“Directional strategies are obviously best during a bull market -- if you bought Solana early on and sold it at the peak, you might have made 1,000%. It’s more about timing. Market-neutral strategies aren’t going to touch that,” said Michael Safai, co-founder and partner at proprietary trading firm Dexterity Capital. “We’ve been doing this for five years, and for us, it’s a long game, where we can always make money no matter what the market is doing.”
Though there are a number of different market-neutral strategies traders can deploy, “you’ve done pretty well if you’re in the neighborhood of 20-30%,” Safai said. “But you can do better than that if you’re clever.”
Risk-Taking
Beyond taking advantage of market inefficiencies across centralized trading venues, another crypto-only market-neutral strategy can be found within decentralized finance, a fast-growing experimental sub-sector of crypto that became popular over the past two years.
BlockTower’s Rai said his firm is actively looking for returns in DeFi, but acknowledged that DeFi faces increased criticism due to the collapse of the Terra blockchain and the billions of dollars that have been hacked in the nascent sector.
Celsius, a crypto lending platform, paused withdrawals and other activities for its users recently, after many in the market questioned the firm’s investment in DeFi.
Rai said his firm had “no material losses” through Terra’s meltdown, since it saw the warning signs early on.
“What a savvy fund manager has to do is evaluate -- given the return profile -- is it worth taking on these risks? And what is the risk-adjusted return?” he said. In DeFi, “these risks are uncorrelated to the broader market. A smart contract getting hacked has no correlation to what the S&P 500 is doing or what Bitcoin is doing. It’s an idiosyncratic event.”
This article was provided by Bloomberg News.