Bitcoin is behind Australia's top-performing hedge fund

Bitcoin is behind Australia's top-performing hedge fund - Warburton - 26th September 2017

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A T-shirt sits on a desk at Bitmain Technologies's headquarters in Beijing, China. Bitmain is one of the leading producers of bitcoin-mining equipment and also runs Antpool, a processing pool that combines individual miners from China and other countries, in addition to operating one of the largest digital currency mines in the world. QILAI SHEN

by Jonathan Shapiro

Australia's top-performing hedge fund in over one year is on the bitcoin trade even though its portfolio manager is not a "long-term believer".

Leon Warburton of $20 million Perth-based Warburton Global Macro Fund says the firm has made a tidy profit trading the spread between bitcoin prices in North America and Europe and Asia where the crypto currency frenzy has taken hold.

"We got onto bitcoin quite early before the institutional guys got there and were able to pick up a spread between the different exchanges," he told The Australian Financial Review.

Over a six-week period the fund was buying bitcoin in Europe and the US and then selling it in Asian markets where demand, and therefore pricing, was higher.

"It shows you the psychology of different nationalities and geographic locations," said Warburton, who said the fund captured a 6 per cent spread and added about 5 percentage points to the fund's returns.

Mr Warburton said the fund held a long position in bitcoin heading into the so-called "fork" where bitcoin was divided into traditional bitcoin and bitcoin cash, where transaction speeds could be improved.

"The transaction costs have skyrocketed so unless you are willing to pay a large amount of money transfers can take hours through to days."

"Because we were getting 6 to 8 per cent spreads we were prepared to pay a big premium to get our trades done at the speed of an email, but it's just become so congested."

About 25 million people own Bitcoin but Warburton says most "are hoarders" that treat their holdings as a store of value rather than actively trading it.

"It's very sentiment driven. I don't think it will ever become a medium of exchange – it will become like quasi gold."

Bitcoin is too volatile to trade, he says, but "if you are going to take a fundamental view on the crypto-currency it would be whether it's going to cannibalise the gold market."

Warburton says the fund has spent time meeting market players in London but also trawling through social media to engage with sceptical programmers to get a holistic view on the space that is captivating, infuriating and confusing traders.

Institutional investors have largely sat on the sidelines as the crypto currencies have taken off, with the exception of former Fortress macro trader Mike Novogratz who was reported to have put 10 per cent of his net wealth in crypto-currencies.

There is a risk the bitcoin community tears itself apart.

"Bitcoin is very political – there are so many factions fighting against each other. Essentially it might turn into a fiat currency where there is a governing body. It's decentralised which is why they can't keep up with how they will expand the network."

'You may as well do it'

Warburton says the fund will probably take a long position and "scale it appropriately" because bitcoin is an uncorrelated return stream.

"A lot of people suggest you hold 1 per cent of your net worth [in bitcoin] and it will either go to zero or $500,000 [a coin] if you are willing to lose 1 per cent of your portfolio and take a punt that it could add $1 million to $2 million to your wealth you may as well do it."

With the prospect of the derivative exchanges such as the Chicago Mercantile Exchange and the CBOE introducing options to allow greater "institutional exposure" and the prospect of a US listed exchange traded fund eventually being approved by the Securities Exchange Commission, there is upside.

"If they launch an ETF in America and people can buy that as a share. it could be the catalyst to go to $20,000 to 25,000 a coin but I would say that's the trade [to sell]."

That is the point where Bitcoin would "cannibalise" 5 per cent of the $US7 trillion gold market.

Warburton says the fund is an "old-school" hedge fund targeting 30 per cent annualised returns.

It aims to hit this high target through a combination of quantitative and discretionary trading. The quant component is divided equally into a momentum trading and a "risk parity" strategy, akin to that deployed by US mega funds Bridgewater and AQR.

"With the risk parity strategy you assume bonds and equities have risk premiums and you want to leverage up bonds to the same risk level as equities – so that the diversification benefits work. We use leverage as a diversification benefit rather than for straight out leverage."

The hedge fund, which began trading in April 2016, has come out of the blocks flying and is currently the top-performing Australian domiciled fund this year returning over 50 per cent annualised, after a 5.3 per cent gain in August.

That makes it the single-highest-performing fund in Australia, tracked by Bloomberg, over a rolling one-year period.

So far it has just under $20 million of assets while it builds its three-year track record

"We only have an 18-month track record so we have to tick a few more boxes."

(The Australian Financial Review)