The Exchanges

Q How similar or different is that soft skill underwriting to what you would have done with managers prior to your time studying crypto?

A It was super different. I spent 13 years at Cambridge total, and I spent my first seven doing hedge fund investing, so researching hedge fund managers and putting hedge fund portfolios together. Back then, this was a mature industry, even in 2006, when I joined Cambridge, and there were track records, even people leaving firms had track records from other firms. There was much more to base your work on. You could do quantitative analytics, reference calls, and everything else, but with crypto, almost all of it was soft, and it felt as if you were taking a much riskier bet. Then you would when underwriting a traditional manager. So all we did back then was speak with people, understand how they think, do reference calls, figure out whether they have the personality and the grit and the passion around the space to be around for the longterm. And putting these three pieces together, you then made a decision. And of course, diversification would help as well.

AI assessment note: “It was super different. I spent 13 years at Cambridge total”

Q Where did that deep personal interest come from?

A Well, I am Greek, so I was born and raised in Greece. I think that gives you some context. There's what the major crisis in Greece that happened during the European debt crisis that started in 2012 or so until 2017. Although I wasn't in Greece, I was in the UK and the US. My family was there, so I started seeing things that I could never have imagined. For example, you had government debt overnight. Being written down 75% or so. Just imagine if you woke up tomorrow on your treasuries, your safe assets were marked down by 75%. And then you had capital controls in 2017. I remember flying from London and giving my mom some extra cash because she couldn't get too much cash out of an ATM every week. You saw all these things. And at the same time, I bumped into Bitcoin. One of my Greek friends suggested I read a book called Mastering Bitcoin by Andreas Antonopoulos. And It was eye opening. I realized that there's a decentralized system of computers that's actually functioning that transfers value on the internet outside of traditional financial rails and without any intermediary. So immediately I was like, oh, wow, we should have had some Bitcoin next to our Greek government bonds. It would have helped a lot. So that's what kickstarted my interest. So it's deeply personal.

AI assessment note: “So that's what kickstarted my interest. So it's deeply personal.”

Q When you started taking this on for Cambridge Associates from that interest, how did that play out?

A There were other people who were looking at the space, and maybe had actually met a couple of the managers back then, like Polychain, and had spoken with clients about them, but there was no centralized effort at Cambridge. So what I tried to do is, first of all, gather all the information that was out there that we already had. Gather it in a centralized way and figure out what we have, what we know, what we don't know. So that was the first step, and it was just me in the beginning. It was more like a project. From there, I started gathering all this information. We created an email list where many Cambridge consultants signed up for, and we exchanged ideas over there, so that was really helpful. We also read several Medium articles. We started reaching out to the managers back then that weren't that many, trying to figure out what they're doing, how they're thinking. Spoke with entrepreneurs, spoke with some of the generalist VCs who had been investing in the space. And my belief was after speaking with all these folks that something important was happening and that we shouldn't be dismissing it at all. And despite the fact that many of our hedge fund guys were saying that this is a bubble, which it was, Several of these very highly regarded venture capital folks like Andreessen Horowitz or USV were considering this to be potentially as big as the internet. So you need to ta…

AI assessment note: “So what I tried to do is, first of all, gather all the information”

Q So you may not want to say the names, but if I threw out an A-sixteen Z, a Paradigm, a Multicoin, I imagine there are a bunch of others. How many managers would you say are in that mix of those sort of considered elite today in the space?

A I would say there are about 15 to 20 at this point, with maybe 10 being the elite elite, like league one, at least in the perceptions of people. I do have to say though that some of these elite firms of 2016, 1718, 19 have also grown very large. And that's something noteworthy and important because when you have a fund size of a hundred million or 200 or 300, and then you have a fund size of a billion or more, it's a different ball game you're playing. So I think that for the vast majority of these elite firms of 2018, 2019 have become substantially larger. So they're playing a little bit of a different ball game at this point. That's something folks should be aware of, I think. There's nothing wrong with that, but I'm just saying it's a little different.

