The Derivative - Alt (Digital) Trend Following with Sarah Schroeder of Coinbase Asset Mgmt.

Episode Date: April 27, 2023

How do you get a job at a top quant shop?  With a little love from grandma?! How do you navigate a systematic strategy in the fast-moving world of digital assets? On this episode of The Derivative, Sarah Schroeder of Coinbase Asset Management (formerly One River Digital) covers a range of topics related to crypt/digital assets, including the formation and vision of One River Digital, its purchase by Coinbase, the importance of counterparty risk management, trend-following and directional strategies, allocation to digital assets, central bank digital currencies, and the role of women in the hedge fund space.  Schroeder shares insights into her experience working at AQR as a portfolio valuer and discusses the unique alpha models for different tokens, investment strategies, and fundamentals in the digital space. The conversation also touches on the potential for significant directional shifts in digital assets, the barrier to entry into the space, the personal and professional use of crypto, and the role of central banks launching their own coins. Shroeder closes the episode with advice for young women getting into the hedge fund space and the importance of having good mentors in one's career — SEND IT! Chapters: 00:00-01:42=Intro 01:43-13:13= Go Grandma! Playing chicken with Goldman & AQR 13:14-24:08= Alt Market Trend Following @AQR to Crypto Curiosity 24:09-35:15= One River Digital bought by Coinbase / Asset Mgmt for Institutional investors 35:16-45:27= FTX Crisis, counterparty risk,  an urgency to trade & choosing your vessel for choppy seas 45:28-01:00:18= A unique model to Trend Following, shifting risks, monetizing trends & driven by retail 01:00:19-01:14:30= Directional Strategies, going short with digital & finding liquidity in the tokens 01:14:30-01:26:26= Trend allocators in long token exposure, mixed connotations about “Crypto” & having a slice of digital in your portfolio 01:26:27-01:34:38= A coin for everyone: Central banks & digital currencies – Does privacy go away or is it a social good? 01:34:39-01:44:58= Women in the hedge fund space: Curing periods, credibility & good counsel Visit oneriveram.com, coinbase.com and the coinbase blog for more information Don't forget to subscribe to ⁠⁠⁠⁠The Derivative⁠⁠⁠⁠, follow us on Twitter at ⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠ and our host Jeff at ⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠, or ⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠ , and ⁠⁠⁠⁠Facebook⁠⁠⁠⁠, and ⁠⁠⁠⁠sign-up for our blog digest⁠⁠⁠⁠. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit ⁠⁠⁠⁠www.rcmalternatives.com/disclaimer

Welcome to the Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Hello there. Welcome back. Happy spring. Hope you had a good spring break. Hope your baseball team's doing

well uh or at least as well as the cubs in this new season and i hope your flowers are beginning to bloom and that's all i got for spring on to this episode where we had a fun chat about trend following niche markets about grandma getting you a job about crypto or digital as sarah likes to call it and all its promises and warts and everything in between. And actually, we got into why a systematic strategy might not even care whether it ever gains mass adoption or not. They just want it to move. This was quite enjoyable getting to know Sarah Schroeder, a PM at Coinbase Asset Management, which was OneRiver Digital until just recently. Send it. This episode is brought to you by RCM's Institutional Outsource Trade Desk.

Say you're a big ETF shop, wanted to launch a new product, trading futures. You've been used to securities, don't know how that all works. Who can help you think through order routing, trade sizing, risk protocols, and more? You got it. RCM's Outsource Trade Desk. Visit rcmalts.com slash 24 hour slash 24 HR for more information. Hi, everyone. We're here with Sarah Schroeder.

Welcome, Sarah. Thank you for having me. Yeah. And we just talked about you're there in beautiful Stanford, Connecticut. I am particularly beautiful now that it's finally spring for those of us that have been suffering under East Coast winter. But New York seemed like I keep seeing all these tweets of like, it's a beautiful 70 degree day here in New York. Is that just the past few weeks? Very recent. It's been a very recent turn from winter heavily into spring.

And now are you an East Coast person born and raised? Where are you? No, I'm originally from Southern California, the very opposite corner of our country. I came out to the New York area after grad school. I was a California kid for quite a long time, a UCLA graduate and a UC San Diego graduate prior to that. So twice through the University of California and managed to escape California nevertheless, because the reality is after you've come out of grad school and you focused your academic career on math and finance and are looking at a career in quant finance, the greater New York area is definitely the place to be. And so I wound my way up out here and have been here since.

You see San Diego, the Toreros? The Toreros? No. No? What are they? Well, UCLA is the Bruins, UC San Diego. You know, to be honest, I don't actually remember what the mascot is, which is a clear sign of how focused I was on my studies more than on the mascot, so to speak. I just pulled it up. The Tritonon i thought it used to be the terreras the tritons we're gonna have to look up who that was that used to be my party trick i knew all 200 division one basketball teams mascots but oh incredible obviously i've

slipped no obviously i've slipped um so you gave up beautiful californ, moved out east, have some rather big names on the resume there. So where did you end up with once you got to the New York area? Yeah, I mean, I came out here to go work for AQR. It was really hard to say no. I worked at AQR right after grad school and right up until the moment that I joined One River Digital. Prior to coming out East and kind of in between my two University of California stints, I spent some time at an intellectual property consulting firm that used quant models to value IP portfolios. Given the West Coast focus, you can imagine a lot of the clients there were valuing or interested in understanding the value of IP portfolios in the semiconductor and biotech type spaces. So that was really my foray or first kind of introduction into quant modeling and computer science. Was the goal like to do patent lawsuits and whatnot? or what was the... Yeah, it was a lot. There was a lot of patent advisory work, some in the context

of litigation, some in the context of companies looking to license or sell their IP portfolios, but generally trying to monetize their intellectual property. So that was a very different setting for quant modeling and quant finance than what I worked on while I was at AQR, uh, but you know, a good entry point, you get to see a lot of different data sets, a lot of different industries and start to really kind of understand how puzzle pieces might fit together in an unstructured data format and then start to wrangle structure there. And what was, I'm thinking it just popped in my head. I don't know if you watch any NBA basketball, but the playoffs have had this commercial with Mark Cuban.

Yeah. He's pitching like a Cuban sandwich. He's like, they're called Cubans and my Mark Cuban. So like, what was the craziest IP thing that you looked at? But you don't have to name names, but you're like, what? I don't think this is worth anything. We worked on quite a few different projects that related to semiconductor technology, some in smartphone settings.

There were a couple of cases that touched on name your favorite smartphone manufacturers. Yeah. And I think perhaps maybe the one that was most quizzical to me was there were some BlackBerry patents that were at issue at a time where BlackBerry's usage had already been heavily in decline. So it seemed like a bit of a challenge to really heavily monetize the technology that had already been kind of a little bit supplanted there but yeah you know a good idea in theory never totally dies it just might have to shift a little bit and isn't uh qualcomm is that a san diego right so you had all that it is chip ip running around there anyway yep yeah that those supply chains are so complex they might have touch points someplace in california or in the united states but you know those are chains are so complex. They might have touch points someplace in California or in the United States, but those are truly global supply chains.

Yeah. And so AQR does a, many of my classmates in my grad program were very excited at the prospect of working at AQR and had applied and interviewed and all had been rejected. And I did not strictly apply for a job at AQR. I had come to the East Coast. You unlocked the secret. The secret to getting in is don't apply. I think the secret to getting in, I think the secret to finding some professional success is to have a reputation that speaks in your absence, frankly. And I was very fortunate to have good mentors and professors that spoke highly of me and folks that would kind of speak favorably of me when I was not in the room. And, and, and, you know, you have to have credentials to back

all of that up. Right. So as I was finishing my program and I had come and done flyouts to New York to interview at a bunch of firms, I had a job offer to go to Goldman Sachs. And I was pretty excited about that because that seems like a beautiful, shiny gold star on your resume and a wonderful place to learn from really talented, incredible people. And I had the offer letter and I had not accepted it yet. I had a two-week turnaround, as I remember, to think about it. And during that two-week period was my graduation ceremony from UCLA. And one of the partners at AQR, Mike Mendelsohn, was the commencement speaker at my ceremony. And my grandmother was speaking to him after the ceremony at the sort of schmoozy networking session. And as every loving grandmother does, she was bragging about her grandchildren.

And I, being the grandchild in the room, was the victim of her praise. And so she had been very busy telling this AQR partner all these wonderful, glowing things about me, and I did not know that this conversation was happening except that I had seen that they were speaking, and I sort of let them speak for a time, and then I thought, well, I better go rescue my man from my grandmother, and so I interjected myself in the conversation and almost immediately he looked at me and he said, your grandmother tells me you have a job offer to go to Goldman Sachs, but you haven't applied to work at AQR. And I said, well, yes, that's correct. And he immediately told me not to accept the Goldman offer until I had flown out to AQR. And I had to come meet the team there before I made a decision. And I said, well, I have one week to make this decision.

