Welcome back to The Rate of Change with York
Wealth Management. As advisors to some of the
wealthiest families in the country, The Rate
of Change is a podcast designed to help you in
the pursuit of building long -term wealth through
the insights of some of the brightest minds in
asset management. I'm your host, Murdoch Gaddy,
and in today's broadcast, we're joined by Clint
Maddock, founder and director of Digital Asset
Funds Management, or DAFM for short. DAFM operates
multiple funds, including the digital income
class, an income focused fund in digital assets
that applies a trading strategy originally developed
by a hedge fund partner of theirs for traditional
fixed income markets. If you're familiar with
digital assets like Bitcoin and Ethereum, or
you're still trying to figure out what exactly
is a digital asset, this conversation will be
very interesting for you. We explore with Clint
broader questions about crypto markets like where
is the industry headed? Has it matured beyond
its early development and volatility? What if
another Sam Bankman freed FTX style collapse
happens? Can investors gain exposure to crypto
in a way that avoids the extreme price swings
we've seen in Bitcoin recently in the past five
years? And is there a structured regulated approach
to integrating digital assets into various structures
such as self -managed super funds? For me, one
of the interesting takeaways is how the digital
income class fund, which is established in 2021,
has produced a three -year compound return of
48 .21%. a 30 .98 % gain over the past year.
And last month, as of time recording, did 4 .05%.
For context, since May 2021, Bitcoin, if you
look at them side by side, has delivered an annualized
return of 19 .94%. But... with substantial volatility,
including deep drawdowns along the way. By contrast,
the digital income class has maintained consistent
returns with only one negative month in 44 months.
For me, this really raises an interesting question.
Is it long -term success in holding digital assets,
a hodl? as everyone likes to call it, is it purely
about the price appreciation and you just hold
on for dear life and hope that it's going to
the moon in 10 years? Or is there merit in still
having exposure to this asset class in a more
structured way or method that generates steady
returns without relying on market direction?
It's a good question. Another aspect worth unpacking
is the strategy itself. Originally developed
to identify inefficiencies in traditional fixed
income markets, such as, but not limited to,
bonds, term deposits, bank bills. It has since
been adapted and refined for digital assets.
One of the key reasons it continues to generate
returns is due to the higher borrow costs in
crypto markets compared to historic credit markets.
When investors borrow Bitcoin or Ethereum, and
why do they do it? Well, essentially, they're
just borrowing Bitcoin or Ethereum to leverage
up the position because they want to go longer.
They're using futures and forage contracts, which
they often pay a premium for. This creates yield
opportunities for those on the other side of
the trade to essentially make money from this
with the right strategy. This conversation with
Clint is a lot of fun. Listen to him explain
how... All this works, the mechanics behind the
strategy and what it tells us about the broader
evolution of the digital asset markets and where
it's going. So before we get into this conversation,
please remember this broadcast is made for entertainment
purposes only. I encourage you to listen to the
disclaimer at the end of the broadcast and keep
your feedback coming. You can reach me at mgatti
at ywm .com .au. So, look, this particular podcast
is actually referred to us by another group which
we've had on before. It's a very interesting
strategy. So, if anyone's out there, you know,
has a strategy which you want more details on,
you would like to get on the broadcast, you know,
please introduce us. Also... If you're looking
to invest or any of these guests we've had on
you found very interesting, you want to learn
more, please reach out to me via email on mgatty
at ywm .com .au. And we'll have a look at your
portfolio and see whether or not it's the right
fit for you and your family. With that being
said, I hope you enjoyed this conversation as
much as I did. So sit back, relax, and enjoy.
Clint Maddock, welcome to The Rate of Change
with York Wealth Management. Hi, Maddock. Thanks
for having me. Good to have you on, Clint. If
anyone's wondering where I came across Clint,
one of our guests that we've had on in the private
lending space said that they were looking into
these guys personally, right? And we're very,
very happy that I should reach out. And why don't
we, Clint, begin like we always do and why don't
you tell us a little bit about yourself and how
you got into financial markets? Yeah, no problem.