AI assessment note: “I would say there are about 15 to 20 at this point”

Q Why do you think most have opted for the venture capital approach?

A I think there are good reasons for it and bad reasons for it. The bad reason being that you think this is venture capital and all my structures are closed end in venture capital, hence I have to do closed end because this is part of venture capital. Even though there's early liquidity and these folks are in certain cases sitting, 80% of their portfolios are tokens after three years. I think that's not a good reason. It's more a, how do I classify things type of reason. The good reasons are the following. Number one, the way these closed end funds work is they draw capital over time, right? So you kind of average into the space naturally. Of course you could do it yourself with an open ended funding theory, but This way the manager calls when they find an interesting deal and you, you invest over a period of inferior two years or so it's been a year cycle so far, but that's the averaging in part. That's number one. Number two, you get more early stage. So just to be clear, you know, if you go into venture structures on average, you go in more into early stage, which means pre-seed, seed series, a pre-launch tokens and equity type of deals. And the upside is probably higher there. It's also riskier in some ways, but so the good reasons are you averaging over time, you invest earlier stage. And you're locked. Because you're locked, you won't make any bad decisions in terms of timi…

AI assessment note: “I think there are good reasons for it and bad reasons for it.”

Q that Bitcoin has stayed at a strong price, even, you know, if it's volatile for a long time, a lot of people would say the longer that Bitcoin isn't zero, the less likely it is that it will ever be zero. I'm kind of curious, more broadly, a lot of us evolved in the security and the infrastructure behind the blockchain. Where do you still get concerned about systemic risk?

A Yes, there's still a lot of risk in the space. Just to be clear, this is early stage. It's an experimentation and iteration. Leverage is one thing in the system, especially decentralized finance. You've seen that several occasions with unwindings of leverage and massive sell-offs. There are smart contract risks that still exist. There are hacking risks. Although Bitcoin and Ethereum The big chains have not been hacked, and they can't really be hacked. I mean, it's going to be really hard. You've seen side chains being hacked and bridges. All of these things are systemic risks to the space. Leverage. Hacking risk. The counterargument is that with code and software, you can be much more efficient. That's great, but on the other hand, there's these systemic risks, and hopefully the industry Grows over time, learns over time and gets stronger. That's what has been happening actually, historically. I remember back when Mt. Gox blew up, which was an exchange. Many folks thought the crypto space was over. How could an exchange like Lose everything. And then you had Coinbase, and now you have all these institutional custodians and, and exchanges. Hopefully you're going to see the space mature in several of these systemic risk areas. So these are two leverage and hacking risk, and then regulatory risk. I don't think it's systemic anymore. I could be wrong. I think it was systemic in 201…

AI assessment note: “Leverage is one thing in the system... There are smart contract risks that still exist.”

Q So if you look at where these managers came from, what are the different genotypes of the managers in the space?

A That's a great question. I think the best way to answer it is from the When I was first meeting with several of these funds, outside of Polychain, and Andreessen, and Pantera, and a couple of funds that were in the space really early, there were several folks who were just entering in 2018, and their backgrounds were all over the place. There was folks like Ben Foreman from Parafy Traditional Finance, right, KKR. There were entrepreneurs like Kyle and Tushar in Austin. There were Former early Coinbase employees, Olaf is one such case, but there were others that were emerging in 2018. There were some generalist VCs who were leading or starting to lead some of the crypto investments in these funds who had decided to leave and do it on their own, like Alex Pak, for example, at Bain Ventures. There were dropouts out of college. There were people dropping careers from tech and finance operators. I think this was an open field of opportunity. And at the time it was open to everyone and the design space was massive. So you had people from all walks of life. With that said, there was also like the electric capital folks that had strong angel track records and had been investing in the space really early on personally. But back then, you know, you had much less information or concrete information to build out conviction on some of these funds. It was More about, I would say, are they th…

AI assessment note: “There was folks like Ben Foreman from Parafy Traditional Finance, right, KKR. There were entrepreneurs”

Q How do you think about the different ways people can get exposure and construct portfolios in this space?

