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Kevin Dougherty B. G., Opalesque Geneva: The managers at BR Capital call themselves investor-builders as they, like builders, can see the real value in the early days of a project, while also applying traditional financial markets analysis and discipline to identify investments with the best risk/reward profiles. The soon-to-be-launched Digital Assets Hedge Fund (SP2) aims to continue that approach as it invests in liquid tokens across the cryptocurrency ecosystem.
SP2 is run by managing partner Kevin Dougherty, previously a partner at crypto hedge fund Decentral Park Capital, which he helped launch in 2017. He has over 20 years of experience at traditional investment banks and hedge funds, including Pharos Financial Group which was given a 'Best Hedge Fund Manager' award during his tenure.
He will be presenting his investment process at Opalesque's next webinar, "How emerging market fund manager Kevin Dougherty outperforms in Crypto, Web3", on Tuesday 11th June (details below).
With four offices around the globe, BR Capital has invested across the cryptocurrency ecosystem, in DeFi, DAOs (*), data and security, metaverses, gaming and NFTs since 2018.
"We have a combination of traditional financial markets and cryptocurrency financial markets experience, as well as funds targeting all three main areas - venture, HF Fundamental, and HF Quant," Dougherty tells Opalesque. "I am unaware of any other cryptocurrency fund management group with all that."
SP2
The fund in question is long-biased, with a focus on tokens that support platforms and products focused on Infrastructure (smart contract platforms, performance boosters, etc.); DeFi (decentralised borrowing, lending, exchange, etc.); Data (use of blockchain to store, secure and aggregate sensitive information); and Web3, which according to BR is the next Internet with user-driven and controlled decentralised protocols replacing centralised Big Tech applications.
The investment process relies heavily on deep expertise and access to deal flow to identify and invest in the protocols that the firm believes will define the future. It starts with a qualitative protocol screening and is followed by the quantitative process of deep due diligence. Then there is the discretionary element, where the investment committee makes the decisions. After that, all investments are monitored.
Risk management is central to the investment process. According to BR Capital, it is a key differentiating factor vs. other cryptocurrency funds, most of which are defined by high volatility and boom/bust performance, and few of which have any hedging expertise or a disciplined, repeatable investment process. Risk is managed through tail risk hedges to address systemic market risks; technical due diligence of projects, diversification and limits to counter crypto protocol level problems; and to manage market risks, the managers use futures and options strategically and tactically.
Long-bias strategy ideal for asset class
"The rationale for SP2 is that a long-bias hedge fund strategy is ideal for this asset class," Dougherty explains. "The cryptocurrency market is highly liquid and volatile, and the unique 'Liquid Venture Capital' nature of crypto also makes it ideal for this strategy. Crypto right now is in the 'Facebook vs Myspace vs Friendster' stage, where it is unclear which platform (for example, Ethereum vs Solana vs TonCoin vs others) will emerge as the 'winner' in its category (i.e. like Facebook)."
The SP2 strategy is to take positions in the tokens/protocols with the best risk/reward profiles such as Ethereum, Solana and Toncoin for the Smart Contract sector, Uniswap and Jupiter for the DEX sector, or Render for Artificial Intelligence, etc., and adjust its positioning as the market develops and it becomes clearer which will be the 'winners', he continues. "At this phase of market evolution, sector leadership - the point where Facebook became dominant and Myspace and Friendster faded away - is likely to emerge quickly, and the SP2 strategy has the advantage over crypto VC strategies as it can quickly consolidate its holdings into the winners."
Venture capital (VC) funds cannot do that; a crypto VC fund backing protocols on other smart contract platforms such as Cardano or Polkadot, for example, cannot easily switch all of its investments into the winning network protocols.
Finally, the institutional investment ecosystem around crypto is currently very different from any other asset class. Indeed, crypto VC firms had about $72bn in AuM at the end of 2023, whereas crypto hedge fund strategies only managed ~$15.2bn (Fundamental strategies held $11.4bn, Quant Directional funds $1.8bn, and Market Neutral funds $1.9bn according to digital-asset financial services firm Galaxy Digital). This roughly 80/20 split in favour of VC is the reverse of every other asset class, where hedge fund strategies are dominant with 90%+ of AUM.
Dougherty expects the changing cryptocurrency institutional investment ecosystem to become more similar to those other asset classes, resulting in much greater AuM allocated to hedge funds like SP2. He is launching now to be early.
Cryptocurrencies are similar to other early state asset class investors are used to invest in, such as emerging markets, Dougherty adds. And all the better if in the hands of experienced fund managers.
(*) Digital tokens are units digitally represented in a distributed ledger or blockchain. Decentralized finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. DeFi uses technology to remove third parties and centralised institutions from financial transactions. A decentralised autonomous organisation (DAO) is a web3 idea that allows communities, corporations, or any type of collective organisation to be administered and governed without centralised leadership, thanks to the ability of blockchain. And Web3 is an idea for a new restatement of the World Wide Web which incorporates concepts such as decentralisation, blockchain technologies, and token-based economics.
The CBOE EurekaHedge Crypto-Currency Index is up 21% YTD after losing 18% in April and returning 96% in 2023. And the HFR Blockchain Composite Index is up 22% YTD (and 59% in the last 12 months) after losing 15% in April.
UPCOMING WEBINAR
SKILLSLAB - How emerging markets fund manager Kevin Dougherty outperforms in crypto, Web3
Join us for an Investor Workshop featuring Kevin Dougherty, Managing Partner of BR Capital's Digital Assets Hedge Fund (SP2). With over 20 years of experience in financial markets, Kevin's focus has always been on analysing and managing assets in emerging asset classes, including Emerging Markets Equities, Commodities, and Cryptocurrencies. His experience as a fundamentally driven emerging market hedge fund manager uniquely qualifies him for the emerging asset class of crypto and Web3.
When: Tuesday, June 11th at 11 am ET (4 pm GMT, 5 pm CET, 6 pm Riyadh, 7 pm Dubai)
Free registration: https://www.opalesque.com/webinar/
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