Photographer: Akos Stiller/Bloomberg

BlackRock Bond Veterans Start Hedge Fund Aimed at Cryptocurrency

  • Prime Factor Capital will trade digital currencies from April
  • Ex-Decca Capital analyst also starting cryptocurrency fund

Goodbye bonds, hello Bitcoin.

That’s the career path taken by former BlackRock Inc. bond specialists Michael Wong and Adam Grimsley who together with a third founder have set up Prime Factor Capital, a London hedge fund that will trade cryptocurrencies from April.

While they aren’t alone in seeking to harness opportunities in digital currency, the move stands out in an area known for being one of the wilder corners of finance. The allure of cryptocurrencies lies in their lack of correlation with more traditional asset classes, Grimsley said in an interview. This means that in a credit market where valuations are driven by central banks’ quantitative-easing policies rather than the fortunes of individual bond issuers, it’s become difficult to stand out.

“In our day job, we were constantly asked about diversification, but credit markets have become very correlated and the dispersion between credit assets has declined,” Grimsley said. “Here we see truly uncorrelated returns.”

Wong, who managed fixed-income assets at BlackRock, is chief investment officer, while Grimsley, most recently a senior fixed-income specialist at Legal & General Investment Management, is head of investment solutions. The third member of the team, Nic Niedermowwe, was previously an energy trader at RWE AG.

Valuation Swings

But wild valuation swings, such as Bitcoin’s 40 percent fall from its mid-December peak, and uncertainty about how regulators will treat digital currencies, mean this is not a field for the faint hearted.

And BlackRock does not share the enthusiasm of these former employees. Its head of active investments for Asia-Pacific, Belinda Boa, said Bitcoin was experiencing “bubble-like valuations,” while Mark Wiedman, head of BlackRock’s iShares exchange-traded funds unit said he can’t see the firm launching a Bitcoin or virtual-currency ETF.

UBS Group AG won’t trade Bitcoin or offer it to retail clients as increased regulation may trigger a "massive" drop in value, the Swiss bank’s Chairman Axel Weber said on Wednesday.

Despite the warnings and similar comments from investment luminaries Warren Buffett and Ray Dalio, Bitcoin’s eye-popping 1,400 percent rally last year has been hard for many to ignore. A growing number of wealthy individuals, family offices and institutions are looking for ways to gain exposure, and more funds are setting up to accommodate them.

“Cryptocurrenies may be excellent innovations that have yet to reach maturity, or they could be a flash in the pan,” said Craig Borthwick, a senior associate at law firm Dechert LLP, who specializes in investment funds. “Either way, the volatility in this nascent market means there’s opportunities to make money.”

Hobbyists’ Market

Another one-time bond specialist setting up a fund to harness opportunities in cryptocurrencies is Alex Walsh, who previously worked at credit hedge fund Decca Capital Ltd. He plans to start a new event-driven hedge fund trading large-cap digital currencies, including Bitcoin, Litecoin, Ripple and Ethereum, by the end of March.

Walsh, who until recently spent his days combing balance sheets looking for trading ideas, sees opportunity in applying professional investment experience to a corner of finance that’s currently the preserve of amateurs.

“When realizing how inefficient crypto is, it was fascinating to me,” said Walsh. “This market trades tens of billions of dollars per day in volume, but the majority of that is driven by individuals and hobbyists with still a small percentage of digital assets actively managed by institutions. That dynamic creates mis-pricing and therefore trading opportunities."

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