So I guess we better do this quickly. And sure, this all happened on a Sunday. On Monday, that AQR partner called the managing director that I had worked with as a summer associate at Credit Suisse. And that managing director, again, spoke favorably of me in my absence. He sent my CV over to AQR and the wheels were turning in motion kind of without me exerting a lot of pressure or any pressure on them. And by the end of the week, I was doing a full day interview at AQR. And they said, we want you to come work here, say no to Goldman.

And I said, yes. Great story. All thanks to grandma. Where'd you get grandma? Did you send her a nice little present or something? Absolutely. I can a great story. And so full day interview, what does that look like? They're putting you through the ringer through math tests. Is it, you think as difficult as people would assume from the outside looking in? But, you know, my memory of it has faded a little bit. I think we all sort of

gloss over those details as the years go by. The morning I remember being on the more kind of sort of more standard rigorous interview type style, brain teasers, kind of hypothetical scenario construction. How would you go about estimating or modeling this kind of phenomenon if you don't know all of these parameterizations? And just getting a feel for kind of how do your critical thinking and analytical skills work? A little bit of pseudocoding. How would you construct a kind of a script that does X, Y, and Z, that kind of thing. And then the afternoon I remember was more of the conversational kind of components, meeting the team, meeting some of the other partners, sort of the personality and culture and fit test. And yeah, it was a full day. I remember it was, I think it was 8.30 to 5 or

something in that neighborhood. And the offer from Goldman is going to expire at the end of that day. So I remember sitting in the last interview with one of the AQR partners and kind of looking at him across the table and saying, well, I sort of have to know right now. But the amazing thing about that is in hindsight, I'm a little horrified by my own actions in this narrative because I was a little, a bit blase perhaps, because I felt like I didn't have that much to lose. I didn't really know exactly what I had to gain one way or the other, but my downside scenario was really risk managed. I had an outside offer that was a very good offer at a very good firm that I would have been happy to take. So I think, you know, that gave me a certain

amount of confidence and comfort that probably helped quite a lot in this interview day, because it takes away some of the edge of the nerves, right? And so what were you working on at AQR? And then we'll leave the past behind. So I started on the commodities research team at AQR, which is a bit of a kind of sort of personal interest area, I suppose. I think commodities are particularly interesting. They're just, they're very unlike other macro markets in a lot of ways. They have their own very specific supply and demand dynamics.

And they have their own cycles. And that was a really, really interesting kind of entry point for me into kind of classic quant finance, just a tremendous amount to learn about this very unique asset class. And that was sort of the beginning. Then my focus expanded to be a little more multi asset class when I started working on the systematic trend strategies at AQR that covered not just commodities, but equities and fixed income and currency markets as well. And then eventually that led to a little bit of entry into some of the systematic macro strategies at AQR, but really the markets

kind of was my personal narrative at AQR. I, over the course of my years there, started to really develop a personal and a professional area of expertise in some of the more esoteric markets, esoteric derivatives in particular. And there's a heavy commodities focus there as well, right. So the AQR alt markets portfolio, that really was my portfolio and kind of became my main area of focus for the last several years that I was at AQR. The technical trading strategy that's really focused on some of these more niche derivative markets of the world. Like what are we talking about? Like carbon credits or even more niche than that? Yeah. Malaysian palm oil, the South African maize complex, you know, European power markets before they were in vogue and on the cover of the Wall Street Journal on the

regular. You know, just think about sort of the smaller, less liquid, lower capacity, especially commodity markets, but even outside of commodity markets, kind of some of the smaller emerging market currencies, for example, volatility futures. How do you think about, I was just having this discussion with a friend the other day of like, okay, you want access to those, but if you just access those and leave the interest rate markets and main currencies and whatnot out of your, let's just say, a trend portfolio, you're going to have like all this basis risk and you're not going to capture the like trend beta, so to speak. So and then if you put them into the portfolio, you probably can't weight them enough. They really have that much of a impact overall.

So they're kind of just like there. They're interesting. They can drive alpha. But like, what do you do with them? How much can you actually do to make an impact? Yeah. So this is why in the AQR context, they merited their own portfolio, right? Because AQR certainly has a managed futures offering, and that is kind of focusing on trends in the core macro markets. And, you know, I've heard others call this something akin to the trend kind of beta type idea, trend in the core macro markets. And I've heard others call this something akin to the trend kind of

beta type idea, trend in the core markets really, or like macro trend in a way. And then the more idiosyncratic markets, you're right. If you're trying to kind of commingle all of these assets in one portfolio, and you're thinking about running your aggregate CTA book or managed future strategy of size, the less liquid markets are really not going to have a lot of representation in that context. The other thing is the kind of due diligence and the counterparty relationships that you might need to have in place for some of these smaller markets is definitely one step further afield than what you're doing if you're just participating in some of the core macro markets.

So there are a category of investors that are really excited about the idiosyncratic opportunities that those assets present and want that exposure and are very comfortable with the additional relationships and kind of operating requirements that are necessary there. And then there's another category of investors that frankly just don't want it, not because they kind of don't believe in it, but they're looking for the sort of trend beta, as you called it, right? And they're really looking for how do I get the most cost-effective exposure to trends in major markets? And I just don't want to pay a lot of fees for that. So I'm going to focus my efforts on a low cost managed futures buck. Whereas some of the more idiosyncratic markets have higher

operating expenses, higher kind of counterparty risk requirements and monitoring and all of those good features that do merit the higher fees that those portfolios tend to carry. So having them in separate portfolios means you're really giving allocators the opportunity to choose their own adventure and express their preferences. It's also nice to not have to be tied to getting those two different types of allocation from the same manager, right? You can get your allocation to the idiosyncratic markets from a manager that has really developed expertise in that, that has a team or a portfolio manager or two that is really dedicated their focus to that. Whereas you can get your kind of macro, your core trend or managed futures exposure from someone that's been doing that for a long time that maybe doesn't have an alt markets book. Right.

So that kind of begs the question of like, OK how much should i put in the old markets you're like well and we can get into this more once we get into the uh the digital side so i'm assuming now the story goes you started to look at digital assets crypto as you're exploring these esoteric markets right yeah that's exactly what happened I mean, the whole mandate of this AQR portfolio was to trade the emerging idiosyncratic niche markets of the world. And here come digital. 2016 through 2018 period, as we're doing a ton of research around what markets belong in this portfolio. I mean, you know, if those aren't, if those markets don't belong, what does, right? So of course I, I was pushing on that and really interested in getting those markets and in the AQR portfolio. And then when the CME futures launched, it was just such a no-brainer because here you have an instrument that you can access through your existing relationships and exchanges and structures. And so it's really kind of the lowest hurdle way for a TradFi player to kind of start to participate in digital. And so ultimately, that's exactly what happened.

So we did add those assets to the AQR portfolio but you know it was a bit of a Pandora's box that once I had opened it I couldn't close because once you start once you start kind of looking at digital I mean I had personally started paying attention to digital markets in in sort of the 2016-2017 period and it was too early for the AQR portfolio at that time for a variety of reasons. But, you know, one is just the liquidity, especially in the CM futures really wasn't there early in early days. It took some time for the liquidity profile to really start to establish itself. And, you know, volume had been present early on, but open interest

wasn't. And if you're a sort of medium horizon trend follower, you really want to see some open interest be present so that you're not- CME wasn't even first, right? CBOE came out first. Right. So- So there was a little competition there in the beginning of who's going to get the liquidity. Yeah. So it took some time for that to really start to kind of stabilize and for that to look really viable as an instrument. But, you know, even once that happened, the reality is the future, the CME and the CVOE derivatives don't trade around the clock and the spot markets do. And it's only a small fraction of the aggregate liquidity that you see

in digital spot markets. So clearly, you know, there are some limitations here in terms of the timing and the size of the liquidity and the set of assets that's available, right? You could get Bitcoin and ETH, but anything outside of that, forget it, right? So, you know, while it was very early days and still is early days for tokens outside of those two, I had an eye on the future and started to think, okay, where do we go from here? What's next? And clearly, you know, thinking about what was next, what came next for me in that AQR portfolio meant that I really wanted to start exploring

what other serious hedge fund types were thinking and doing in the digital context. And was anyone trading spot markets? Had anyone thought about building infrastructure to support this? Had anyone put the counterparty relationships in place know, it also felt very much like what was possible from an alpha modeling point of view, from a quant modeling point of view would be much wider than what I could do if these were two out of many hundred markets in a kind of more macro oriented portfolio. If I had a dedicated digital focus, you know, were there more interesting things that I could be doing from an alpha signal perspective? And, you know, I felt very clearly that the answer was yes, but I wasn't going to be able to allocate the time or attention to that that I had wanted.

A simple example of that would be if the model goes short at four in the morning, I could be short on that side in the future. Or, you know, if you have a banking crisis happen over the weekend. Not that that ever happens. But that's exactly it. So I was delighted to add the CME instruments to the AQR portfolio. And I stand by that as being absolutely the right call for that portfolio in particular. But my curiosity started to run away with me a bit, as it is inclined to do from time to time. And that line of inquiry, I guess, ultimately led me to Eric Peters and the team at One River Digital at the time, now Coinbase Asset Management. And it was just such a serendipitous meeting of minds.