Look, it's been more years than I care to admit,
but going right back, I found myself at UNSW
studying engineering and I received an email
from my uncle over in London. He said, what are
you doing? What are you up to? and said, look,
I'm not really sure. I'm not really enjoying
engineering so much. He said, well, I'm working
at a bank at the moment and there's these guys
with a background similar to yours and they're
making more money than they should. So if you
like maths and engineering, then give it a crack.
So basically carpet bombed all of the investment
banks around the year 2000 and see where that
got me. I ended up at a market maker in Sydney
that was just establishing their roots in Asia
Pacific called IMC back in the early 2000s. They're
a market maker, a Dutch market maker. I think
at the time they had around six employees and
they had something like 1 ,500 applicants. It's
a pretty hot space to be in. I was one of the
four people that got offered a job. back then
and actually said no at the time and put my tail
between my legs and chased up the MD at the time
and said, look, I've made a mistake. Would you
reconsider me? And fortunately he did and the
rest is history in terms of my career in the
markets and especially in market making and my
approach to the markets. It was kind of set well
over 20 years ago now. I've said it once, I'll
say it a thousand times. I find some of the most
interesting people in finance never had a degree
in finance. They always like start, I want to
become an architect. You want to just start in
a particular path. And then, you know, you wake
up one day and you go, hold on a second, if the
market crashes, I might, you know, have to get
a cab license because I'm not as phenomenal as,
you know, the Da Vinci kid that you're studying
next to. And then you find yourself in finance
and the world's just so much bigger. How interesting
is like when you meet people, the paths of how
you got there is not where they started. It's
so common, isn't it? I know, I know. So I was
studying aerospace engineering. Really? Of all
things, yeah, you know, of planes. You know,
I was in the Air Force for two years at the Defence
Force Academy and it wasn't for me, so I was
kind of drifting. And, yeah, UNSW introduced
the Master of Commerce degree at the same time.
And, yeah, that was the path I was set on, a
lot of chance. Really, isn't it? You know, when
you're just doing one thing and the sliding doors
and, you know, this opportunity presented itself
and, yeah, there you go. But it was around that
time in finance when they were starting to take
on the more quantitative guys from science, engineering,
actuarials. It was around the early 2000s and
nowadays most of the hires in the... market making
space and the banks will be from the more scientific
background as much as you know economics and
commerce so i was kind of on the on the start
of that isn't it interesting like if you look
back at it that was early the other thing that
was really early was like doing graphic design
which i did it personally just to get an architecture
with orchards a waste of time now you fast forward
20 years everything's essentially like ai can
you market yourself you know can you sit in front
of a screen can you use essentially adobe like
it's literally can you program or you know do
you understand how social media works yeah it's
amazing how fast the world's changed so speaking
about how fast the world's changed um with what
you guys do your your world is essentially in
the crypto space correct yeah look we we operate
through investment strategies Just one second.
So the firm is Digital Asset Funds Management,
DAFM for short, correct? So sorry for cutting
you off. I apologize. But why don't we just start
here? Why don't we just give a bit of an understanding
of, you know, who DAFM is, you know, what do
you guys and girls do, you know, what's the philosophy
and, you know, how do you operate, please? Yeah,
no problem. So I've been trading Digital Asset
Funds Management as the manager of the fund.
And that's been going for just shy of four years
now. So we've got an Australian unit trust, which
is the investment vehicle. And its primary focus
is to trade digital assets, which, let's face
it, the volumes in Bitcoin and Ethereum primarily,
looking at 90%, 98 % of the market volumes is
going to be in those two products. So primarily
we're trading Bitcoin and Ethereum. in the derivatives
markets. So, I mean, where do you want me to
go on the background of the AFM? Well, why don't
we start here, right? Because what's interesting
about what you guys do is, you know, people hear
crypto, they just think essentially I'm buying
and holding Bitcoin, correct? But what you're
doing is completely different but in that space.
