Key Takeaways
- • Strix Leviathan, a crypto hedge fund, is overriding its systematic buy signals and remaining in cash, according to head of strategy Dr. Matthew McBrady, who told Forbes the firm is waiting for the system to stabilize before letting signals drive positioning.
- • McBrady said the Nest Fund treats crypto assets as commodities and runs a commodity trading advisor-style strategy built on price, volume and volatility signals, many of which have recently generated down signals.
- • McBrady drew parallels between the FTX collapse and 1929, arguing that the absence of a regulatory framework allowed exchanges to engage in proprietary trading with client funds.
- • McBrady expects regulatory action to follow the May collapse of LUNA and TerraUSD, which he said exposed retail investors to stablecoin risk, and expects a volatile, sideways-to-down market through the rest of 2022.
Summary
Dr. Matthew McBrady, head of strategy at crypto hedge fund Strix Leviathan and former chief investment officer of BlackRock's $1.5 billion multi-strategy hedge fund, told Forbes that the firm is deliberately overriding its models and staying in cash. He said the decision reflects caution after a systemic shock in which many market participants had direct exposure. Although many of the firm's signals are now pointing to buying, particularly in the most established assets such as bitcoin and ether, McBrady said the firm is waiting for the system to stabilize before allowing those signals to drive larger positions.
McBrady explained that the Nest Fund treats crypto assets as commodities and applies a commodity trading advisor approach that has been used in traditional markets for 40 or 50 years. The strategy relies on individual asset momentum and cross-sectional relative performance, and those signals have recently produced many down readings. He noted that such trend-following strategies tend to underperform in highly volatile, directionless markets.
On counterparty contagion, McBrady said Strix has no meaningful exposure to Genesis or BlockFi, which recently filed for bankruptcy protection, and that the firm does not rely on third parties to hold its assets. He compared the current environment to 1929 or early 1930, arguing that FTX was able to combine exchange operations with large proprietary trading using client deposits because no regulatory framework separated those activities. He said FTX surprised the firm given the scale of its claims and its U.S. regulatory registrations.
McBrady argued that the LUNA and TerraUSD collapse and the failure of Three Arrows Capital, which he described as a levered long fund, reflect problems familiar from traditional finance. He expects the May collapse of LUNA and the related stablecoin ecosystem to drive the most significant regulatory change, since retail investors held large sums in products they believed were bank-like. He anticipates a regulatory contest between the CFTC and the SEC but said the classification of assets matters less to Strix than having well-regulated, liquid markets.
Looking ahead, McBrady said he expects skepticism toward short-lived rebounds and a volatile, sideways-to-down market for the rest of the year, with conditions possibly improving by early 2023. He cited Warren Buffett's advice to be fearful when others are greedy and greedy when others are fearful, adding that the firm plans to wait for greater systemic stability before increasing exposure.
McBrady explained that the Nest Fund treats crypto assets as commodities and applies a commodity trading advisor approach that has been used in traditional markets for 40 or 50 years. The strategy relies on individual asset momentum and cross-sectional relative performance, and those signals have recently produced many down readings. He noted that such trend-following strategies tend to underperform in highly volatile, directionless markets.
On counterparty contagion, McBrady said Strix has no meaningful exposure to Genesis or BlockFi, which recently filed for bankruptcy protection, and that the firm does not rely on third parties to hold its assets. He compared the current environment to 1929 or early 1930, arguing that FTX was able to combine exchange operations with large proprietary trading using client deposits because no regulatory framework separated those activities. He said FTX surprised the firm given the scale of its claims and its U.S. regulatory registrations.
McBrady argued that the LUNA and TerraUSD collapse and the failure of Three Arrows Capital, which he described as a levered long fund, reflect problems familiar from traditional finance. He expects the May collapse of LUNA and the related stablecoin ecosystem to drive the most significant regulatory change, since retail investors held large sums in products they believed were bank-like. He anticipates a regulatory contest between the CFTC and the SEC but said the classification of assets matters less to Strix than having well-regulated, liquid markets.
Looking ahead, McBrady said he expects skepticism toward short-lived rebounds and a volatile, sideways-to-down market for the rest of the year, with conditions possibly improving by early 2023. He cited Warren Buffett's advice to be fearful when others are greedy and greedy when others are fearful, adding that the firm plans to wait for greater systemic stability before increasing exposure.
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