Digital assets on the buy side


With Thejas Nalval, co-founder and director of investments, Parataxis Capital

Briefly describe Parataxis Capital, including its operations and trading capabilities. Who are your end user investors?

Parataxis Capital is a US-based hedge fund focused entirely on the digital asset space. We currently manage three funds, our flagship multi-strategy fund with an absolute return mandate. Across our funds, we actively trade liquid digital assets in public markets and also make private investments in early stage digital asset protocols. We are also a small business owned by disabled veterans, headquartered in New Jersey.

Our investors are largely high net worth individuals, family offices and, increasingly, institutions. Most of our LPs have a small passive allocation to space, but generally seek to increase their exposure to the sector and are more comfortable doing so in a way that manages risk with a quality institutional team.

Discuss your own career path – from traditional roles in capital markets to digital assets?

Thejas Naval, capital of the parataxis

I am a trader by training and I spent my early years in the equity trading room at Goldman Sachs. I was most recently at the program’s trading desk on a team that facilitated index rebalances for the world’s largest index fund managers. Despite the training I received in the trading room, GS was the perfect place to launch my career after college. During my time there, I managed to develop an incredible network of peers and mentors, many of whom are still close today.

Ironically, it was during my years at GS that I first discovered the world of digital assets. In 2012, some of my colleagues were mining and trading bitcoin. It was around this time that I bought bitcoin and began to personally descend into the crypto rabbit hole before deciding to jump into space full time. For me, the draw was the ability to create something of value in what appeared to be a whole new emerging asset class. In 2017, I joined a Los Angeles-based startup looking to build the first U.S.-based digital asset investment bank. I helped build and launch a hedge fund with this team and managed a fundamentals-driven long-short strategy for the fund. I brought this strategy to another crypto hedge fund in 2019 before leaving to launch Parataxis Capital with my partner, Ed Chin (another Wall Streeter alumnus turned crypto pro) in 2020. I am currently a co-founder and director of investments for Parataxis Capital. .

Companies on the long side usually own securities such as stocks and bonds, for which there are tangible underlying assets. How does a buying company like Parataxis Capital manage digital assets?

This may come as a shock to those who are not native to crypto, but as a fund we primarily interact with digital assets themselves. There’s a whole Wall Street-like ecosystem that’s being built to serve funds like ours. There are exchanges, brokers, lenders, custodians, etc. We are therefore able to deploy traditional and sophisticated investment strategies for this nascent and growing asset class.

Our portfolio building process begins with a thoughtful assessment of market risk and what that might mean for digital asset prices over the next quarter. We analyze fundamental indicators, supply and demand dynamics, behavior of other market players, liquidity on exchanges, product developments, market microstructure, regulatory climate and include an overlay of the broader macro environment surrounding traditional risk assets. Based on continuous discussion, questioning assumptions and debate within the investment team, we determine the levels of risk we are comfortable having in the portfolio and put money set aside for any opportunistic investment. We do not use leverage and rebalance the fund as new data and opportunities arise.

Risk management is at the heart of our process. We believe that managing risk within a digital asset fund is paramount for protecting capital and generating positive returns over multiple market cycles and in different market environments. Our risk management process leads us to identify and manage risks that fall into one of the following categories: (i) portfolio risk, (ii) operational risk, (iii) counterparty risk, (iv) regulatory risk and (v) risk of force majeure. We manage risk the same way a fund manager would operate in traditional assets, albeit adjusted for the risk profile of crypto.

What makes your fund unique?

First and foremost, we are not ideologues. We recognize that this market is capable of producing both parabolic returns but also the potential for significant drawdowns. As a result, we maintain a constant focus on managing risk, which helps us navigate volatile times like the one we just experienced. After risk management, we spend a lot of time building the portfolio. The aim is to provide our investors with risk-managed exposure to the most attractive opportunities at all times. Finally, I think we have some of the smartest people in the business on our team. Each of us brings a unique breadth and depth of knowledge of traditional and digital asset markets, which allows us to regularly identify new investment opportunities and consistently stay ahead of an ever-changing market. .

Will the SEC approve a bitcoin ETF? How important is it for the development of digital asset markets?

We believe the SEC will eventually approve a bitcoin ETF, but it will likely be at some point next year. An ETF won’t have a direct impact on the bitcoin blockchain (or other digital assets for that matter), but having one solves a major problem for many investors looking to gain exposure to the asset class. We believe that a significant marginal buyer over the next few years will be sophisticated retail investors and RIAs who aim to add digital assets to their current portfolios. This is all kept at a traditional brokerage or other retail platform. Providing access to a bitcoin ETF, once approved, is an easy task for these brokers and platforms, especially if they can generate a fee or charge a commission for that access. So as much as crypto natives will preach that true ownership requires owning the private keys, the truth is, the ETF model already has 30 years of infrastructure and distribution around it. The level of new marginal capital that will be driven into space from this channel is likely to be an order of magnitude greater than what we have seen in recent years. It’s incredibly bullish for the growth of this industry.

Recent spikes in bitcoin price volatility – what do you think and what does this mean (if any) for Parataxis Capital and its business model?

We believe the digital asset space will grow into a multi-trillion dollar asset class over the next decade. However, we also understand that the market is still nascent and capable of periods of inordinate volatility, as we saw during the last quarter. Our firm position has always been that investment managers should try to capture the bulk of the upside, while managing risk and protecting against potential losses. Our active funds performed well over the past quarter and managed to outperform not only the market but many of our peers as well. We are exceptionally proud of these results as they validate our business model and open up this asset class to institutional investors who are looking to deploy significant capital but are often reluctant to do so due to the volatility of the sector.

What is the future of digital assets, from an institutional asset management business perspective? In 10 years, will most or all institutional managers have digital asset offerings?

One thing we’ve observed with our space is that it tends to scale at a much faster rate than traditional asset classes. We’ve found that the digital asset market is reinventing itself every six months or so. Therefore, a single strategy or product offering that made sense in the past may not work or may be out of date in the future. The only way to stay on top of this evolving growth super-cycle is to consistently maintain a deep understanding of where the return on investment opportunities lie and to maintain the tactical freedom to pivot to strategies that produce the returns. highest risk-adjusted. In other words, the key to generating alpha over time is to identify and skate where the puck is going. Constantly. We like to think we are doing it right because we live and breathe these markets. It would be difficult for a new entrant to reproduce this. We therefore believe that the asset management business will be divided into people distributing beta products and funds focused on generating alpha. There will be those with significant distribution capabilities who win the asset-raising exercise and direct capital to passive vehicles. And then there will be those like us who aim to allocate to the pockets of the market that offer the most upside, remaining tactical to avoid market dips and compound returns in a way that will always beat a straightforward buy-and-sell approach. conservation.

Buy-side digital assets were first published in the third quarter issue of GlobalTrading, a platform of Markets Media Group.

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