And to my understanding, and please explain it,
You're taking the strategy of, you know, let's
call it what is real world compared to crypto
world. You know, that's how some people perceive
it. But now crypto world is becoming real world.
You're essentially taking algorithmic trading
strategies, which worked at major investment
banks, you know, in the futures market. And you've
applied that to the digital world and to digital
assets. Is that how you best explain it or how
would you explain it? So we've taken existing
trading strategies out of the TradFi world, the
traditional finance world, and we've repurposed
those exact strategies from the user interface
at the front end through to the code base on
the back end, through to the teams running the
strategy. So we've taken that from TradFi and
then we've applied that into the digital asset
markets, primarily Bitcoin. So we're able to
do that. around 2019, because that's when the
digital asset Bitcoin markets became mature enough
that a derivatives market sprang up around them
offering the ability to just as easily go long
as short. So it really opened up our world in
terms of the number of products we could trade,
in terms of the style of strategy that we could
apply into these markets, which Although the
underlying asset, Bitcoin, is very different
from what we might have been trading otherwise,
you know, an SX200 stock or a bond future or
a bond, for example. Instead, we're trading Bitcoin
and Bitcoin futures. But, you know, the core
code, the core strategy, it's very similar in
that respect. So, you know, we don't mind whether
the market goes up. We don't mind whether the
market goes down. All we care about is can we
model these instruments mathematically? Can we
work out what relationships exist between the
underlying Bitcoin and the various products that
exist on the fragmented markets that are popping
up all around the world that trade these crypto
derivative products? So a lot of people since
2019, just to kind of paint the picture, what's
the level of volatility being so hypothetically
if you just held Bitcoin? Because, you know,
there's been some really large swings in comparison
to the performance that you've had with the strategy.
Yeah, that's a really interesting point. We launched
our fund publicly in April, May 2021. So just
under four years ago. At the time, Bitcoin was
around US around $40 ,000, $50 ,000, so $60 ,000,
$70 ,000 Aussie. Its annualized return since
then to, well, at least to the end of January,
it's come off a little bit in the last month,
but to the end of January, the annualized return
was sitting around 20%, 22 % annualized. Performance
was around 23 % annually. So it turns out that
buying and holding Bitcoin performance was on
a very similar level to our fund. However, what
you don't see is what happened in the interim.
From 2021, there's a big run -up, 60 ,000. FTX
collapse. Bitcoin was down around 16 ,000, 17
,000, all US dollars. And then since we've seen
Trump, Elected through November, hit all -time
highs of around $110 ,000. So you've been on
this wild rollercoaster ride with Bitcoin to
achieve a return on par with what we were achieving
market neutral. So we only had, in all that time,
we only had one month where we lost money out
of 45 months of being live now. So you had 44.
positive months with Bitcoin on this wild ride.
I think it's a pretty compelling argument to
approach the market in a systematic, methodical
way. And yeah, look, it's been our volatile markets,
very volatile markets. And what we've seen happen
over the years is that as Bitcoin especially
is more widely adopted, that we've seen some
of the volatility of Bitcoin. especially compared
to the TradFi markets, say S &P 500, the VIX,
for example. Those volatilities are converging
over time. Yeah, that's fascinating. So what
I'm understanding, because if you think about
it, if you buy it and you hold spot, it all depends
what price you paid for it, correct? And unfortunately,
with crypto, haven't you found that the best
time to buy is when everyone hates it and you
think it's going to go in the bin? But no one
does. It's like as if they require the thing
to go from $33 ,000 to $60 ,000 just to get confidence,
and then they blink, and then they're paying
$70 ,000. And then it hits $110 ,000, and it's
like everyone should sell, but no one does. And
then when we wake up this morning, $79 ,701,
I believe, this morning. But what's fascinating
about this as well is last night in the US, stocks
plunged. So today we're recording on the 11th
of March, and pretty much it sold off because
the anxiety of tariffs and government fringes.
