolated to Goldman Sachs as our single prime. RAOUL PAL: What do you think the magnitude   of alpha raise in the space in your group? Or  you've got big look at a load of strategies. So,   you get an idea of overall alpha. What  kind of alpha do you think is in that space   versus the alpha available to Millennium  who's running in traditional markets?  CHRIS SULLIVAN: I think it's  more than double. RAOUL PAL:  

I would say that way more than double. CHRIS  SULLIVAN: Yeah, I'm being conservative.  RAOUL PAL: I'm not asking you to  forecast your own returns or anything.   But I get a sense that the alpha here is  full cycle alpha over the whole thing.  

It's not 10%, 20%, can be 50% or 100%  of the overall asset returns over time.  CHRIS SULLIVAN: It also depends  on what you're calling full cycle.   Is that I would argue we've only completed one  and then two full cycles in crypto. We really   only have that concise period to look at. So,  it depends. This one, we don't really know yet.  RAOUL PAL: We don't know. We don't know. All I  know is the returns from the hedge fund space   from the crypto, pure crypto hedge funds,  have been eye watering writ large. It's been  

extraordinary from-- and that's from different  strategies. You've seen it across your strategies   how many strategies have been making money  in this, and it's not just a function of   beta because you've seen choppy markets, you guys  are short term, and yet in those choppy markets,   you generate return. The same is true, elsewhere.  Who else do you see-- what developments do you see   in the hedge fund, crypto hedge fund industry,  that you're thinking, oh, that's fascinating?   What are you seeing going on elsewhere? CHRIS SULLIVAN: What I really like is   the maturation of a lot of the beta in index  products. I think the accessibility as well as   the volume going into them shows the space is at  least in column three or four. Then what comes   next is funds like ours, or Argo, or any of those  highly active, highly disciplined fund structures   that are in the space and diversified. I think  that that shows us that that next move is coming.   I think the makers and prop firms are doing  stuff in defi that's fairly extraordinary. Most  

investors don't have access to that as you know.  But we're not really cognizant of what others are   doing because this is a 20-hour day gig. RAOUL PAL:   I haven't seen that many people doing what you  do, which is a multi-strat, very broad, very deep   crypto fund. What's been interesting is when I  speak to all of the participants in the space,  

you have Arca, they do a very different  thing. They're a bottoms-up token investing,   very poor, there's more asset allocation. Everyone's doing different stuff.   Money is really slow to flow into this space  still. And it blows my mind. It's like this is the  

biggest alpha the financial markets have generated  in a long time. Maybe since- - for a long time.  CHRIS SULLIVAN: That segment should be going  to us and others that you just mentioned for   the risk management. Like, okay, we get it, you  might be scared of a pure beta index fund that   already has the AUM you're looking to align  yourself with. But if you want these robust   hedging products and option products to become  real, the active funds that are in the space need   to be gigantic to support that to a trading of  that. Very realistically. So, you're right to say  

they're a little late to the party. RAOUL PAL: Yes. Look, we understand.   Everybody's trying to get Bitcoin on their books  first. Let alone this, but I found that the   family office space has been slow to the  crypto hedge fund space. I found that   banks, fund of funds, other allocators has  been relatively small allocation still to   what seems to be-- the last time I saw anything  close to this was when high frequency trading   really got going. There were some egregious  returns that came out of that for a while.  Then there was macro in the 1980s and 1990s,  gigantic returns. But even then, that was   like 15 vol and 30% returns, not like this. High  frequency trading is the only thing, but it was an  

arms race and it went. What's interesting  about this space is there's more tokens,   more complexity every day. So, it's impossible to  ARB it all the way. The alpha, I don't think the   alpha is going to go for a decade or two decades. CHRIS SULLIVAN: No, and we would potentially   get a little more of a risk taking between  these jurisdictional venues. If we assume   the US does some competent regulatory action  that would allow us to take a view, okay,   here's the box we can play in, we can go  further deep into these jurisdictions,   there's not going to be an NBBO for perps on  whatever platform, there's not. The convexities   here in US might be concave and then convex  in those other venues. But we're not going  

to take our money and invest our money  and silo it in a way that's not as secure   as a current way we're doing it to ARB that away. But in the event that we've got some clarity,   of course, that's there. At times, it  might be because these option or perpetual   expiration cycle might be eight hours, you have  different funding rates. People need to understand   what drives the pricing of these products. We take  more of a purist view where there's only going to  

be so much financialization product that this fund  takes. We want to be in the underlying. However,   for hedging and for alpha, those instruments  there, you can get both out. The basis ARB   is gigantic. We're naturally long and short at  the same time. So, we're always monetizing that.  RAOUL PAL: How are you going to deal with--  right now, might not fit into the fund,   but as you grow over time, you'll find more  esoteric buckets. We're going to have the   tokenization of everything. And there's  got to be a liquid market between   whether it's NFTs or whether it's real estate  NFTs, all of this has to have markets around it. 

