DARMA Capital’s New ETH Fund Uses Quant Analysis To Gauge Risk Conditions

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February 27, 2019 3:00 PM

“We know that with quantitative analysis, you’re focusing on the facts, not the emotions, says DARMA Capital CEO James Slazas. “So, we take the emotion out of the decision-making process …”

DARMA Capital, based in Dorado, Puerto Rico, has launched the first in a series of “optimized long” trading programs for digital asset investors. The first of these programs, the DARMA Optimized Long-ETH Fund (DOL-ETH), is an Ether investment fund that is designed to generate alpha excess returns relative to an ETH benchmark, while professionally managing market volatility and asset price risk.

The fund will use quantitative analysis to define the risk state, a determination of the market’s volatility variance. James Slazas, DARMA’s CEO, points to his and his team’s 30+ years’ experience with quantitative strategies and service as a commodity pool operator. “We know that with quantitative analysis, you’re focusing on the facts, not the emotions. So, we take the emotion out of the decision-making process and quantify when the trading environment is risk-on or risk-off.”

The promise of the fund is that it will dynamically adjust the amount of Ethereum holdings depending on how much or how little near-term price risk is imminent. “We are taking a standard investment structure and applying risk management to this asset class,” says Chief Investment Officer John Slazas.

A few years ago, says CEO James, “one could simply buy and hold to earn extremely high returns. These returns attracted the relatively sophisticated investors [who were] requiring additional validation that blockchain technology was scalable.” He added, “That compounded the extreme price volatility that we’ve seen in the past 18 months, thereby making a buy-and-hold strategy neither sustainable nor realistic.”     

DARMA seeks to mirror the Slazas family office strategy and apply it to the DOL-ETH program. The program’s proprietary metrics will identify different risk regimes within a structured price framework, and, by extension, the current risk state of the Ethereum market. The program aims to give long-term holders of digital assets a hedging mechanism designed to turbo-charge upside price movements. During periods when the price is expected to be buffeted, the program will prevent the long-term investor from being fully impacted by a decline and opportunistically acquire additional assets at lower levels. The strategy may trade in major fiat currencies and bitcoin for short-term volatility spread opportunities, if risk and correlation coefficient parameters are met. This proprietary, predictive price structure allows opportunities to be “risk managed,” according to Slazas.

The DOL-ETH investor must be a qualified eligible participant (QEP), an individual who meets requirements to trade in sophisticated investments such as futures and hedge funds. The QEP must own at least $2 million in securities and other investments, as well as at least $200,000 in initial margin and option premiums for commodity interest transactions. QEPs are considered savvier than accredited investors.

James Slazas told ETHNews that his investment strategy is “positioned well for today’s market dynamics because Ethereum has at least a two-year scalability roadmap to meet, which will add to volatility [around] milestone announcements.” The liquidity, compliance, auditing, and regulatory regimes required to attract and support the universe of institutional investors is still maturing, he says:

“As scalability increases, allowing for adoption beyond the immediate crypto ecosystem, this should lead to incremental, larger market caps and thereby more attention and resources in the market. Meanwhile, we are now in a building period for the institutional infrastructure that’s needed for digital assets.”

He adds, “DARMA was created to continue to lead advancements in that infrastructure and offer an investment for institutional investors as well as core blockchain participants.” The idea is to acquire more assets prior to all the pieces being in place.

According to DARMA’s press release:

“The future success of the Ethereum network depends on its scalability as demand grows. Like any emerging platform (think of the internet in 1995), Ethereum will encounter development hurdles as it struggles to scale early on, but Ethereum is well-positioned to expand. Ethereum‘s ‘real world’ use cases and network of global developer support allows the blockchain network to methodically develop solutions for each scalability challenge it encounters.”

A lot of great minds steeped in institutional trading and quant analysis are spending brain cells on technology-forward product development that’s customized for crypto investors. There will surely be hits and misses along the way. Some will be bruised in the competition to disrupt; others will prosper mightily. Let’s just pray that the exuberance is not irrational this time around. Replacing emotion with analysis may be a step in the right direction.

Mary Driscoll covers finance and business trends as a staff writer for ETHNews. She formerly served as an editor for management and finance at the Economist Intelligence Unit and a research principal at APQC. In addition, she has written for The Wall Street Journal CFO Report, HBR-online, and strategy + business. Her book on corporate treasury management was published by John Wiley & Sons, Inc. Mary enjoys hiking and skiing in the Sierras with family. Her goal in life is to win big on Jeopardy.

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