And I think the NASDAQ 100, as an example, posted
its worst day since 2022, wiping off more than
a trillion dollars in value. Meanwhile, Bitcoin
briefly sank below 78 ,000. So it's very, very
interesting markets. And look, why I'm painting
this picture, and I wouldn't mind you explaining,
but... Is it correct in my understanding that
how you operate does better, you know, in sideways
kind of markets and essentially, you know, the
big volatile moves. So you benefit from essentially
like holding patterns and like how does it work?
Because, you know, if someone's looking here
and going, what do I do? Do I, you know, wait
to essentially buy Bitcoin on the dip or is there
another way to make Bitcoin that might be potentially
a... safer, less volatile means of doing so.
In my understanding, that's essentially something
that your company offers as a strategy. How does
that all work? I think there's two things in
that. There's market timing, especially of Bitcoin,
and how do we profit from the volatility in the
markets? I would say that... When it comes to
market timing, look, that's not my strong point.
That's not in my wheelhouse. I'm just as emotional
as the rest of you when it comes to trying to
time my purchase. And one of the hard lessons
I've learned is to not try and to just stick
with a market -neutral approach. So, you know,
personally, yeah, I'll hold some Bitcoin and
other digital assets. But in terms of trading
that, I've learned to just buy and hold. or hodl
as they say in bitcoin as a hold on for dear
life so i think someone someone missed the belt
hold on a on a telegram chat it's just taken
off as hodlers in bitcoin so people typically
people will buy their bitcoin and they just won't
sell and uh i think that teaches you a lot about
market timing as well, because when I was talking
earlier about the wild ride that Bitcoin has
been on, you know, if you did have cash on the
sidelines towards the end of 2022 and you managed
to see, you know, all of the bad news is out,
Bitcoin's at lows not seen for quite some time
in Bitcoin, and you were able to say, you know,
I believe Bitcoin still has a future long term.
You've got to remember at the time, there were
a lot of people out there, big names. saying,
you know, Bitcoin's going to zero. It has no
intrinsic value. You know, you'd be right for
not buying it. But, you know, if you had and
you bought it for, say, 20 ,000 US, you're sitting
on a return of, you know, today 4X, you know,
as high as 4 .5X in barely over two years. But
like I said, when we launched our fund, it was
sitting around 40, 50 ,000 US. So now you're
looking at a return of not even 2X, right? You
know, 1 .5. One half, two X. Depending on when
you buy it and look at the market dynamics and
all the doom and gloom or not, it makes a huge
outcome in your final P &L. So that's, I think,
why there is a lot of this huddling in Bitcoin,
because there's the belief that over the long
term, given it's a scarce asset, that's not what
we do at DAFM. What we do is we trade the ups
and the downs in the market in a neutral fashion
and look for the small inefficiencies that exist
in these markets. It's a new market, Bitcoin.
It's been around since 2009 as we know it, Bitcoin
as we know it. The derivatives markets that have
sprung up around it, you're looking probably
six or seven years. They started to get a foothold
probably around five. Six years ago, there was
enough volume there for a more professional,
institutional -grade outfit to start getting
involved like us. So there's no point in us looking
for nickels and dimes in a market that's turning
over a few million dollars a day. We need people
to trade against. We need interest from the public
and investors. And it wasn't until the late teens
that we were of the belief that that was there.