Sure, some stuff will trade by appointment,  and some stuff will never trade at all.   But other stuffs going to get relatively liquid.  I'm looking at those NBA NFTs. That's probably   going to be a liquid market. How the hell do you  figure out what are the smart contract terms?   What can you do? You will end up just having a team trying to figure out all of this stuff,   the complexity, because they all  look like derivatives. You and   I have come from derivative backgrounds. CHRIS SULLIVAN: I have a smart contract  

formula breakdown research that we just wrote  internally to try and deal with exactly that   that I was reading before I jumped on.  The simplest is actually the quantitative   like bring it up, make me have to trade  it. But we are biased and purists. So,   I think the way we look at it, as we started  layer-one protocols, then native layer-two,   and then beyond that was really sector specific,  whether it's a yielding token that we can stake,   or it's a specific defi project that's nascent,  or one that is not out yet like Definity,   that could do all kinds of fun things,  or whether it's Web 3.0. All the above.   You've got differentiated sectors, but for how  we analyze it, there's a way to siphon it upwards   and just first look at the liquidity side and rank  it quantitatively and then rank it qualitatively.  RAOUL PAL: How do you know what the esoteric  risk is? Financial markets, we know what   the second order risks are. Prime broking gets  pulled. All sorts of stuff happens that we know  

but I was talking to Mike Vranos from Ellington,  structured finance, $10 billion hedge fund and he   talks about the second order risks that a lot of  people don't realize until they blow up once and   he learns it. How the hell do you figure it out  with what you're staking, the defi protocol,   how? Or is that just size and position sizing? CHRIS SULLIVAN: That's one way of doing it. But   before we even get there, we oftentimes test  with our money and our GP, that there were   almost never has been a circumstance, whether  it be staking or strategy or algo, whatever,   that we don't test it for months before it goes  into the fund. That's just our process of how we   do it responsibly. But to get into second order  risks, hybrid diversification of counterparty  

is one way that we do it. We don't have the fund  that's not exposed to more than 50% at any given   counterparty, it doesn't matter what strategy is  running there. That's one way of looking at it.  There's not a weighting-- a bit at sometimes  35% of fund but that's its top end.  

We can have a lot of that out to be very honest.  We analyze smart contract risk. Then within that,   what subsectors do you have a smart contract risk?  Because this is a trustless permissionless system,   but it's not one without risks. So, you have to  work with all the code audits, you got to look at,   is there a public GitHub bug in any of these  defi protocols where you can look at what crazy   people have put on there and said,  no, you got to do it this way.  That's one thing I really love about the  crypto space is everybody's hardcore, advocate,   and defend, defend, defend. So, if there is  something wrong, and the people operating   the token are transparent, someone's going to get  in there and fix it, or at least expose it. So,   that's been really helpful for us over  the last two years to differentiate   or how are we weighting, for example, Ave comp  and [?]? How are we weighting our allocation   with that? Well, these qualitative terms are how  we're doing and how we're measuring the smart   contract is. Then looking at liquidity pools. Some of this stuff is silly. As silly as some  

of the NFTs where you've got these APYs in the  hundreds. The cool thing is it's hyper capitalist,   demand, money coming in, interest rate goes up,  supply coming in, going out and trickles down.   However, the second order risks you're  referring to haven't been tested yet. So, we're  not touching any of that, because I  can't measure it. There's a long way  

of saying I cannot measure the second order  risks of money locked in liquidity pools,   etc. And I'm not making a judgment of them. RAOUL PAL: I understand. I'm not comfortable   with it, because I can't get my head  around what the risk actually is.  CHRIS SULLIVAN: I'm very comfortable with a  trading system that has a 3% trail stop on. I   know what I can lose, and how many times it can  get chopped. I have no idea if it can be just   hacked away. Because we've seen some of the events  where pools get destroyed and I won't pick on  

the one that happened last year, but that was  pretty destructive. Then my patience is growing   thin on ETH 2.0 at this point, Vitalik if  you're listening, they need to get that--  RAOUL PAL: For what reason? CHRIS SULLIVAN: Well, we've gotten to the   point where there's so much layer-twos on top of  this, that we need to see the prices come down on   gas fees and transaction costs. There are only so  much these young-ish developers are going to take   and only so much the public is going to trade. RAOUL PAL: And do you think ETH 2.0 solves that?  CHRIS SULLIVAN: I believe that it's all part of  it. My acumen is not skilled enough to declare  

to say that it does.   But my understanding is that it would help. RAOUL PAL: When do you think it comes out?  CHRIS SULLIVAN: I thought it should already be  out. So, I hope by November is what I'm hearing. 