It was a group of people that clearly had the same questions I did, and they were very focused on providing answers. And so those early conversations were very easy because we were so well aligned. And the end of that conversation was basically a question to me, which was, well, you know, you have all these great questions. We're interested in the answers as well. Do you want to come here

and we'll figure them out together? And so that's exactly what happened. And so you mentioned it there briefly. So One River Digital has now, since we've scheduled this and started recording, become Coinbase. So dig into that a little bit of how that went down, whatever you're allowed to say about it. So, you know, I think it's probably important to contextualize this just a little bit with sort of the history of OneRiver Asset Management. OneRiver Asset Management is a 10-year-old hedge fund that started, you know, truly 10 years ago, but really focused on providing investors with diversifying solutions, especially focused on kind of how do you give investors protection against tail risk? So the kinds of

hedge fund offerings that OneRiver offers are, you know, some trend following strategies, some volatility strategies and inflation portfolio, that kind of thing. And Eric Peters and the team at OneRiver have a very macro kind of lens through which they see the world. They're really focused on what are the big structural risks and trends that we're seeing. And what, what happened is one of the clients, one of the investors that OneRiver Asset Management had invested in their portfolios and still has today was an entity out of the United Kingdom that in 2020 was very concerned about the direction of monetary policy and the amount of quantitative easing that had been happening and what the implications of that might be. And they thought one interesting way to kind of put on a trade that would address some of those possible concerns

was to make a sizable allocation to digital assets. So they were looking for asset management partners that could be good partners for them and help them navigate how do they put on exposure to Bitcoin and Ethereum when they don't have asset management partners that offer this through traditional fund structures? How do they put it in their asset allocation? And the practical kind of how do we do this question was hard to answer for them at that time. And so they came to Eric Peters because they had this really nice relationship with One

River Asset Management. They knew that Eric and the team at One River really were the types of people that think about the world critically in this way. And even if he and the firm didn't have an immediate off-the-shelf solution ready, they knew that that's the type of people that when presented with a problem, even if they don't have the immediate solution, they will look at the problem and say, we're going to find the solution. And so we know a young lady who we can hire to figure out the solution. Well, this, this predates my time a bit, but I wish I could claim credit for this. But ultimately Eric and the team said, we'll figure out how to get this done. And so sure enough, in November of 2020, they helped this client put on $600 million of exposure to Bitcoin and Ethereum, at the time,

the largest institutional allocation that we know of. And that trade played out really favorably, as you can imagine, through late 2020 and early 2021. And so the decision was made between the firm and the investor in the back part of 2021 to close out the trade. And so ultimately what had been a $600 million allocation netted them about $1.2 billion in gains. A tremendous trade, great timing. But really, that trade, I think, was a catalyst to action. Clearly, the interactions between this investor and OneRiver Asset Management highlighted that there was this gap in the market. There really wasn't an asset management firm that could serve as a fiduciary that was offering institutional quality investment products in the digital space. And there are a few firms now that are kind of trying to do these types of things, but clearly there just was a lack of service providers and kind of credible people that understand institutional investments with

kind of that trad fi background and mindset. And so that led OneRiver Asset Management and Eric Peters to start OneRiver Digital as a separate business entity that was focused specifically on building institutional quality investment solutions and really facilitating these kinds of interactions for clients. The funny part is it's almost like the other people in that space, like, no, we don't want any traditional finance background. Like that's antithesis to what we're trying to do here. So it's unique of like, no, here we're trying to put, we know some things that have worked and protected investors over here. Let's bring those into this arena.

And we know some things that have gone poorly or kind of when left unintended can go poorly. And can we make sure that we're preserving those lived lessons and not dooming ourselves to repeat them, right? So- I'm sure you've seen those memes, right? Of like crypto and on Twitter, like,

hey, it's fun watching them in real time, figure out the lessons of modern finance over the last 200 years, right? They've like condensed it into a six year period of trying to learn these lessons. It's not always fun. Sometimes it's painful. Okay. Yeah. But, but you're right.

I mean, we, this is sort of the nature of humans. We're all kind of doomed to repeat our mistakes more or less. We try to reduce the frequency with which we do that. But you're exactly right that the vision here was really let's not doom ourselves to repeat mistakes. and a reasonably conservative path so that we can survive whatever crises and counterparty missteps might happen in the industry around us? Can we build a firm and build investment solutions that are going to be resilient to the turbulence that exists in the digital landscape? And so that was the mandate for One River Digital. It's certainly the mandate for OneRiver Digital. It's certainly the mandate for Coinbase Asset Management. So you asked a little bit about how did this acquisition happen? I sort of gave you the background of how OneRiver Digital came to be as a business entity. And this team, I'm so grateful to my colleagues.

It's a really incredible group of people from blue chip, traditional asset management firms, folks with backgrounds from BlackRock and CPPIB and Brevin Howard, Millennium. I mean, it's a pretty serious group of individuals here. And you're right that these are folks that have really internalized lived experience in portfolio management from traditional finance. And now we're really focusing those efforts on digital. So as we started building this business entity, invariably one of the features is you need some operating capital. And so there was a Series A equity raise in 2021 to support One River Digital. And that Series A equity raise had a number of names that were participants, but kind of two lead names in that group were Coinbase and Goldman Sachs. So, you know,

a serious crypto player, a serious tribe five player, hard to ask for better anchor equity investors than that. So the relationship between OneR River Digital and Coinbase really predates the acquisition. The firms had been partners through that equity raise process. And of course, as I mentioned, if you're running an asset management business in digital, and you're not looking at Coinbase as one of your possible counterparties, you're probably not looking at the full set of counterparties available to you. So we had been working with Coinbase from a custody capacity or a custody perspective and just in the kind of normal course of business prior to the deal. So they take you guys over, but it's the eye towards, hey, we want to build out this institutional trading or we want to build

out an asset management arm and offer these products to their existing client base. So we were and are focused entirely on asset management for institutional investors. Our mission has not changed as part of the acquisition. Or institutional investors. Sure. Yes, exactly. Yeah. Coinbase has, as you said, has retail product offerings and did prior to the acquisition and still does. But they didn't have an asset management arm. And so this is a new business entity for them, a new line of business for them. Well, and to your other story, like, hey, we can spend a gazillion dollars advertising and doing all this and get a billion dollars worth of customer deposits, or we could have this institutional arm, get one client that wants to invest a billion

dollars. So just two ways to go around the same thing. I don't know that those are mutually exclusive. I don't think of those as an either or, right? I mean, these are sort of an and, and like, if you, you know, to draw on parallels from traditional finance, if you look at Goldman Sachs, they're a business that they're a very diversified financial services company, right? They have investment banking operations. They facilitate access to financial markets. They have asset management solutions. And one of the benefits of being a really diversified business is that the cadence of your revenues and the profitability of any one business line is invariably going to cycle through different periods. And if you have that diversified

mix of business, certainly in the case of Goldman, we've seen that create a really resilient firm that has just been a leader in the financial industry for years and years and years. So I think there are some nice lessons to borrow from that business model that, you know, are, are worth taking very seriously. Definitely. And I, I meant to say, yeah. And right. So, Hey, we've got this piece going over here. Now we can get in with, now we can get access to the other piece. Um, cool. What else? So what you personally, you had to move offices, you didn't have to move towns, homes, like for you is rather seamless. Yes. So I've been living in New York City and working in Connecticut ever since my first day at AQR. So none of that has changed my personal commute.

I've been doing the reverse commute with a brief pandemic hiatus, but otherwise for the entirety of my time on the East Coast. But our offices have really not changed. We're still located in our Stanford Connecticut office. The team has really not changed. I mean, this was a change in kind of corporate ownership at the parent company level. But as I said, the team and the mission and the business focus and the investment strategies are entirely intact. Now I want to dig into the strategy, but before I do that, I was thinking back, we can't talk about crypto without FTX, right? I think it's a rule. It's in the bylaws. But so was part of that, hey, we need to put this traditional finance and we need to do our due diligence for lack of better term.

So did that help steer you guys away from FTX at the time? We spoke on this pretty publicly. We hosted a webinar ourselves kind of late last year on the back of the FTX crisis. Look, I think one of the lessons that certainly ports over very clearly from traditional finance to digital is the importance of counterparty due diligence and counterparty risk management. And that is not a secret, right? That is just part of being a fiduciary and part of being a thoughtful investment manager is making sure that you know who you're doing business with and not just what are the risks that are kind of very obvious on the table, but what are the implicit risks that you're taking or working with a prime service desk or some other service provider, knowing, especially when money is changing hands and you're going to park assets at that entity, you want to know how are those assets held? Are they in a commingled structure? Are they held for your benefit or in a clearly delineated account? Have they passed? Do they have SOC audits?

You know, what is the degree of security and assurances that you can secure from that counterparty? And then what does that tell you about the risks that you are or are not taking? And like I said, those broad questions and that general framework for thinking about counterparty risk management is much broader than the digital industry. But I do think that there was, especially kind of prior to 2022, there was quite a lax attitude to counterparty risk management. And I have to imagine that some of that was this tremendous kind of sense of urgency to participate in digital markets.