We did our internal market analysis and saw really
quite huge inefficiencies in these leading derivatives
exchanges in that space. So we built, like I
said, we modified our systems in order to take
advantage of those inefficiencies and there just
wasn't enough capital in the space to absorb
the profitability that we saw. And that's why
we decided to launch the fund. So we had been
trading it for a couple of years, but the opportunities
were just too big. And so by 2021, we'd got all
of the documentation together in order to launch
that fund and try and raise money as quickly
as we could in order to take advantage. How much
money is in the fund? At the moment, we've got
around 30 million Aussie in there. And, yeah,
like I said, it's all market neutral. How many
funds are you operating? So I've got the Australian
Unit Trust, which is the income fund, and then
also sitting under that DAFM umbrella, we've
got a Bitcoin tracker, which just, funnily enough,
backs the price of Bitcoin in a unit trust. Does
that pay any income on top of holding just the
Bitcoin? It doesn't pay out any income. However,
what we do with the Bitcoin holdings within that
unit truck is we loan it to our market neutral
strategy. And it nets around 3 % per annum to
the Bitcoin unit holders. So over the years since
we launched the fund, the Bitcoin return is roughly
10, 12%. higher than the Bitcoin returns in Aussie
dollar. Is that net after fees? Yeah, everything
I talk about, it's all net after fees. You've
got the security of having the Bitcoin managed
by professionals like us, so you don't have to
worry about your private keys. You don't have
to worry about losing your password to an exchange.
You don't have to worry about doing it. Know
your customer on a crypto exchange, which you
may or may not trust very highly. You're handing
over passports, driver's licenses, plus deeds
for your self -managed super or family. You don't
have to worry about all that. And your accountant
can get the tax statements at the end of every
year and be happy enough to approve that as well.
we're definitely going to get into how the Argo
works and everything. But since we're talking
about it, I wouldn't mind actually digging into
this a bit because, and the topic which I want
to discuss is, as an example, superannuation
funds, like self -managed super funds, which
are very, very tight. Like we had a client pass
away and they deal with Westpac, right? And the
fact the client held Bitcoin directly made it
a nightmare to deal with probate, right? They
locked down the bank accounts and the process
that should have taken a couple of months ended
up becoming substantially extended to the frustration
of the family. So we dealt with that process.
But can you just explain what changes, you know,
have been made in the industry and maybe touch
on as well, there's been a launch of a number
of ETFs, right? So these ETFs can now be held,
you know, within 501ks and essentially, you know,
Australian super funds, right? So that's been
the first launch. But then to my understanding
is firms like yourself are now becoming available,
which means that we can now get access to essentially
crypto inside self -managed super funds. Because
what I didn't like when I'm seeing these ETFs
is the ETFs are ripping so many fees out. What's
interesting is your Bitcoin on the huddle side
is still paying 3%, so you're performing better
than. But if you're holding these direct ETFs,
I think it's about 10 of them. you actually work
out that you're going to be receiving like a
large percentage less than what the spot price
is worth and say you held it for five years is
that accurate and do you want to give it a bit
of color around like what's actually changed
that's led to this because that's quite interesting
yeah the etfs are fascinating and they they launched
in the us january last year january 2024 and
the demand was immense. They went from launching
to, when I checked the other week, they had $100
billion invested into those ETFs in 13 months.
Wow. It's huge. There's been nothing like it
ever launched before. There's always the Bitcoin
and gold comparison. And if you look up the gold,
They launched in 2003 and it took years. How
many years? I'm sure how many. It was like nine
years or something until they reached the similar
kind of AUM that Bitcoin reached in 13 months.
Seven years it took for the gold to reach those
sort of levels. And ETFs, the mechanics of that,
subscriptions are made. money flows in, the ETF
issuers go to the spot market and they just buy
Bitcoin. There's no two ways about it. They want
to reduce their tracking error. To do that, they
buy Bitcoin towards the end of the day. They
can publish their net asset values versus the
returns of Bitcoin. As long as they've done that
towards the end of the day, they don't care how
much they've driven up the price of Bitcoin,
as long as they got filled close to the closing
price. And so you're seeing literally billions
of dollars flow in over just 13 months. You know,
we're talking, you know, 55, 60 weeks to get
those sort of inflows. You're looking at hundreds
of millions of dollars a day of Bitcoin purchases
all focused towards that window towards the end
of the day. So there's a huge tailwind for the
price of Bitcoin. And, yeah, like I said, you've
seen that go exponential last year, especially
towards the end of the year with the Trump election.
