Following our reporting last week on Heka Funds, Protos got in touch with Elysium Global Arbitrage Fund founder Fabio Frontini to find out more about how, despite great counterparty risk, it managed to make 100% returns for its clients.
Elysium is a sub-fund of Heka Funds — also run by Frontini. It’s based and registered in Malta and trades more than $1 billion in Tether tokens every year, arbitraging them from one exchange to another. Frontini explained to us that, given the large volume and very fast nature of the trades, it’s able to trade with close-to-zero fees.
Elysium makes money by effectively buying Tether from one exchange and selling at almost zero cost to another, taking the difference in the spread.
It aims to serve as a market-neutral fund, making profits by arbitrage, yet it carries a large counterparty risk. Indeed, Frontini says it lost money when FTX crashed but recovered its losses thanks to the ensuing market volatility that created an incredible arbitrage between the CME futures and the spot BTC and ETH price.
The big question is, given that Elysium is taking on such a large counterparty risk by holding so much Tether, isn’t it operating on the assumption that Tether is indeed backed 1:1? And, more importantly, how does Frontini know that Tether is safe enough to take on such a large counterparty risk? Frontini explained by giving us his story of how he discovered Tether.
Heka founder claims he could always exit Tether trades quickly
Frontini launched Abraxas Capital in 2002 with his former colleague and friend Luca Celati. The pair worked together at Dresdner bank. Subsequently, they opened various funds, the first of which was a global macro fund specialized in options on global equities indexes, bonds, and foreign exchange looking to capitalize on fat-tail outcomes.
Heka’s Elysium trading fund was opened by Frontini in 2018 after one of his clients, lured by the promise of high returns, convinced him to invest in crypto.
After a little research, Frontini discovered a small crypto fund operating in London but based in the Cayman Islands. The fund was making high returns arbitraging bitcoin. Frontini analyzed this fund and found that it was buying bitcoin from western exchanges and selling it manually on Japanese exchanges.
Frontini liked this trading strategy, given that it was market-neutral and could attract clients who wouldn’t necessarily be interested in crypto.
On the back of this discovery, Frontini founded Elysium and started arbitraging bitcoin but eventually pivoted to stablecoins as the bitcoin arbitrage trade began to close.
In February 2019, Frontini met Tether CFO Giancarlo Devasini for the first time and was invited to the Bahamas to meet its bankers, Deltec Bank. Frontini claims that Deltec showed him enough evidence that Tether was backed one-to-one and was, at that time, indeed backed by more than 60% cash and the rest in short-dated US treasuries.
This meeting with Deltec Bank took place at roughly the same time Bitfinex was alleged to have covered a hole in its finances using Tether funds.
Eventually, Frontini tested Tether’s liquidity incrementally by placing small trades and increasing their volume gradually to ensure that Tether was liquid. He claims that he could always exit the trades immediately, even in large volumes.
Locating the Société d’investissement à Capital Variable (SICAV) in Malta was a decision based on regulation. Frontini says that at that time, Malta was the only country in Europe that could allow the registration of single-manager crypto funds.
Apart from Elysium Arbitrage Fund, another sub-fund of Heka is the Elysium Alpha Bitcoin Fund which Frontini says serves a role very similar to that of an ETF.
The SICAV is registered at Bank of Valletta, Malta’s largest bank, however, BOV only acts as administrator for Heka bond arbitrage sub-fund (Phoenix). The administrator for the crypto funds (Elysium Global and Elysium Alpha) is Fexserv Malta. Custodians for these funds are other banks, as BOV doesn’t handle fiat deposits and withdrawals related to crypto.
As the story stands, Deltec Bank has given enough proof to Frontini to trust Tether with large volumes of money and after having made more than 100% in returns, Frontini’s clients may not be too worried about counterparty risk.