An asset manager wants to have a go at a bitcoin-options-based fund as major exchanges make crypto derivatives trading more accessible to investors.
The Los Angeles-based Wave Financial has launched the Wave BTC Income & Growth Digital Fund, touting the fund to be the first crypto-derivatives-based yield fund on the market.
“I think what was missing in the crypto market is a lot of very solid traditional types of products, but with crypto assets,” Ben Tsai, managing partner of Wave Financial, told CoinDesk.
After several months of due diligence, Tsai said Fidelity Digital Assets is now on board to provide custody for the fund.
The idea is to capture part of a new market of yield products in the crypto space, building on creativity from traditional funds and the growth of the crypto derivatives platforms that underpin the technical aspects of these new funds.
The Wave fund plans to generate monthly income with the premium from selling call options with strikes 20 percent higher than the current price at the time. It aims to distribute dividend that is 1.5 percent net asset value of the bitcoin held in the fund, potentially resulting in an 18 percent annual yield.
The bitcoin income fund charges 100 basis points fixed management annually, and takes 30 percent of any returns above the 18 percent yield, putting the rest back into the fund, according to Tsai.
The new fund is currently open for subscriptions, but there haven't been any investors who have confirmed to subscribe.
"We have a number of investors that have expressed interest and we are working to get them the actual private placement memorandum and subscription agreement," Tsai said.
That $393 million fund’s total expense ratio is 111 bps including 100 bps management fee, which is on the lower end of the fee spectrum for option-based funds, according to Morningstar.
The average return in its option-based fund category is 1.25 percent over the last year, 5.1 percent over the three-year period and 10.44 percent year-to-date as of Sept. 17.
A risky game
One of the ways for this fund to work is to accurately identify mispricing in the call options market. However, it's tricky to achieve that given crypto derivatives such as options, Samuel Lee, financial advisor at Chicago-based SVRN Asset Management, told CoinDesk.
“They are a very new asset class whose market is not very efficient,” Lee said, adding:
The financial advisor also said, while it is possible for the firm to realize 18 percent monthly yield, the fund’s total return should matter more to investors.
“A lot of income funds with very high yields are often sacrificing price returns,” Lee said. “While you are getting hefty premiums, you could be sacrificing all that upside potential.”
Focusing too much on yield would also risk meeting monthly income targets with investors’ principal in the fund, he added.
However, inefficiency in the options market could be an opportunity for crypto-derivative funds, Lee explained.
“The more inefficient the market is, which means fewer smart people are looking at it, the more mispricing there is going to be," he said.
Embedded transaction costs can also eat in the total returns of such funds, Lee added.
The wide bid-ask spread in the crypto derivatives market implies low liquidity and high transaction cost and there will also be taxes imposed on the income, according to Lee.
Built on derivatives
All of these funds are possible because of the operational simplicity today provided by major crypto exchanges offering new platforms to trade crypto derivatives.
This month, Binance acquired crypto exchange JEX to boost its crypto derivatives offerings for traders. The Seychelles-registered JEX offers spot and derivatives including options and futures trading in digital currencies.
In August, Crypto futures exchange Deribit said it has become one of the first crypto futures and options exchanges to provide large-volume trades of bitcoin and ether derivatives.
In March, Galaxy Capital-backed institutional trading and portfolio management platform Caspian launched trading in cryptocurrency derivatives including futures and options.
There are also more exchanges with plans to offer such services.
Derivatives marketplace CME Group announced in September that it will offer options on its bitcoin futures contracts starting in the first quarter of 2020.
Seed CX subsidiary Zero Hash – the company’s custodian and settlement service provider – will support derivatives transactions, and include options at a future date.
Will investors bite?
The prospects of new funds and structures may be exciting, but the jury is still out if the Wave fund will gain traction, as management waits for the first substantial investors to subscribe.
Tsai, who led alternative investments in the Asia-Pacific region at Alliance Berstein, said Wave Financial is approaching accredited investors and high-net-worth individuals, and it has been developing a distribution network across major international markets.
Several firms have expressed interest in distributing the fund, Tsai said, including one in Southeast Asia asking to be an exclusive distributor in the region.
Latin America is another region with potential, Tsai said.
“In my previous experience, the Latin American investors in the wealth management space actually buy similar products as Asian investors,” said Tsa, describing investors from these regions as being less risk-averse.
He said the fund offers investors a less volatile way to make money from bitcoin, as it earns premium as long as the BTC price increase is below 20 percent.
In addition, the crypto derivative-based fund could also diversify investors’ portfolios as it is uncorrelated to most traditional asset classes, Tsai said.
Trading chart image via Shutterstock
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