And you can either do things quickly or you can do them carefully, but it's very hard to do something quickly and carefully. And so many folks had to choose which end of that spectrum they wanted to sit on. And I think there were a reasonably large number of folks that chose to be quick as opposed to careful. And as a business here, we chose to be careful as opposed to quick. So we did not have assets at FTX or Binance. And some of that is because at the time when we first started as a business, we were a U.S. investment manager. We're located here in Connecticut. We wanted to and have since established a Cayman-based IM.

And so we are now very actively kind of shifting our focus to what can we do now that we have offshore funds and an offshore investment manager? And kind of what does that open up in terms of possibilities, but that doesn't lessen the amount of scrutiny that we apply to those relationships. And I think that that's, that's really that level of kind of care is really what has safeguarded us a number of times. You know, just, I think folks generally need to be really diligent about pressing on risks and what is the downside scenario. And you do have to be a little bit of a pessimist, even if it's not your natural disposition when you're thinking about onboarding a new counterparty relationship. You really have to go through the worst case scenarios and ask yourself

what those are and then ask the counterparty what they are. And certainly one thing that we've benefited from is our counterparty due diligence process is very slow. We take a number of months to engage with any prospective counterparty and we tend to ask them the same questions over and over again. Part of that is because we're looking to see if we get consistent answers over time or the answer is changing and kind of subject to shifts in the direction of travel and wind. And that is a signal in and of itself, right? So we've been able to avoid all of the blowups from last year. We didn't have exposure to Celsius or Voyager or BlockFi or any of the FTX

debacle. And we didn't have exposure to the Terra Luna implosion either, even though we have published indices that include a number of crypto assets. But those assets failed out of our index screening criteria. And there were definitely you know, there were definitely moments through 2022, where we would get questions or comments from folks who felt like we were taking quite a conservative stance. Sure. Yeah. Because especially in the, in the kind of crypto crypto landscape, when you have, when you have a lot of folks that are doing a lot of things that we're saying no to, eventually you do look a bit conservative. But I think now we've certainly seen things play out that validate those choices heavily. And we feel really comfortable that being

conservative is an important part of survivorship, right? And I would much rather survive and be conservative to get there than the alternative. I would have been like, well, we don't call it conservative. We just think you should wire the money to the custodian's name instead of the trading firm's name. There was some low hanging fruit of not necessarily conservative, but yeah yeah so good to know so it sounds like you're saying i won't put words like hey there were obvious red flags if you're doing careful due diligence and it wasn't too hard to avoid that um i think part of my understanding too is a lot of people in their haste to get in there missing the fact of like no it's blockchain it's all in the chain

i'm protected right it's in my name like so there's this little misconception of like no i'm not just wiring money to some random place it's going on the chain and i have mine so i don't know how much you think that was part of the issue i think people that know no are like no it's we we also know that assets on chain you know is not a solve against all ills either. We've certainly seen enough bridge hacks and rug pulls to know that even if your assets are on-chain, if they're moving between chains through a bridge that has been historically an area of weakness and vulnerability, none of these things are perfect, right? There's no cure against any risk. It's every decision in investment management, but also just in life as an individual, every decision is a risk management decision. You're choosing whether you want to take the risk that's presented before you. And do you think you're going to be adequately compensated for it? And I think the problem that many folks have is they're

very focused on what the possible upside is and not adequately focused on what the risk is. And then thinking about that, that expected compensation in light of the risks that they're facing. And I know at least some of the groups I talked to were like, oh, it's hard to tell which exchanges are good and bad. So we're just going to don't put more than 10% at any one exchange, right? If something like out of these like standard kind of table stakes, risk management approaches, but you could lose 30% when three of those go down. So you can, but you know, look, there's something very practical

about diversifying your uncertainty away a bit, right? You're saying I don't have great conviction in any of these places, so I don't want too much exposure to any one of them. Could a handful of them still go down? Yes, of course. But do you think that that is statistically a slightly less likely outcome than one of them going down and you have half of your assets there because you only have two? Yeah, maybe. I mean, it's not, like I said, it's not a perfect solution, but at least there is something in that where there's that risk reward trade-off evaluation happening, right? You're in the, I'm going to spread my assets across 10 exchanges or 10 venues kind of construct. You're saying, well, I think all 10 of these have some amount of risk, but I think they're probably less than one correlated to each other.

So I think that I'm a little bit better off perhaps statistically by spreading that risk around and my expected reward from trading over 10 of them versus just on one is maybe equivalent, but the risk profile is a little bit better. It's not a perfect solution, but there is something kind of reasonable about it. And what would you say, I'd like to borrow this Bill Maher line. I don't know if you ever watch him, but he's like, and it's about Catholicism. So we're going deep here, but he's like, people, you want to swim in this pool, you admit, oh, there's a few turds over there in the corner of the pool, but we'll just ignore those and swim over here. And he's like, there's turds in the pool, get out of the pool. So in the

crypto space, if we admit like, oh, there's a few bad actors, there's some weird stuff going on. Like, how do you separate those two of like, I'm still fine swimming in the pool, even though I know there's some bad stuff over there in the corner. Yeah. I guess I don't really think about it in that particular swimming pool analogy frame of mind, but I certainly do think about it as these are choppy seas. And so if you know the waters are incredibly turbulent, you can either just jump in and try to swim, or you can put on a few flotation devices, maybe have a boat that is adequately prepared to face high seas. You can choose, you can choose your, uh, your vessel, so to speak. Right. And

you can either have no vessel at all and just kind of hope for the best, or you can try to prepare yourself. I think that that's sort of the analogy I would take, right? So I guess in the Bill Maher swimming pool analogy, if you feel like you want to be in the pool and you're concerned about the water quality, maybe you build yourself a little boat. Yeah, or I've said it before, like if there's a bar of gold on the bottom of the pool, maybe build yourself a suit

and go down and grab the bar and come back out. So speaking of our metaphorical boat, so let's get into the strategy that you're running there. How it works, what the base is. I'm assuming it's trend following since you have said trend following already. So we love trend following on this pad. So go for it. It is admittedly where I have oriented my career so far. So that's exactly right. When I came to then OneRiver Digital and now Coinbase asset management, my colleague and co-PM Paul Ebner, he came from CPPIB. He ran internal quant strategies there he he and i are so complementary to one another i really think about things from a kind of bottom up quant construction point of view and he more naturally tends to think about things a little bit from like a top down sort of portfolio integration point of view and so we naturally kind of are very, very well suited to working with one another.

So he and I started talking about just systematic strategies in general and what makes sense here. And if we're going to build a quant stack and all of the infrastructure to support it, you know, what are the strategies that we think make sense today? What can we focus on building first? And then what can we kind of table as something to build and curate later on. So, to be honest, we started by looking at some of the market neutral kind of futures arbitrage, cross-exchange arb-type strategies because those have been a little bit in vogue in digital for

a couple of years. There are some basis trades that look attractive on their face. And as we started to kick the tires on some of those, this counter-party risk and exchange risk question kept coming up over and over again. To really participate in those kinds of strategies, you do need to be participating on many venues. And very commonly, you're trading instruments that are venue specific, right? So if you're trading offshore and you're trading perpetual futures on a particular exchange, that asset is not fungible across venues. So you're living with the instrument on that particular venue. So you're taking a lot of counterparty and exchange risk. And as we started looking at those strategies, you know, we didn't love the risk profile that they carried for all of those reasons. But,

you know, the other thing is those strategies, we've seen a little bit of alpha compression in them over the last couple of years. They still look reasonable, but, you know, if we're thinking about what is viable three, four, five, 10 years from now, if you think that alpha compression might continue in those strategies, perhaps they're not going to be as evergreen as something that, you know, something like trend following that is a directional strategy. And so we started looking at those, those strategies, kind of set them aside and said, you know, this looks okay, but we think we can do better for something that's a little more viable today and going to be a little more evergreen. And the classic, just for listeners there, like the CME typically is at a premium because you don't have the exchange risk. Is that correct?

Well, you do have exchange risk because you're still trading on an exchange, but you, you might have a lower exchange risk profile than some others. So the classic trade there would be go long the whatever European ether and short the CME ether. Oh, if you're thinking about the, the arm trade. Yeah, that's right. Take whichever instrument, look for futures off on different venues in equivalent assets and matched expiration dates and short whichever one is more expensive and long one that is cheap

and capture the spread effectively is the ARP trade there. That's exactly right. Right, and the problem that you're bringing up, if the long side goes away, right, if your profits there are gone because of exchange risk, you don't have an ARP trade. You just have the one side. Yeah. Yeah. And, you know, from an operational point of view, kind of managing the cash sweeps and the collateral flows across those different venues adds complexity and adds another layer of risk that is often not talked about

as well. So there's a lot of moving pieces there. It's not to say that you can't do it, but doing it is certainly difficult. There's a lot of counterparty risk that's baked in. You can mitigate some of that by having a very short horizon strategy where you're really only putting on positions intraday and then closing them out quickly. So at least you're not sitting on a position overnight. So the timeline over which you're maximally exposed to one particular venue or counterparty is short. So there are ways to manage around this a little bit and make that risk profile more palatable. But like I said, I mean, given the risk profile, the complexity and the resiliency of that as a source of alpha, you know, we felt like it was perhaps not the most natural starting point. And it it it seems it seemed worth consideration.

