Hedge funds guided by automated trading algorithms are winning where humans are losing as the crypto market crash results in a trillion-dollar tumble, reports Financial Times.
Computers execute automated trades for quantitative hedge funds (or “quant” funds), relying on math and statistics to make investment decisions, largely replacing human analysis. For former Lehman Brothers and Morgan Stanley trader Jay Janer, this type of trading has proved pretty profitable.
Janer now runs the Cayman Islands-based KPTL Arbitrage Management whose Appi fund is currently up 20% for the year, amid the volitile market conditions. For example, while most LUNA holders lost out during Terra’s recent crisis, Janer’s fund cashed in on the collapse.
In May, the price of Terraform Lab’s native token LUNA and stablecoin TerraUST (UST) all but vanished after the stablecoin lost its dollar peg, helping to spark the current crypto market crash. The computer-controlled fund exploited Terra’s downward spiral for profit. It had also placed short positions on Bitcoin and Ethereum before targeting smaller tokens.
“We’ve made good money from Luna…The model followed what was happening in the market. It started crashing and the model got in,” Janer told FT.
“It’s wonderful to have a market that moves so much… I don’t know of any other market that moves so much.”
However, movements in cryptocurrency pricing has been predominantly downwards. What was a more than $3 trillion market now strains to exceed the $900 billion level.
Elsewhere, Leda Braga’s Systematica Investments is also profiting from Bitcoin’s sustained losses. Its nearly $7 billion Alternative Markets fund is enjoying profits of close to 16% for the year. London hedge fund Florin Court is also up nearly 15%, also making use of quantitative strategies which employ computer models to make investment decisions.
Automated hedge funds up while DeFi falls victim to crypto market crash
The ongoing turmoil appears to be having an outsized effect on the DeFi lending space. What was once DeFi summer is now becoming a season of insolvency.
This week, DeFi lenders Voyager and BlockFi received emergency bailouts from leading crypto exchange FTX, to the tune of $500 million and $250 million respectively. Although the move, heralded by FTX chief exec Sam Bankman-Fried, could be more self-preservation than selflessness as the exchange tries to limit the damage to its own business.
Beyond DeFi an unwelcome margin call helped to push positions held by Singapore-based venture capital fund Three Arrows Capital into liquidation. The fund reportedly used shares in Grayscale Bitcoin Trust as collateral for loans and liquidations across several exchanges resulted in at least $6 million of outstanding debt.
Ultimately, it is often retail investors who end up being most impacted by crypto market crashes. Many were convinced to invest in projects like the Terra ecosystem by industry influencers like Raoul Pal, who famously suggested that LUNA was a solid investment. In a show of current investor sentiment, massive crypto exchange Binance is now embroiled in legal proceedings on behalf of disgruntled customers who claim the exchange explicitly marketed TerraUST as “safe.”