RAOUL PAL: It sounds quite late, right? CHRIS SULLIVAN: Yeah. But it will probably   happen in a corrective period where  it's going to need to happen. Hopefully,   that's what helps provide affordability. RAOUL PAL: The other one you mentioned,   this is at a tangent now, I've been hearing from   a few people, I would mention Definity. What  is this? Because I read it and I can't get my  

head around this, but this sounds massive.  The money in it, the value that's in it.   We haven't talked about as far as I know,  I'm sure somebody in some interview has,   what the fuck is this? What's coming? CHRIS SULLIVAN:   I don't want to do a commercial for them. RAOUL PAL: No. But everybody I respect,   is like, oh my God, this is massive. CHRIS SULLIVAN: Their smart contract   code is called Makoto, or something cool. The name  is really unique. We actually reviewed the code.   It's as bad ass as it comes. RAOUL PAL: What is it? It's like  

internet 2.0 is what is being built? CHRIS SULLIVAN: Internet 20.0.   It's the Amazon and Google killer, is what it is.   I might be advertising for them more robustly than  they would, but it's what it's purporting to do   is real, and it seems like you can audit  this stuff. This isn't rocket science.  

They're going to add a lot of value to all [?]. RAOUL PAL:   Yes, it's backed by like Andreessen Horowitz,  huge amounts of capital, it's already worth like?   I don't know. 40 billion or something stupid? CHRIS SULLIVAN: Mid-40s, I think, yeah.  RAOUL PAL: And there's not even  a token that trades, is there?  CHRIS SULLIVAN: No. RAOUL PAL: So, it's already   valued without any business at $40 billion, [?]  non-crypto geek well knows anything about this. 

CHRIS SULLIVAN: It's OGs versus New Gs. Some folks  that have been in it since 2011 are hypercritical   of this project. Then other folks that are  more-- maybe my vintage, five years or so   are enamored by it, but either way,  it's going to get it chance to compete. 

RAOUL PAL: There's no cryptocurrencies,  like a whole protocol.  CHRIS SULLIVAN: Yeah. It's a hot-- the crack  code is close enough for rock and roll,   but it's not a native crypto, no.   But that doesn't mean they can't do one. RAOUL PAL: I have no idea. It's like this mystery  

thing coming for me. But I'm sure, a lot of people  watching this will go, of course, we know all   about it. I'm just starting to figure it out. CHRIS SULLIVAN: I don't know how you would know   all about it. Because it's only by the folks who  invested in it, there are only who I've spoken to,  

and then what they make available for you to  review. Of course, it reads fantastic. But I   don't know, it seems to me that it's not going  to do a flub like some of the other non-crypto   but crypto companies that have put out projects  and stuff that have not really been accepted by   the community, etc. It seems like they would  be. But if they can execute on their use case,   that's going to add a lot of value. RAOUL PAL: Fascinating.   What are you most excited about going forwards  now? So, your opportunity set? What are you   doing? Obviously, the big opportunities, as the  space grows, it brings new investors, you've   built huge institutional great business  there. But it's still relatively small,  

which is a fascinating part of all of this,  what are you most excited about going forwards?  CHRIS SULLIVAN: Every day, I'm equally excited.  I don't have an end state, I think my team   is going to try and do this till we're dead. RAOUL PAL: You never know,   crypto might kill you first. CHRIS SULLIVAN: Right. I was very happy for more  

than a decade. I definitely did not have lines  before getting into crypto. That is for sure.   But I think from our perspective, what we're  really looking to do is to take investors maybe   through a few cycles, show them what we're made of  as mentors, not just within the strategy, but as   discussing this openly and honestly with  clients. Making it very client centric,   this isn't a fun that we can access everybody. We're very transparent. We're pretty kind human   being. So, we do value the experience, and want  to make sure that we are adding value to someone's  

portfolio holdings. For example, if someone  hasn't invested in ETH, they shouldn't come in   to what we're doing until they've done that. RAOUL PAL: And why the hell can you tokenize this?   Because that is coming, and all  the bloody paperwork, everything. 

CHRIS SULLIVAN: I think,   A, I do what my lawyers tell me to do. RAOUL PAL: Yeah, but you're in the US. Let's   assume we're a global entity, why is this stuff-- CHRIS SULLIVAN: We have the offshore, about half   our investors come from the Cayman entity. I  would not mind residing on next door to you   down in the Caymans. My family's down here in  Florida and that's just hour and a half flight. 