And so we did look at it very seriously, but ultimately set it aside. And, you know, directional systematic strategies is, is definitely my wheelhouse. And so we looked at that as kind of the next, well, you know, I, I had a very strong prior that it would work reasonably well. And sure enough, you know, looking at the strategy, we liked a lot of it. We loved a lot of the characteristics that it brought to light. I think for one, if you're trading the spot markets in particular, now you have an asset that is not venue specific, that is fungible from one venue to another. So if you happen to run into trouble with one of your custodians or one of your exchanges and you have a position on,

you can move that position over to a different venue and still liquidate it, right? So you have an asset spongeable. So you have a little bit of a layer of counterparty risk insulation that's really attractive. So that gives you a little more resiliency to the strategy. That's a nice feature. And if you think about trend following strategies, they're meant to benefit from big directional shifts in markets. And just think about what we know from crypto the last three, four, five years, we've seen gigantic directional shifts in the asset prices. And I think that for me, I really view digital kind of going back to the AQR context. I view it as that extension of kind of go out the asset spectrum and look at the more idiosyncratic and more niche markets.

And those are the ones that have their own specific return drivers that can create these big asset price movements and trend following strategies are such a nice way to have a systematic strategy that lets you dynamically shift risk and monetize those opportunities when they come to market. And we've seen those kinds of asset price realizations in crypto. It just seemed like such a natural fit. And then the ability to transact in assets that are fungible across venues is really attractive. You can transact in spot markets, which have arguably among the deepest liquidity in digital assets today. So all of a sudden, you're participating in what you think might be a higher conviction strategy and in higher conviction kind of trading liquidity

spaces in the digital ecosystem. So all of that, all of those features are really nice. And how many are we talking about? How many digital markets? So as you look at liquidity, you know, there's quite a lot in the top two names. Bitcoin and Ethereum have lots and lots of liquidity. The top kind of 10 tokens outside of those two have reasonable liquidity. And then it starts to taper off pretty considerably after that. And even kind of within the top 10 outside of Bitcoin and ETH, there's, you know, the top one and the 10th are quite different one to the other. So it does kind of exponentially decay, so to speak, right? You're sliding out this liquidity scale. That means that what's possible from a trend following point of view in terms of transacting, it's really not that

many assets that are truly credible from a liquidity perspective today. And actually, I'll go back to our index construction. This is sort of a good guidepost. Among our asset inclusion criteria for our indices are liquidity filters. So the index publisher, I suppose I should say, uses market cap and liquidity filtering criteria to determine which assets are of sufficient liquidity to be sort of adequate for institutional investors. And there's been a diminishing number of those over the last year. I was going to ask, have those filters come down from where we were five years ago? No, the filters haven't changed, but that means the number of assets that pass through the filters has. So, you know, after all of the filtering has been applied, including some fundamentals and risk screening criteria, I think at the peak, we had about 13 assets that passed those filtering criteria. Today, there are nine. So a few assets have fallen out and they've fallen out specifically because they failed to meet the liquidity criteria.

So we've had, you know, think about like roughly 10 tokens is probably the rough pool today for what you can transact at sufficient size and sufficient liquidity. But even kind of within that 10, like I said, there's just a huge amount of variation between the top two and the bottom two there. In liquidity. And so I'm thinking, okay, one of the main benefits of trend following is diversification, right? And I have 80 global markets. Cotton and cocoa are moving when euro currency is doing nothing, whatever. And I can grab, right? I'm risking that small amount to make big amounts when those outliers move. So how do you think about, are those 10 highly correlated? Do you lose some of that diversification benefit? I mean, of course you lose diversification benefit relative to like if in a 10 asset portfolio relative to a hundred asset portfolio,

you're certainly losing breadth. Right. But I think about, if you think about kind of your information ratio or your sort of alpha capture in a portfolio, there's two components. You can think about breadth in the portfolio across the asset spectrum, which is one way to think about it. You can also think about breadth in the signals. So you can kind of get some within portfolio diversification from having more nuanced views on each asset. But the other thing too, that I think is really worth mentioning here is one of the things we see that is a nice feature of trends in digital assets today in particular is even if you just look at Bitcoin and Ethereum, focus on your top two assets where there is a lot of liquidity, even in this very, very narrow asset universe, just two assets,

the size of the trends that we see in digital assets has been so pronounced relative to the size of trends that you see in more core macro markets, right? And so the kind of potential for really, really significant directional shifts here is still very large. And I think part of that is just due to how nascent the space is. I know digital assets have been around for 10, 15 years now, and that feels like a long time, but in the broader adoption life cycle, we're still in relatively early days by a lot of metrics. And so if you think that you're in this kind of big growth, big, big growth cycle, right? Last year aside, and kind of take the short downturns out of the context and think about this adoption cycle. When you're in this early

adoption cycle, if you see the kinds of significant shifts in the years ahead that we've seen in the last three, four, five years, the ability to monetize those trends, even in a two-asset portfolio, totally exceeds your ability to monetize trends in pick your favorite two macro assets, right? And part of that is the volatility profile. You're looking at assets here that are 50 to 100 vol annualized relative to, you know, in commodities, we talk about crude oil as being quite a volatile macro asset. Its volatility profile is pretty commonly around like 35 all annualized. That is a lot less than what we've seen in digital. So if you have these huge shifts and you can monetize them well, the possible alpha capture there, even in a very narrow asset universe, is really attractive. such a relatively new industry with this kind of long-term adoption cycle ahead, possibly, then as you start to think about what market maturation looks like, all of a sudden,

it's very reasonable to think that the illiquidity conditions that you see in, say, names 10 through 100 today will ease considerably in the years ahead. So I think what you have now is a relatively small number of assets where you can reasonably express this kind of portfolio. But the kind of opportunity that those assets present is still very attractive, even though the pool of assets is quite small. And as you start to see market maturation, I think the attractiveness of trends in those top couple of names might start to compress a little bit, but that'll also hopefully align with the time where the liquidity profile is such that you can add far more markets. So I think in terms of the long-term view here is that I don't think that trends will be as attractive in just two names 10 years from now as they are today. But I also think that it will be a much easier road to having a 20, 30,

40 asset portfolio at that time than it is today. I love that way of thinking about it. I hadn't thought about it like that. The other way to say it would be, well, yeah, those classic trend followers need 80 markets because they need all those markets to get that volatility. Here we have the volatility with just these two markets. And so a few things you touched on there. One, it sounded like you might've said or hinted at there's a unique model for different tokens or no same model on all of them? There are a lot of interesting things you can do. And we've got a few things in the works now to have some specific alpha features for different assets, especially as you start to look at the altcoins, right? I mean, you know, just think about the staking dynamics for Ethereum versus some of the other altcoins. There's a different cadence to how staking happens in these assets.

The timelines are specific in some tokens. The kind of yields in some tokens are anchored at your moment of staking. In others, it's a rolling cadence. And so there are these kind of asset specific features that you might want to bake into your alpha models. So there's a lot of that kind of bubbling along behind the scenes here. And you're not like, your mandate isn't trend following the coins. It's a digital alpha, right? You're just trying to produce alpha no matter the model. Yeah. I mean, look, like the team's mandate is investment strategies and digital assets. And

my particular kind of lens on that is systematic strategy development and building the tech and infrastructure stack that supports those. Now, Triumphal is a great place to start. And you have to pick a pragmatic starting point for any new business. And so that's exactly what we did. And that's what we've been building and have built so far. But we have a sentiment model that is also directional in nature that fits nicely in this kind of portfolio context where it aligns with wanting to take long views in assets where we see trends moving in a positive direction and looking to potentially go short in markets where trends are starting to fall apart. But how you're measuring trends and what time horizons and what kinds of trends, there's a lot of opportunity for nuance and choice there, right? So those are the areas we started exploring kind of most immediately. But we've also spent, as a collective team, a lot of time looking at some of the more kind of most immediately. But, you know, we've also spent as a collective team

a lot of time looking at some of the more kind of fundamental metrics behind some of these tokens. Now, I think that that's further afield. Like if you think about fundamentals in equity markets for a stock selection portfolio in particular, that's a very well-developed area of academic research. There's a lot of papers on what factors look like in equities, what kinds of fundamentals matter. And you've got a whole host of fundamental or quantum mental equity managers that have very,

very clear opinions on this. In digital, we so far don't really see that asset prices respond exactly to fundamentals. And some of this is just the newness of the space. Some of it is also what market participation looks like. Digital assets have been, up until quite recently, almost entirely driven by retail. And if I have to generalize about retail traders, I would guess that most of them are not spending a lot of time digging into the specific fundamentals of any one token. Now that might be overgeneralizing, but I think that probably loosely holds. But certainly, you know, it's much easier as an individual retail participant to pay attention to what

