“It’s not about being right, it is about how much you loose when you are wrong”
Portfoliomanagement with CryptoAssets at CM-Equity AG by Johannes Frank: Below you find the recap of Johannes activities during the CryptoMarket Crash (March12-20th):
The moves in the cryptocurrency market between 12th and 20th of March are a prime example of what we’re focused on when it comes to managing our own and our clients money. Like every other AssetClass Bitcoin and Ethereum crashed when investors liquidated their positions for cash in the wake of the corona crisis. Bitcoin dropped 50% in two days, a devastating blow to every traditional fund strategy.
Conservative portfolio: We were long Bitcoin and short the Juni futures contract that we sold on Deribit at about 4.5% premium over the spot market. Under normal circumstances we would have waited until 26th of June to cash in that return. On March 12th, we were able to unwind this so called carry trade early, because the Juni futures contract traded at up to 12% discount below spot. We bought it back at an average discount of around 8% thus we returned 12,5%.
Trading portfolio: We had a leveraged position of long perpetual contracts and short March futures that we sold at about 1% premium over the sport market on 4th and expires on the 27th. We thought that the futures was overpriced compared to the perpetual contract, in other words we most likely payed less interest in the perpetual contract then we return from the carry in the March futures. On March 12th we were able to unwind the position and buy back the March futures for a discount of 6% below spot and because of leverage, we’ve made a decent annual return in a single day.
But that is not the point of the recap. But what if we were on the wrong side, too?
In our conservative portfolio this is not possible since a carry trade is never leveraged, has no market risk and so features more or less guaranteed profit.
In our trading portfolio positions have – albeit temporarily – market risk. So we focus on risk control above everything else, which always starts with position design itself.
“Well, if it goes wrong, I just take my loss and live for another day” is easy to proclaim but in situations we’ve just witnessed, you simply cannot get out.
Instead, we look to get into trades that unwind themselves over time even if they go wrong. Or – in case we really like the situation and we lose over time – reduce position size and always have a hedging market ready that is liquid enough to neutralize the core risk immediately.This tactics using Risk- and MoneyManagment at its BEST, allow us to ride out extreme market situations, since it is very unlikely that we’re squeezed out at an awful price.
When you look at our trading portfolio’s Long Perpetual/Short March futures position, imagine it to be the other way around: Short Perpetual/Long March futures.We would have gotten nuked on that particular day! But due to the fact that at expiration day the futures price must equal the spot price, we know that our only risk was paying interest rates for the position in the perpetual contract. We would have lost money, but only a tiny fraction of what we had lost if we were forced out by the price.
It’s not about being right, it’s about how much you loose when you’re wrong.
PS: If you are an investor or an assetmanager and would like to have an allocation dedicated to CryptoAssets managed by Johannes Frank please email to email@example.com or firstname.lastname@example.org