But primarily the ETFs are traded in the U .S.
There are a handful trading now in Australia,
but from what I've seen, their AUMs are still
pretty low. I think what you'll also see in the
States, obviously they're U .S. denominated,
so as an Aussie you're exposed to the U .S. dollar
risk. So it's not an obvious investment for an
Aussie fund, and they are charging fees as well.
I don't think they're too big in terms of fees
charged, but relative to your index tracking,
index -hugging ETFs, yeah, the fees are a lot
higher. And with competition, they'll come down.
And it'll be interesting to see what the ETFs
do in Australia as well. There just doesn't seem
to have been nearly the demand in Australia as
there has been in the US, at least by looking
at the AUMs of the ETFs here. Yeah, it's very
interesting just the uptake. It's like everyone
knew you could hold it outside. But look, what's
interesting as well, right, you know, as an advisor
in Australia, we're not allowed to essentially
provide client advice even for a wholesale individual
because it's unregulated, like technically, you
know what I mean? And then essentially, you know,
be, you know, reciprocated or remunerated for
essentially that advice because it's not held
within, you know, like the platforms, correct?
It's my understanding the vehicle which you're
operating, you know, it can be put on the likes
of NetWealth, Premium, Hub24, right? And then
held within, you know, a trust or a self -managed
super fund and then easily accounted for, correct?
And then since you got, just as something as
simple as the Bitcoin, since it's Bitcoin, you
know, plus 3%, you know, the ETFs are essentially
the ETF minus, you know, the holding price minus
the fee. Is that my understanding? of what's
currently happening here? Yeah, the ETF will
be, like I say, the Bitcoin price, less than
50, 100 basis points per annum, typically the
fees that I've seen, whereas our Bitcoin tracker
will be Bitcoin plus approximately 3 % net. Yeah,
it's just so interesting, just the uptake. Especially
if you're going to hold Bitcoin for a number
of years, yeah, you'll see some significant outperformance.
Yeah, right. Again, we're getting back to the
Argo, but since we're here, we might as well
just tuck into the mechanics. So one thing everyone's
going to ask is, you know, what's the risks?
Because everyone saw good old -fashioned Sam
Beckman Freed go under. And I think I saw the
other day, was it Tucker Carlson proceeded to
interview him from prison? It was hilarious.
I think it literally popped up within the week.
Like, he's literally, his hair's just still a
mess. You know, biggest crook of the century.
And, you know, he's doing an interview from prison.
Just going, how's prison life, man? So which
brings to the question, right, you've seen this,
you've seen Binance, you've seen a lot of essentially
third -party softwares, you know, fall under.
But can you, for people that don't understand,
can you please explain the difference between
a cold wallet and essentially holding your, you
know, Bitcoin on exchange? And what is the risk
of holding an exchange and how do you mitigate
against that? Because as you mentioned, you're
doing high amount of algos, which require a lot
of volume. So can you hold it in essentially
a cold wallet or do you have to hold an exchange
in order to get the liquidity? No. So one of
the biggest risks that we face as a fund is the
counterparty risk. And the only way to avoid
that and own Bitcoin, I should make the distinction
that we've got the Bitcoin tracker. And we've
got the market neutral front. And our flagship
fund is the market neutral fund. That's returned.
It's actually returned more than what Bitcoin
has returned since we launched without the volatility.
But, you know, I love digital assets. I love
Bitcoin. That's kind of my personal view. That's
beside the point. That's not what we do in the
fund. But look, if you want to own Bitcoin and
not have the counterparty, there's a saying,
they say, Not your key, not your Bitcoin. If
you don't own the password to access that Bitcoin,
then it can be stolen. It can be hacked. It can
be lost. It's not in cold storage. If you hold
it in cold storage, you have the keys to that.
