Marex Unveils Bitcoin, Ether-Linked Long Strategy With Dollar Index as Hedge

London-based financial services platform Marex has launched a volatility-adjusted strategy tied to bitcoin (BTC), ether (ETH) and the dollar index (DXY) futures to cater to investors wary of the relatively high price turbulence in the crypto market.

Marex said the strategy is already being marketed to clients. Bitcoin and ether have equal weight in the strategy, with the DXY futures acting as a hedge.

The basket is consistently rebalanced between BTC, ETH, and DXY futures to target annualized volatility of 8%. When volatility rises, the strategy cuts exposure to risk assets – BTC, ETH – and increases exposure to DXY. When volatility falls, the basket rebalances toward BTC and ETH.

The strategy takes advantage of the DXY's safe-haven appeal and bitcoin and ether's tendency to behave like risk assets to keep the net volatility exposure of the portfolio as close to the target value as possible in all market environments.

"This is the first institutional grade FX and crypto vol targeted strategy," Mark Arasaratnam, co-head of Digital Assets at Marex, said in an email. "It's targeted to investors wanting to gain some exposure to crypto but are concerned about its volatility."

Arasaratnam added that the DXY acts as a robust complement to the long-only portfolio from both a thematic and empirical perspective.

Per Marex's pitch deck, at the current level of volatility, the strategy would provide a 12% exposure to digital assets and the rest to the DXY futures.

While crypto propounders hail bitcoin as a safe haven asset, the empirical evidence suggests otherwise, with the top cryptocurrency chalking out major rallies during sustained weakness in the U.S. dollar. The dollar, meanwhile, remains a hedge against systematic uncertainty, acting as a haven during times of stress in both crypto and wider markets.

The two have had a persistent negative correlation over the past three years. Thus, the DXY component of the strategy ensures less volatility and lower drawdowns.

Research by Marex suggests the basket involving DXY as the hedge asset would have generated a return of 29% between Jan. 1, 2021, to June 30, 2023 (a period consisting of both bullish and bearish trends). That's significantly higher than the return from the classic buy-and-hold strategies.