A There are several ways to do it. There's, as you know, there are venture capital funds, there are hedge funds, there are long only funds. There's direct exposure through Bitcoin, ETH, large cap DeFi, etc. Maybe I should mention there's also that whole ARB and market neutral space, which is a separate thing, I would say, from the long only exposure, but it is a part of crypto. So you have so many options as an investor. The vast majority so far have opted to take the venture capital approach, but there have been others who have taken an approach of, let me buy Bitcoin ETH. Not paying any fees. It's a good beta proxy for the industry. And in fact, Ted, if you look at how Ethereum performed over the past few years, it's beat most funds, net of fees. So some folks have opted for that approach. And then people who value liquidity substantially more and who want to have access to it in the bull market have opted more for the open-ended types of funds. In the end, I think it's up to the investor and their circumstances, right, on how they want to play this.

AI assessment note: “There are several ways to do it. There's, as you know, there are venture capital funds”

Q When you've put your portfolio together, and I know you have more of a liquid portfolio and a less liquid portfolio, as you maybe talk about both separately, but how have you thought about comprising different strategies into a portfolio as a whole?

A Yeah. So we think of it both in the open-ended funds and the closed-ended funds. We think of it in a similar way. The way we at a very high level that we think about it is we want to be biased towards early stage. So that is important, especially as fund sizes are growing. You need To find newer managers, right on the pre-seed and seed side. So it takes quite a bit of work to do that, to keep, to keep the market cap, if you will, if you want to call it market cap, to keep the market cap of the entire fund down. So we're trying to be more towards the early stages. Number one, number two, we're trying to be somewhat geographically diversified. So the majority of the exposure is in the U S. Of course, but we have quite a bit in Europe and we have some in Asia and especially in the earlier stages, even though crypto and blockchain are global, the startups are global and distributed most of the time in terms of teams at the early stages, the sourcing, the geography and with regards to the sourcing matters, take for example, so rare and dapper labs. So rare is the Dapper Labs of Europe with European soccer. Dapper Labs is NBA top shot. Many American funds did Dapper Labs. Many European funds did the seed round of so rare, not American funds. That's just an example. So you, you want to be geographically diversified in that way. And also, now that there's some areas of expertise that h…

AI assessment note: “You want to put different managers with different strengths into the mix to build a diversified portfolio.”

Q have continued to win. So you could think of like platform hedge funds compared to smaller, long, short hedge funds. How do you see that dynamic playing out? I mean, you've clearly said you're favoring the early stage funds, and some of the elite funds are now big. As the space grows, why is it that you think that the smaller funds is a better place to play going forward?

A It's math. It boils down to math. It's as simple as that, and I'll give you an example. The way we think about it at Accolade, not just on the crypto side, but on the venture side as well, is what's the average ownership? What's the fund size? I'll give you a theoretical example. Say you have, you own on average, five percent of a network and your fund is a fifty million dollar fund. It's just a theoretical example because valuations obviously are going to be the ultimate determinant of your ownership. But let's say you have a five percent average ownership and a fifty million dollar fund. You need a one billion dollar outcome, one unicorn to return your fund. You have five percent ownership of a network and your fund is five hundred million. Again, theoretical example. You need ten billion. If you look at the range of outcomes in venture, I mean, there's a very small group of ten billion outcomes. There's a small group of a billion dollar outcomes. There's a wide range of five hundred million dollar outcomes, so you're stacking your odds in your favor. If you have high ownership on a smaller fund size, you're stacking the odds in your favor. It doesn't necessarily mean that you'll beat the big guys, because they could have the Solanas of the world in there and crush you. That's possible, but we're talking about probabilities here, and we're talking about Asymmetric types of ou…

AI assessment note: “It's math. It boils down to math. It's as simple as that”

Q There's a lot happening in the space, and if you take your many years of investment insight and then apply it, how have you thought about philosophically, like how do you want to approach the crypto blockchain world in terms of the types of managers that you'd like to invest in and the portfolios you'd like to build?

