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Blockforce Capital’s Market Neutral Strategy

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Blockforce’s flagship fund consists of three buckets of investment strategies that, when combined, have historically produced exceptional risk adjusted returns.  Those three buckets include our Long Beta portfolio, our Systematic trading strategies and our Market Neutral component.  In previous posts, we have gone into detail about the fundamental research we do for our Long Beta portfolio and how we develop proprietary algorithms for our Systematic trading strategies.  This post we would like to dive into our market neutral strategy for the fund.

The purpose of the market neutral strategy within our portfolio is to provide steady, consistent returns regardless of market conditions.  In other words, the market neutral strategy acts like our rock in the portfolio, providing a base from which we can take more risk elsewhere (ie: Long Beta).  In good times, our Long Beta and Systematic strategies generate the majority of returns but during down markets, our Market Neutral, combined with our short strategies in the Systematic bucket, reduce the volatility of the portfolio. 

Blockforce generates its market neutral through two methods.  The first is taking advantage of arbitrage opportunities in the market and the second is through lending.

Arbitrage Opportunities

The crypto markets are still relatively young which means there are still a lot of inefficiencies inherent in the trading of cryptoassets.  Blockforce is able to take advantage of these inefficiencies and earn a return without exposing the fund to the underlying price movements of the assets.  While there are a number of these trading strategies, the most popular and well known is the Basis Trade.

The Basis Trade is a market-neutral strategy that exploits inefficiencies between the spot and the futures market. The arbitrage opportunity centers around the fact that there is typically a difference in price between the futures market for bitcoin and the spot price of bitcoin. As that futures contract comes closer to its expiration date, the spread between the two assets should converge to zero.  As a result, it’s possible to capture this spread without taking on any directional exposure to bitcoin’s price.

When the future price of bitcoin is higher than the current spot price (known as contango), the basis trade is executed by buying bitcoin (entering a long position) while simultaneously selling the futures contract of bitcoin (shorting the futures contract).  The bitcoin purchased is held until the contract delivery date at which time the bitcoin is delivered to the holder of the futures contract (sold) and the investor has made their return.

For example, if bitcoin trades at $100 while the one-month futures contract is priced at $104, an investor could sell the futures contract at $104 and buy bitcoin for $100. The investor then holds that bitcoin for the life of the futures contract (in this case one month) at which time they are required to deliver that bitcoin to the holder of the futures contract.  Presumably, the spread between the futures contract and the spot price should have converged to zero over that time (meaning the price of spot and the futures contract is the same price) because a futures contract due immediately in theory should be worth exactly the same as the spot price of bitcoin. Thus, the investor would have captured that spread by buying BTC at $100 and selling at $104 thereby generating $4 in profit for a 4% return. Notice that the 4% return is earned regardless of what happens to the price of bitcoin between the time it is originally bought and the time the futures contract expires.

The Basis Trade is one example of how Blockforce is able to generate consistent yield regardless of the price movements in the market.

Lending

The other main avenue that Blockforce earns a market neutral yield is through the lending of cryptoassets.  Blockforce lends out its cryptoassets to some of the largest and well capitalized institutions in the world and in return, is paid an interest rate on the assets we lend out.  This interest rate is typically 5-10% depending on the demand in the market.

Why would these large institutions want to borrow cryptoassets from us?  The answer is that an easy way to increase the returns is to add leverage.  For example, in the Basis Trade outlined above, using borrowed capital an investor is able to buy more bitcoin and sell more futures using the same amount of principal.  For example, adding 2x leverage allows the investor to purchase twice as much bitcoin and sell twice as many futures contracts then they otherwise would be able.  Thus, the investor would pocket twice the return (minus the cost of borrowing) turning our previous example from a 4% return to an 8% return. 

This is one reason why many institutions are willing to pay much higher interest rates to borrow cryptoassets, so they can add leverage to a very profitable trade.  Adding leverage made it possible to earn upwards of triple digit returns over the course of the last couple of years which makes borrowing at 5-10% a very attractive proposition. As a result, those willing to lend their cryptoassets (such as Blockforce) were able to earn an attractive yield on the assets they hold.  

One last clarifying note, while the institutions we lend to may use leverage to increase their returns, Blockforce does not currently use leverage in our portfolio. Nor is Blockforce engaging in risky DeFi products which offer higher yields but also present much higher risk of blowing up as we recently have witnessed in the case of Celsius.

The use of arbitrage strategies and lending gives the Market Neutral portion of our portfolio the ability to generate positive returns regardless of market conditions.  By combining this bucket with our Long Beta and Systematic strategies, Blockforce’s portfolio has historically been able to capture the upside of the crypto markets while minimizing the downside risk.

GET IN TOUCH

Our team has invested through multiple crypto market cycles – giving us experience, insight, and perspective that few crypto fund managers can match.  We’d love to connect with you on how to invest in our strategies, email info@blockforcecapital.com or call us at 619-340-0660, or CLICK HERE to request more information.

Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.


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