price trends look like, how sentiment is evolving. And so from an investment strategy design point of view, I want to put things in the model today that reflect what market participants are paying attention to. And if market participants are not really paying attention to fundamentals just yet, then it's going to be hard for trading behavior to reflect in asset prices what shifts in fundamentals might be telling us. Do I think that time is coming? Yes, absolutely. I mean, I think the entire existence of Coinbase asset management is a signal that that is probably not too far afield because the more serious asset managers and institutions come into the space and start looking at fundamentals, the more we're going to start to see asset prices reflect that. But I think we're just still sort of early there. So we have a lot of research happening behind the scenes, some of which

will matter much more in the future than it does today. But that doesn't mean that we want to neglect starting that learning process now. And does all that you mentioned being short, so does all that hinge on a return to all-time highs on the whole space getting adoption and crypto increasing in value, or do you not care? The models could go long, they can go short, who cares? Yeah. The beauty of directional strategies and trend strategies is that you can be a little bit agnostic to market direction. I mean, it's nice to have a strategy that doesn't force you to anchor to a long-term market direction, right? I mean, it's nice to have a strategy that doesn't force you to anchor to a long-term market view, in my opinion. I mean, of course, I'm biased here and systematic

strategies are sort of where I've lived for the duration of my career and the long and short side of strategies is where I've lived. So of course, I'm speaking with some bias here, but I think in digital, this is definitely one of the things that we found resonates with some investors that haven't allocated to the space yet. Some folks find the idea that they have to underwrite a long-term investment thesis behind digital to be a real barrier to entry in the space. It's hard to get your investment committee to sign on to the idea that token X, Y, and Z is going to reach some astronomical price or even just exceed its price today. That's very, very difficult to do for investment committees that haven't done the due diligence on that one particular

token or set of tokens. And, you know, I do think this is why we've seen most of the institutional allocation and digital fall through, flow through VC channels, because they're really depending on other teams to be able to underwrite that investment thesis and the possibility for one protocol to succeed or not. But if you're not ready or willing to tie yourself to a long only view in this space, you don't have a lot of other choices today. So having a directional strategy that lets you say, I don't know, I hope perhaps that things are going up, but I realize that they might not, and or the timing over which that happens might not match my expectations, it would be great for folks to have an investment strategy that lets them be a little less tied to one outlook in the

space. So if you have a strategy like trend following that lets you go long when that is the direction of travel in the markets and then lets you downsize that risk and go neutral or potentially even short when the market really starts to unwind and things start to fall apart a bit, that can be kind of intuitively appealing. I think it's also really appealing from a risk management point of view because as you talked about, the volatility in the space is huge, right? And living with a 50 to 100 vol asset can be deeply uncomfortable for a lot of folks. So if you have this kind of trend following lens, and you're tactically taking risk up or down, and potentially even shifting the size of it from long to short, that lets you manage the risk

around all of that. And just kind of taking your exposure, even if you were just taking your exposure down to flat or only very modestly short in a bear market, that can be a lot less painful than having that beta one profile and fully realizing the downside. We would call it delta one, but yeah, point taken. So talk about the short for a minute. So in the spot markets, especially, is there a huge borrow? Is it very tough to go short? What does that look like as you get in Bitcoin, Ethereum, and even as you go further down the chain? Yeah. Uh, so there's a handful of ways that you can get short exposure today. Um, the,

the one that probably gets the most airtime, generally speaking, is perpetual futures. Those markets are offshore. There's quite a lot of liquidity there. So that is definitely one accessible way for offshore investment managers to put on short exposure. But you're paying a floating funding rate.

So the magnitude of the rate but you're paying a floating funding rate. So the magnitude of the rate that you're paying for that exposure is entirely driven by market supply and demand for leverage for perpetual futures. So you're subject to a floating rate, all fine, still a reasonable way of putting on short exposure, but the economics of that short exposure is highly time-varying is really what I'm trying to say here. There's also a handful of counterparties that are offering OTC derivative type exposure, CFDs and all those good kind of standard things. Those are another viable way to get that short exposure, but you are kind of facing a single counterparty there to do that. The other third way of getting short exposure today is through prime service to desks. So this is very much like an equity prime service offering where you're

borrowing the underlying, you're borrowing the physical, I say physical, you're borrowing the digital token to go short and it's a loan arrangement. So you're agreeing to a borrow rate on that particular token. And then you can transact in the spot instrument as you would, whether you were going long or in this case, now you're going short because you've borrowed the token. The choice for how you want to put on your short exposure is really going to be driven by strategy design. If we're going back to talking about some of those market neutral strategies, if you're talking about futures ARB, you're probably going to be transacting in futures, whether it's the perpetuals or CME, kind of pick your favorite venue. But that's very likely at least one component of your

instrumentation. For a directional trend strategy, you can be a little more agnostic to the instrumentation. But certainly one thing we've found is there are some really nice features to the prime service offering where you're transacting in the physical token. Again, you're transacting in spot markets. So you have an asset that's fungible across venues, so you're preserving that layer of counterparty risk insulation. And we've found so far that the barter rates that we tend to get quoted from prime service desks have been reasonably steady. They do vary over time, and certainly we saw them become more expensive throughout last year as availability became thinner, kind of as you went

from early 2022 to late 2022. And some of those sources of token borrows went offline. As the market fell, there was more demand for more and more short? Not even so much demand, but just less supply. As you had folks downsizing their own crypto exposures, you've got less token supply available for lending, right? So that was definitely one feature to prime service offerings last year that was really interesting to watch. But even with that kind of compression, so to speak, in availability, kind of going back to what I said earlier, in Bitcoin and Ethereum, there's really no issues tapping supply there, kind of regardless of what your desired instrumentation is. The liquidity is definitely

there. As you go further out into the altcoins, it gets a little thinner, but you can find the right counterparties that are willing to lend token to you. And there are perpetual futures markets in a handful of altcoins that have adequate size. So kind of choosing the right instrumentation for your strategy, really important. Liquidity, it doesn't really matter what the instrumentation is. The liquidity gets pretty thin pretty quickly, but kind of within the top two names, you have a lot of liquidity. Within the top 10, you can get on some size, but outside of that, it gets pretty thin. It's weird for me to think about borrowing the coin to sell, right? Because if it's all in your name, it's all on the chain.

So it's essentially in that prime services name. Like how does all that work? Because are you actually on the chain? It's in your name and then you sell it and then you owe the Prime Services desk backing? Basically. So you can kind of think about it as like a, I'll do a terrible job of describing this, so forgive me. But some entity over here, an unknown entity A has a large pool of token that they want to make available for lending. And I'm asset manager B over here

and I would like to borrow their token. And so there is sort of an intermediation account where I will post collateral to this account, for example, and that collateral gets swept away and held in a kind of separate account where the token gets pushed to that account and then ultimately pushed to me. So collateral and token kind of pass through something that almost looks like a tri-party type account structure. It's like a pass-through account. But you're right that kind of from a pragmatic point of view, the token is moving from account to account. So it's getting transferred from their wallet over here to this wallet to me, and then I sell it. And then eventually I buy token back and then we reverse

course. Yeah. It's weird to think of it that way. I guess it is similar to how it works in the securities world, but... Oh, it's almost exactly how it works in the equity space. It's just that you're right, the technological rails that it kind of sits on top of look a little different, but from a market participant's point of view, it looks almost exactly like an equity prime services offering. And to your point way earlier, that had to all be built, all those rails, right? You mentioned a little bit of that one big investor who wanted to be long. What are the types of investors you see that are looking at this? To me, when you say, yeah, we can trend following, my worry would be as an investor, like, oh, it's up 800%. We only got 500%.

