Originally formed as a trading vehicle to preserve and grow its partners’ crypto holdings, Two Prime celebrated its one-year trading anniversary in May 2021. Having matured into a fully-fledged digital asset management company with sophisticated trading operations and differentiated fund products, Two Prime has produced an enviable track record of alpha generation and benchmark outperformance. With digital assets offering exposure to open innovation, disruption, and plenty of price volatility along the way, there has never been a better time for sophisticated investors to consider our future-oriented, institutional approach to derivatives trading, risk management, and yield generation
Trading Strategy, Operational Improvement, and DeFi
Our flagship fund (summary here) “Digital Assets Fund I,” has outperformed its benchmark, Bitcoin, on virtually every metric, generating better returns than both passive Bitcoin buy-and-hold strategies, and active risk-adjusted Sharpe ratio metrics. In its first year of trading, June ‘20-June ‘21, the fund returned 488.6% (net of fees), a 206.7% better return than raw Bitcoin exposure which returned 281.9% during the same period. Put differently, the fund has accumulated an additional 73% of Bitcoin in its first year. The fund’s Sharpe ratio also outperformed BTC, currently standing at 2.08, compared to BTC’s 1.89.
This fund’s success has stemmed from the leadership of our CIO, Nathan Cox, and the trading team. They have developed a robust set of statistical indicators and a framework of “volatility regimes” to make systematic investment decisions about when and how to deploy derivatives, asset diversification, leverage, and lending strategies. Throughout the year, we’ve seen highly variable market conditions that have tested our trading strategies, with massive moves to the upside and downside as well as periods of flat, range-bound trading. Our ability to blend traditional investment indicators with crypto-specific metrics has allowed us to capitalize on a range of volatility regimes and generate alpha in nearly every market environment.
On June 1st, 2021, Two Prime introduced a second fund focused on delta-neutral, high-yield generation. The aptly named “Liquid Yield Fund I” (summary here) initially traded ETH and BTC spot against futures in contango, netting the difference. As spot/future spreads for BTC and ETH narrowed we broadened our delta-neutral yield generation strategy. The fund currently produces an 11.6% annualized return (net of fees) as compared to the S&P Global High Yield Bond Index return of just 5.37%. The team continues to evaluate accretive DeFi yield opportunities that fall within our internal risk framework.
Personnel and Partners
Behind the numbers and data, it is our people that anchor and strengthens our firm. The addition of our CIO, Nathan Cox, has allowed us to develop a highly effective and consistent risk-management approach to digital asset investing. Supporting Nate, the addition of recent business school graduate, Michael Calabro, as a Junior Analyst, and contributions from consultant, Nick Ozyp, have accelerated our ability to scale data analytics and optimize trade execution. In addition, the guidance and support of Goldman Sachs and Bessemer Trust alum Hadi Kabalan as a non-executive director, has further sharpened our vision and product development.
We fully appreciate the importance of long-term institutional relationships and are honored to transact regularly some of the largest counterparties in the industry including Genesis Capital, Three Arrows Capital, FTX, and QCP. This allows us to not only reduce slippage and improve liquidity but garner timely insights from the best in the business.
Regulatory and Tax Improvement
One of the distinguishing features of our firm has always been a traditional fund approach to regulatory and tax compliance. In this regard, we’ve taken great efforts over the past year to structure and register the funds with the interests of our investors in mind. As a consequence, Two Prime now operates as an exempt Commodity Pool Operator in the US with all the oversight and assurances afforded by the CFTC. In addition, we work with the leading fund administrator, Trident Trust, to oversee reporting and as well as Moore Cayman for fund auditing.
Not content to rest on our laurels, we are taking things still further, and are in the process of becoming a full-fledged SEC registered RIA. We know that the digital assets industry suffers from skepticism and reputational risk at times, and we are proud to take steps to become a best-in-class digital asset investment manager.
We have also retained Friedman LLP and are taking every step to prioritize and optimize a favorable tax treatment for our investors.
The remainder of 2021 will bring continued growth and optimization of our structured fund offerings, sharpened execution and operations, and best-in-class risk-adjusted returns for our investors. Our trading team will continue to refine our derivatives and DeFi strategies to optimize risk-adjusted returns and long-term value creation. Digital assets, blockchain, and the DeFi ecosystem continue to evolve rapidly, and we look forward to navigating this innovative space with our partners and investors.
As always, please do not hesitate to reach out directly with any questions or concerns.
Alexander S. Blum