I'm not a yay or nay on that. I  think the one aspect of our team is   certainly heavy decentralization, we'd like  to democratize access to a team like ours,   but at what level is that responsible?  And I would argue, maybe at this current   juncture, we need to go a few more innings before  that's a reasonable way to do it. I think where   that's applicable is when you're looking at  like, I'll pick on Schwab and Fidelity and   maybe Interactiv, where they have hedge funds on  the platform, a token might be a reasonable way to   access our fund versus the 40-page or 100-page-- RAOUL PAL: Is there a way of creating a token   that's only for accredited investors, or you can  only access the token if you have XYZ balance on   FTX or Binance, or whoever it is. I just have  a feeling that this whole business has still   got another round of disruption to go. CHRIS SULLIVAN: Oh, for sure, for sure. 

RAOUL PAL: All of this stupid fund offering  docs and all of this way, it's all going to go?  CHRIS SULLIVAN: It really is archaic  still. I'm not a no to that. I'm a yes.   But I don't know that we're going to be the  first mover there. Maybe we end up being the   first mover. But we want to do it without disrupting what we've built per se and   without our existing investors having  any risk exposure to that process.   Would it be amazing to help develop that and  be a part of it? Sure. We have looked into it   a few times and I think a few of our friends are  also looking at it to at least have the outline   of the processes documented. So, when it's time  and when it's easier to execute not as costly,  

you'll be able to do it. I think what may be harmed our team   is we were old enough in the space to be part  of that ICO craze and watch others do stuff like   that. That was a big turnoff. No offense to the  successful ICO projects, but I don't know like or   nor do I raise, put my own assets and tokens that  are raising for something that doesn't exist yet.   That's just an investment mantra  that I've had since I was younger.   So, I want to be a little more mature in our own  business to do that, and then also, perhaps have   a benchmark and somebody takes this first. RAOUL PAL: Have some regulatory clarity.   That's the whole problem, is the  bloody regulatory stuff you have on. 

CHRIS SULLIVAN: Yeah. We've got armies of lawyers  and plenty of friends with all the regulators   and have had for decades as you know. We're just  not going to be the ones that bring all of their   attention to us just because of the token  aspect of it. Not going to be aboveboard, but   it's just unnecessary business risk right now. No,  we're just fearful of what-- it's always the known   unknowns. The known unknowns, we got them, the  unknown unknowns, we can't solve for all of them.  RAOUL PAL: Chris, this is fascinating. There's a  lot in that for people to understand, because it's  

a whole new world, but it's the world that we  all knew. But it's going to change a lot in the   complexity but amazing, really, super interesting. CHRIS SULLIVAN: Well, thank you. Good on you for   more exposure to the complexity. Every  conversation I have, very few people   are aware of how dynamic, how  diversified, how many sectors there are,   and what it takes to analyze this stuff.  It's inspiring to us, but it is overwhelming   every day, there's not enough time. RAOUL PAL: And you're only one  

section of what's going on to the overall  thing. That's why I can't get my head around.   I feel queasy half the time because I'm  like, I just physically cannot keep up   with this. I laughed. I was on Twitter the  other day, laughing about Sam Bankman Fried,   having the idea of launching an exchange in  November 2019, building a world class platform   four months later, launching it, becoming the  third largest platform by volume a year later.  CHRIS SULLIVAN: It's fascinating  and good on him for doing that.   The speed with which these  iterations are occurring   is absolutely incredible. It actually makes me  hyper bullish for humanity. We believe very, very  

succinctly on our team and very passionately, this  is man's last ability to protect him from himself.   Very, very black and white. The way that the  iterations of these sectors are developing,   it's absolutely incredible. I think it brings new  revenue streams of monetization opportunities,  

top-down but also bottom-up. Bottom- up  is really what the whole world's been   missing for a few decades, as you know. RAOUL PAL: Super exciting. Well, mate,   thank you very much. I look forward to catching  up with you. I'm sure we'll catch up on Real   Vision soon, we'll catch up otherwise, as ever. CHRIS SULLIVAN: Keep creating the best content on   planet Earth, Raoul. RAOUL PAL: We  will do our best, my friend. Thank you.  CHRIS SULLIVAN: Appreciate it, buddy. NICK CORREA: Thank you for watching this  

interview. This is just a taste of what we do at  Real Vision. To learn more about the complex world   of finance, business, and the global economy,  click on the membership link in the description.   Give us 7 days to change your life. This  will be the best dollar you'd ever invest.

2021-06-11 23:04

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