So there might be some investors who are, and that's a bad example. I'd be perfectly happy with the 500, but right. There's some investors like, okay, your alpha strategy just gave me alpha and didn't give me the long only return. So like, how do you separate those things of like, you got to be coming in here looking for absolute return, not necessarily the crypto return. Yeah, that's for sure the case. And, you know, to kind of throw it back to the trend following category more generally, if you're allocating to a trend manager and the S&P 500 is up 30% for the year and your trend manager is up three, certainly there are plenty of trend managers that have had those kinds of conversations where the investor's like, I see the equity market was up a lot. Why weren't you up more? And the trend manager's perspective on that is generally, well, look, we're managing a volatility managed portfolio that trades a huge number of assets and we're dynamically sizing our exposure and all those good things. All of

those arguments still apply here. But I think at the end of the day, the reality is if you want the long exposure to digital assets, there's no better way to get it than to put it on. Then you have to live with it. And that part is really hard because the volatility is so astronomical. And so I do think that that's one of the reasons why we've seen kind of the VC allocations be favorable here. Because to a certain degree, long-only token exposure is like liquid VC. You have an asset that in theory you could trade every day, but are you investing in that asset because you think tomorrow you want to sell it? Or are you investing in that asset because you think that its growth

potential for the next five to 10 years is really attractive? So your investment horizon, if you're going to make a long only allocation, has to be calibrated appropriately. And you have to size your capital allocation appropriately in the context of your overall portfolio. So for the folks that are inclined to put on the long-term exposure, the question is, what is the timing and what is the size of that allocation that makes it appropriate and the right fit for your portfolio? And those are very personal decisions that every allocator has to make for themselves. Where we're seeing the most interest in our trend strategy in particular is there's really two camps, although I think a third is we're starting to see emerge. But the two camps that have been most interested so far, first and foremost, they're the trend allocators. The folks that

have managed futures exposure, they know that it provides them this nice kind of tail property, that it has some option-like characteristic where in a choppy sideways market where there's not a lot of trends, you're kind of paying a small premium for that exposure. But then you can have these really outsized return realizations in short-ish periods that make the whole thing worthwhile. And the folks that understand that cadence to trend following returns and deliverance in their portfolios, those are often the folks that have already contemplated an allocation to an alt markets portfolio like my whole day QR portfolio or like manage all this evolution

or those kinds of strategies for the folks that are, that have already contemplated those allocations. You know, they often see digital as kind of the next evolution in that particular process, their allocation horizons, or kind of outlook sort of follows my career trajectory in a way. So that's definitely one pool of investors that we've had a lot of really good engagement with. They intuitively understand the appeal to a trend following strategy in digital markets because they think about it as an extension of trend following in other alternative and more esoteric markets. They get it. Those folks are very

interested. The next group that are also very interested are the folks that already have a fair amount of long-only exposure to digital. And most of them have it through their VC book. And quite a number of them have experienced some pain from the events of last year, right? They went to all of these great lengths to get their investment committees to underwrite the idea lengths to get their investment committees to underwrite the idea that they should have an allocation to digital. And after living with the write-downs and the FTX collapse and all of the events of last year, a subset of them now are looking at their allocation and saying, is there something we can add here that will complement our existing digital exposure

in this VC book that will act a little bit like a tactical kind of risk add and a risk mitigation around our long-only exposure that we have through this VC portfolio? That mindset is almost exactly why allocators have invested into managed future strategies in the first place. If you're trying to diversify your equity risk and protect against the big crash scenario and add something that could add a little bit of tail protection, that's kind of the classical argument for making a managed futures allocation. We're seeing some allocators kind of come to that same understanding within their digital allocation specifically through the kind of VC beta. It's almost like they could sneak it in like, Hey,

this is just an alpha strategy that we're doing. Yes. It trades digital, but yeah, ignore that part. It's just alpha. Well, for these guys, it's like, how do we, we already underwrote having a digital book and then how can we diversify within our digital book? The first category, the sort of the trend allocators, those are the guys that are trying to add alpha to their crisis risk offset book, right? They're trying to add some other diversifying return sources to their risk mitigation book.

And that's, I don't want to say it's in the sneak it in category, but it's like they already have a place in their portfolio allocation where they can underwrite that this strategy fits nicely because they already have trend allocations there. They've seen the benefit of those allocations. This is a different version of those same things. It belongs in the same sleeve. And then for the folks that have the VC exposure, they generally underwrote the decision to have a digital investment already. So it goes in their digital book, but it would act as a diversifier within that digital book. So those are the two groups. Right. Sort of a weird conversation because like, hey, we have this long only book of

digital and it's interesting you used the word digital versus crypto. We'll get into that in a sec. But like we have this long only book and they're kind of viewing that as short vol right like this has negative skew we're going to have these big drawdowns there so we want to add this kind of long ball trend following classic approach yeah so it's like i have this thing that's short ball and i'm going to trade it as lava even though it's the same thing um which is interesting. So why do you use digital versus crypto? Is that a conscious effort or you've just always a personal effort? I mean, it's a little bit of a habit, I suppose, because from the olden days before we were a coin-based asset management,

when we were one river digital and digital was just part of the kind of standard nomenclature and it's a little bit of force of habit. But I think maybe it is perhaps a little bit of force of habit. But I think maybe it is perhaps a little bit of a conscious effort. Crypto, for better or worse, has mixed connotations. And I do think, to be totally clear, I think about them as synonymous. I do use them interchangeably. I suppose when I put my professional hat on, I tend to say digital a little bit more. And when I talk to my retail trading friends, I probably say crypto a little more often. And it's a little bit, you want to speak to people in the language that they use because you want to be able to meet folks where

they're at. But I think of digital assets as a better term than crypto. And part of this actually is rooted in respect for the original cryptographers. I think it's a little bit of a shame that we have totally capitalized on terminology that really belongs to the cryptography community. And there's an incredibly rich tradition there that is totally distinct from and broader than digital assets and the technology that digital assets represent. And so I sort of want to, I think I personally want to avoid using crypto a little bit out of respect for the mathematicians and cryptographers that came well before Bitcoin ever did. I love it. You ever read Cryptomachrome?

No, I haven't. I suppose I should. Yes. I'll send you the link. And so speaking of, we'll go to crypto now, like what's your personal, are you a holder? Are you a maximist? Are you a believer? What's your... I'm certainly not a maximalist of any kind. If anything, I'm a pragmatist my my personal portfolio is is long only you know I'm not looking to go short in my personal portfolio frankly I make very long horizon and very macro oriented investment decisions in my personal portfolios I save all of the dynamic risk taking for my professional portfolios. That's my day job. But look, my personal portfolio, I wouldn't be in this seat if I didn't really believe

that the technology that underpins digital assets, I think, is pretty incredible and has a long runway and a lot of potential. And I really do think about it in the asset allocation context. I've got a mix of equities. I've got some commodity exposure. These days, I even have bond exposure because the yields look pretty good. But I think having a slice of digital exposure

in your personal portfolio, look, everyone has to choose how big that slice is. But for me, I just think it's, it's such an obvious choice to have as one, one element in the overall mix. And I, I'm just a slow strategic kind of opportunistic buyer is probably the way I would characterize it. My, my general cadence to my personal portfolio is to be, to be a buyer in bear markets. So if it's a painful time to be buying, that's when I want to buy. So that meant that I kind of slowly and steadily picked up my crypto long exposures in my personal

portfolio throughout all of last year. You kept feeling pain and then some more pain and some more pain. Yeah. But, you know, I mean, that meant that I kind of on a personal basis, I was buying up until January of this year. And then I, you know, right as the market started

getting a little bit of lift, I was like, oh, I'm so glad that I did all of my buying during the bear market of last year. And I'm going to kind of pause for now. But the next time we have a major downturn in markets, I'll pick up a little more. And that will be my course of personal action for the foreseeable future. And it's been that way for a few years. And you need to add a little rebalancing premium in there. If you buy at those tops and get out at some of the highs. What if US launches their own coin, China has a coin, all these governments have their own tokens or coins? Do you think that lessens the long-term possibilities or is in concert with it?

No, look, I mean, well, you're really asking now about the central bank digital currencies and stable coins, so to speak, right? Those are a different kind of category within the digital asset landscape more broadly. So I think certainly we've seen stablecoins pick up in terms of their velocity and their use. I think the last quote I heard was that last year, total stablecoin transactions were somewhere in the neighborhood of about 7 trillion. That's not a small number. That's pretty sizable. Now it is small in the neighborhood of about 7 trillion. That's not a small number. That's pretty sizable. Now, it is small in the context of broader global financial markets, right? But I think it's a very credible number, a very clear sign that the possibility for stablecoins to act as a payment mechanism is quite real. But I think where that really, really truly starts

to take off is when you as the end user almost don't notice it, right? If I Venmo someone, I'm not actually thinking about where is that money? And is it USD on Venmo's ledger or is it on a bank's ledger behind the scenes? I'm generally speaking, not that concerned because I'm transacting at small amounts. The money is there and then my friend gets it and they sweep it into their personal bank account and all is well with the world. I think when you can have that kind of experience with stable coins, where you almost don't notice that it's a stable coin that you're transacting in or passing from one entity to another, that's where you can start to see this really reach much, much broader adoption.

I think this is kind of one of the amazing things to me about digital assets is the technological rails are so incredible, but I think that they reach kind of much greater potential when we don't see them so much. One of the inhibitors to broader adoption today, arguably, is the wallet, the user wallet experience. It's a little onerous to have to kind of transmit assets from one wallet to another. And, you know, am I in the right wallet? And, oh, I forgot that I wanted this asset and I have to flip to this other wallet to get it.

