How a Crypto Quant Firm Shook Off the Bear Market – and FTX Exposure

Pythagoras Investment's two funds finished the turbulent year up 8%.

AccessTimeIconJan 25, 2023 at 3:06 p.m. UTC
Updated Jan 25, 2023 at 4:53 p.m. UTC
Consensus 2023 Logo
Join the most important conversation in crypto and Web3 taking place in Austin, Texas, April 26-28.

Brandy covers crypto-related venture capital deals for CoinDesk.

Consensus 2023 Logo
Join the most important conversation in crypto and Web3 taking place in Austin, Texas, April 26-28.

Crypto quantitative trading firm Pythagoras Investment Management LLC made it through the turmoil of 2022 in a rare position. The firm’s funds were up 8% for the year even with exposure to the implosion of crypto exchange FTX. However, the market turbulence halved the company's assets under management to less than $40 million as wary investors stepped to the sidelines.

In a chat with CoinDesk, Pythagoras founder and CEO Mitchell Dong discussed the firm’s market-topping strategies, how risk mitigation has changed post-FTX, and why there’s still hope for the future of crypto.

Market neutral fund strategy

The market neutral Pythagoras Arbitrage Fund was up a slight 0.1% in December but ended the year with a net gain of 8.8%, according to an investor letter shared with CoinDesk.

“We just look for spreads,” said Dong, who has more than 25 years experience operating hedge funds. “We look for opportunities to buy low and sell high simultaneously whenever the software detects an opportunity to do so.”

The trend-following Momentum Fund declined 0.4% in December but still ended the year with a net gain of 8.1% The fund takes both long and short positions based on what technical indicators show.

FTX exposure

The principal threat to Pythagoras’ Arbitrage Fund is counterparty risk. In order to make instant trades, the firm has to keep money on exchanges. Pythagoras diversifies its assets across at least a dozen exchanges with no more than 10% of its funds with any one brokerage, Dong said. Prior to the FTX collapse, Pythagoras did have 10% of its assets with that exchange.

Dong and team immediately requested a full withdrawal from FTX, but only 7% was recovered before the exchange suspended withdrawals. The remaining 3% loss was hedged or offset, first by shorting FTT tokens – the native token of the FTX exchange – and then by taking advantage of a temporary discount in bitcoin and ether futures on the Chicago Mercantile Exchange (CME) that were 3% to 5%, respectively, lower than comparable prices on Binance.

Pythagoras has since tightened up its exposure to exchanges, now favoring those found to have the best technology and credit rating and lowest counterparty risks.

Current crypto climate

Dong has spoken to the firm’s largest investors who requested redemptions and who had wanted to step aside until the dust settles. These investors have a long history with Pythagoras and indicated plans to return to the crypto fold in the future.

“The bad news is that we had redemptions,” said Dong. “The good news is that there’s less competition, more price dislocations and trading opportunities. Previous trades which had been [arbitraged] out are back again.”

DISCLOSURE

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.

CoinDesk - Unknown

Brandy covers crypto-related venture capital deals for CoinDesk.


Learn more about Consensus 2023, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.


CoinDesk - Unknown

Brandy covers crypto-related venture capital deals for CoinDesk.