A There are two chapters here. There's today, And there's 2018. And these are very two different situations because today it's much easier to construct a portfolio than in 2018. Why is it much easier? Because at this point during the 2015, 2019 period, you had this core group of what I would now call elite managers. Emerge in the space. There were very few managers back then. They went into an open space, an empty street, let's say, and they started funding all these startups and they, they created these amazing track records. And fast forward to today, you know, obviously there are network effects and moats around their early activity and they're winning more deals. It's easier for them to win deals and new entrants on average. So all you need to do today, I think, or at least to a large extent, because they're newcomers too, is to try to invest in some of these elite blue chip managers. You know their track records. You know who they are. The entrepreneurs know them. They all mentioned the same people. And these folks are the ones that the institutional crowd are now investing in or trying to invest in because they're a capacity constraint too.

AI assessment note: “all you need to do today... is to try to invest in some of these elite blue chip managers”

Q So there's a lot of things you hear about communication, say a discord discussion group in and around an NFT. And I'm curious, how much do you pay attention to what's happening with the managers in their day to day work as part of your assessment?

A I think it's super important because being in discord groups and chats and telegram chats is part of the due diligence process here. Like it's an essential part of the due diligence process. So we often like to see managers who, even if they're older, which there aren't that many, but even if they're older and are more mature, they have younger people on the team. Who spend their entire day gathering information in these channels. So we certainly assess that. And I think most of the memos we've actually seen from these funds, I would say that a large amount of information in these memos is gathered from these channels. So if somebody is investing in NFTs and is not plugged into the discourse and communities, it's a big question mark. How do you have special insights here? What is it that you're basing your decisions on? What type of information? So to make a long answer short, we look for people who are in the flow, but not in the noise.

AI assessment note: “I think it's super important because being in discord groups and chats and telegram chats”

Q Do you have a bias towards one or the other?

A Yes, I do. I don't think, when you're sitting on 10 and 15 X's and 20 X's, 30 X's, and you have a liquid portfolio of assets, just think of it as a traditional venture fund. Say that I was a traditional venture fund in 2018, and for some reason, like, Most of my companies IPO and I now held these companies and I could liquidate them. And I was sitting on the 20, 30 X range. I would want them to distribute a fair amount in my mind. I would like them to distribute more than one or two X. Would like them to distribute five X or six X. That way the investor has locked in a historically amazing return and then has the option for much higher upside. And the reason I feel this way is because I do honestly feel that there are massive cycles here. And the gains of yesterday can be losses tomorrow. And especially in an environment where the central bank printed an insane amount of money, like it's been an unprecedented response, as we all know. You take advantage of that when you can. That's my opinion. Several of these folks are just not macro driven at all.

AI assessment note: “Yes, I do. I don't think, when you're sitting on 10 and 15”

Q If there were one percent of Cambridge's client base back then even expressed some interest, if you were to guess today, what percentage of a large client base do you think actually has an investment in the space?

A Yeah, I don't have the info. Cambridge would have it right now, but I would say there's probably five X from then at least, like I'm taking a guess here in terms of client number. In terms of dollars, probably 10 X or 20 X. Because what happened is initially there were very few people willing to do really small checks. Now there are more institutions willing to do larger checks. So I think, and from what we see here at Accolade, there has been a very substantial interest by institutions. And if you ask me why, I think The reason is that folks realize that this is really a, one of the fastest growing categories of technology and venture capital. It is extremely risky, but on the other hand, they have close to zero exposure to it. So I think it dawned on numerous institutions that they should have some exposure to it. And even a small percentage of their portfolios adds up to a lot of capital in a small space.

AI assessment note: “I would say there's probably five X from then at least”