And, you know, the user experience is not particularly seamless and fluid for the naive user today. And so that does create some barriers to adoption. But once you don't see those things as the user anymore, can stable coins become a much, much bigger payment mechanism and monetary transmission mechanism? Yeah, absolutely. I think that's true. Now, the central bank digital currency arguments, really, that one is a bit of an interesting one, because I've been talking about stable coins here, right? And I haven't been talking about CBDCs specifically. And this is where lots of heated opinions come into play about

the role of government and the role of decentralization. And I think this is where I find it really helpful to think about cash. Cash, as we have it today, if you've got dollar bills in your wallet, cash is permissionless and cash is anonymous. And central bank digital currencies could be neither of those things. Or they could find ways to be both of those things. But I think I take a personally skeptical view of central bank digital currencies, unless we can replicate those same features that we all explicitly benefit from in cash today, but we completely take for granted. Most folks don't think about how much financial freedom you get from being able to transact anonymously in cash. I know there are some

individuals and businesses that do really appreciate that and are mindful of it. But I think on average, we tend not to think about that as we go about our financial transactions on a day-to-day basis. The knee-jerk reaction is like, oh, well, that freedom just leads to illegal stuff, right? Like only the people doing illegal stuff want that freedom but yeah i can see that like my nightmare scenario is everything's central bank coin there's speed cameras everywhere i'm driving to wisconsin and they get me for speeding and just immediately take the coin right debit it from my account or something like that so like that's where it gets like all big brothery and like okay they can they can not only track you, they can withhold money.

They can write your taxes, just automatically come out without you having any say in the matter. So yeah, there's all that big brother stuff. That's a little scary. Sure. And, but, you know, I think, I think the opportunity to be anonymous, you know, think about charitable donations. Yeah.

If, if you want to make a sizable charitable donation to a cause that is near and dear to your heart and you don't necessarily want your neighbors down the street knowing that you made this particular large donation to a charity that may not align with their ideals, but they're your neighbor and they're your friend and you want to preserve those interpersonal relationships and you want to have some modicum of privacy around how you conduct your financial life. I think that's a sort of more benign example here for why there are social benefits to having some degree of financial privacy. And it's not just the sort of absence of big brotherness, although I personally don't love your nightmare scenario

either. It doesn't make me feel warm and fuzzy, but I do think about these kinds of more, like, this is arguably a social good type hypothetical where you are trying to financially support something that you think is a worthwhile cause, but you realize that may cause social frictions for you and you are looking to preserve your privacy and your freedom so that you can maximize social good in both fronts, both your personal life and over the kind of the broader global or societal front, right? Right. And then I have to push back on your Venmo example a little bit because it already works well it already works so why do we need something else right it's like if this could

only be just like venmo where it's all invisible and we don't even know what's happening like well we already have the venmo we do have venmo and i'm i'm not saying we need to eradicate venmo but look i i think this is kind of this is certainly where the maximalists and I disagree. I think about, I think about digital assets and the technology underneath them as, as one of many tools that I want to have in my toolbox. I don't want it to be, I don't want to open my toolbox and have one multi-use tool and have that be the only thing there. Right. And so I think this is where if you, if you start to think about kind is where if you start to think about currency strategy and central bank reserves, central banks understand this explicitly. Many of them globally have not just one currency in their pile of reserves, but they have many currencies in their

pile of reserves. Extend that logical argument. Yes, absolutely. So now you have a durable asset as well. And then extend that argument to say Bitcoin or Ethereum. And do you want that to be one of the tools at your disposal? Yes, I do. Absolutely, I do. And that's why my personal portfolio looks the way it does. I want many tools available to me, not just one. Right. It's the concept of like and especially if you're venezuelan or somebody right and there's currency issues right so um or you know if you're in the united states and you've had just a tremendous amount of monetary easing for many years true true

i don't get many uh women on this podcast so I need to ask some questions on what's it been like? You should be inviting more women. I try, I just don't know enough. What's it been like for you being in the male-dominated hedge fund world? Do you see that changing? Do you have any advice for young women trying to get into the space? All the above. What's some of your greatest hits from that standpoint? You know, it's funny. I, I really

never thought about this early in my career, which is, is a sign that I was relative to either incredibly naive or very sheltered or very blessed or some combination of all three of those things. But, you know, for the practical advice that I think matters that has certainly served me well is I just started by following my interest and my intuition. I wound up studying math and stats through my academic career because it just, it was an intuitive way for me to understand the world. When I was incredibly young and I started to learn to play piano, you know, your teachers teach you piano in kind of key letter notation, C, E, F, so on and so forth. I mentally re-translated all of those letters. And when I would read sheet music, I never thought about

the letters. I played piano through math. I thought about everything as additions or subtractions or multiplications, all offsets from middle C. So I read sheet music in mathematical notation. And I didn't do that because I thought that that was the way we should all learn things. It just was the intuitive way that my brain would interpret sheet music. It just made sense to me. So I followed my interests through academia and eventually just kept taking more and more math classes and more and more stats classes. And at some point you look around and you realize there are perhaps not as many women in your class as there were a few years ago, but I had just followed my interests until they kind of led me to a natural career path. And that served me really well because it meant that, you know, when the doubt creeps in

and when folks ask you, are you sure you want to be here? There are not so many other people that look like you. You can very confidently say, yes, these are my interests and this is what I'm good at. And this is the way that I see the world. And this is part of my value proposition. And if you can if you can stand on that with conviction, that will serve you really well against a lot of the scrutiny that can come. But the other thing that I cannot cannot overstate the importance of this, it sort of goes back to my, how did I land at AQR story? You have to have good mentors. We all need good counsel in this world. And we all need mentors that can speak for us in our absence, that can provide wise counsel, that can help nudge us in the direction where they think

that we might find the most success. And, you know, coming out of undergrad, I was really in a not great place at the time. I had spent my whole academic career studying math and stats, and I was so excited about beginning a career in finance, but I was applying for jobs in the fall of 2008. There were no jobs. I was on the job market and getting calls back from folks that were saying all kinds of things like, we loved you, we would be delighted to hire you. But unfortunately, our hiring budget just turned into a firing budget. And the only way I found professional footing and wound up working at that consulting firm is because a faculty member and professor that I deeply admired and had been a teaching assistant for suggested that I think about careers in consulting. He knew me well as a student.

He knew my aptitude in different subject matters. And he thought that that would be a very nice way for me to address my interests, but pivot a little bit and start my career in a place that, you know, you know, had openings, for example. But I've really benefited from having wonderful mentors, bosses, professors, teachers along the way. And having those people that can give you a little bit of a nudge of encouragement is just so important. And that, you know, that advice matters for anyone that is entering a field where they may not feel like they are demographically represented in that field, but it matters for truly everybody. It doesn't matter who you are. You need good counsel and mentors are part of how you get it

I love it um and have you found over time like at the higher reaches of right been now at two of the largest hedge fund firms like they don't care if you're green female male whatever if you can say smart stuff produce a p and l like you're in right that's true it might be too cynical but um no there's some truth to that although i will say i will say that uh you have to you have to say enough things and do enough things to be taken seriously and there so there is this kind of curing period and how long the curing period is does vary person to person and and when I say person to person I mean it depends on who's being evaluated but it also depends on who's doing the evaluation right and so they're they're the curing period for me me has gotten shorter over time because I have a much larger body of work and more credibility and

more experience to stand on now than when I first began. And it's that way for everyone, right? Eventually you become a known entity and that buys you a little bit of immediate credibility that you didn't have or knew in your career. So I will say that if you do not look or act or speak like the kind of conventional person in your particular field, that curing period is invariably going to be longer. And that can feel very frustrating at times. But if you know that, if you know that the curing period might be long, there's this kind of delicate balance you have to strike where you need to say enough thoughtful and intelligent things to win credibility during the curing period. But you also almost don't want to say anything too important because what you're saying at the very, very beginning may not actually land initially because the initial evaluation is, do I take this person seriously?

Yes or no. And then the second evaluation after you've passed that test is, and what do they have to say that I can learn from? So build your credibility first and then communicate your message second. I love it. I think we should leave it there. We can't say anything more intelligent than that. Although I wanted to pick your brain on chat, GPT and AI and all that, but we'll save that for another time. The short answer is yes. Everyone should absolutely be experiencing it now. Learn by doing. It's pretty incredible and it's going to get more

incredible in our lifetimes. It made me think of your AQR interview and people of the future are like, hold up, well, can I use my AI bot to answer these questions? And some of the firms might be like, yeah, let me see how you put that technology to use. Yeah, absolutely. It's super cool. All right. Tell everyone where they can find you. What's the website? You're not on social media, right? I have a LinkedIn, although I am notoriously atrocious at social media. But you can find us as Coinbase Asset Management. We are all over the internet these days as Coinbase Asset Management. We are all over the internet these days as Coinbase Asset Management.

Previous references to OneRiver Digital will direct you there. And if you can't, to paraphrase Tommy Boy, if you can't find Coinbase, like you shouldn't be listening to this podcast. We're going to come smack you on the head with a ham. And now I'm going to spend the rest of the day thinking of why did they invent musical notes and letters?

It makes so much more sense than math. I guess I'm a math person too. It's the same way I do. But like it makes so much more, right? Like it's going to forever haunt me now. Let's go research that. Well, thanks so much, Sarah. This has been fun.

And hopefully not too long out of your busy day. No, a real pleasure. Thank you for having me. Yes. We'll talk to you soon. Looking forward to it. Okay, that's it for the pod. Thanks to Sarah and her team at Coinbase.

Thanks to RCM for its support. Thanks to Jeff Berger for producing. We'll see you next week with a mystery guest. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCM Alts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments.

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