You put it on a USB stick, you put that in your
vault at home. You put that in your cell. Then
it's secure. It can't be stolen. But then again,
someone could... someone could come and steal
your vault someone could steal your usb you could
lose you could lose the password and then again
you've lost you've lost the bitcoin so it's none
of it's without risk none of us without risk
so we understand the risks and our risk with
our bitcoin background is is a large extent it's
just the counterparty risk because we're a professional
organization and we we know We think we know
better than others how to handle those risks
and that's counterparty risk. And we spread that
amongst as many counterparties as we can and
we monitor our counterparties. You know, we have
all risk management systems and fail -safes in
place to, as best as possible, avoid counterparty
risk. And, you know, there have been enough examples
since we launched the fund four years ago and
we've been trading it for long enough to... They've
taught us a few lessons, primarily that FTX lesson,
which did burn us to some extent. So how do you
deal with FTX? Is there a company which you can
– my issue here is liquidity, right? Because
you require to essentially have these argos running
all the time and settle. You can't just hold
cold storage, right? Like a give -up trade on
those equities. You're not holding it. It needs
to settle. So in order for the speed execution
and the settlement, are you doing that in -house?
Or I think one of your colleagues mentioned that
there's maybe a company which you use that provides
that level of liquidity which you can deal with.
How does that work? Yeah, we use third -party
custodian relationships to manage the equity
between our... and between the wallets at the
exchange and we'll have wallets at the custodian
to hold the equity. So we try and hold as little
as possible on exchange. We can't avoid holding
our equity, some of our equity on exchange because
we're trading futures contracts. We need the
equity there in order to hold our positions.
In order to open positions and hold our positions,
we need to have equity there. So the more opportunities
we see on the exchanges, the more equity we need
to have hold there. to hold there. If there aren't
opportunities, then we can hold that with the
custodian. So there's this ongoing optimisation
of where we hold the equity. We've got real -time
risk management systems to show us where our
equity is being held, where we're exposed more
than other places and when and where we should
move. But that's something that we can't avoid
because we're actively trading the derivative
contracts and you have to have the equity on
the exchange to trade them. Now, the industry
is moving away from having to have your equity
on the exchange. They call it the off -exchange
settlement, where we can use our custodian, we
can use their relationship with the exchanges,
and then we can reflect our balances with the
custodian. onto the exchange and we have trading
gains and trading losses they can be settled
at the end of the day which will require our
agreement the custodians agreement and the exchanges
agreement in order to move those funds so something
like ftx we could have our our equity at the
custodian that will be reflected onto the ftx
account we can trade ftx as much as we want ftx
pulls all the money out fraudulently trading
losses whatever we don't care And then at the
end of the day, our money is still with the custodian.
FTX has fallen over. We're still with it. And
that's where the industry is moving. A lot of
the exchanges have either set it up or are in
the process of setting it up. And we're in discussions
with the custodians and the exchanges in order
to have all of our accounts set up with the off
-exchange settlement. And we expect that will
happen in production in the next three to six
months. So, you know, that biggest risk that
we face, the counterparty risk, will be largely
removed. Thanks for discussing that. Because
as you can appreciate, you know, there's a lot
of families which we deal with, a lot of intergenerational
wealth. A lot of people understand it, don't
understand it. But now it's happening with digital
assets. I'm sure you agree, it's now becoming
an asset class that people can't not look at
anymore. It's now part of the human fabric. You
know what I mean? It's interwoven. It's as much
as private lending or gold or, you know, Aussie
or domestic. It's now just... technically an
asset class right but at the end of the day when
people were looking at this sometimes they're
like everyone wants to make money right but i
think some behavioral psychology says if someone
loses 10 it actually affects them more than if
they make 30 yeah you know what i mean so uh
thank you for explaining the risk and how you
mitigate against that because to my understanding
the biggest risk after we saw ftx is you know
the that third party everything's sitting on
that particular platform and You find yourself
in a world of pain where essentially the platform
gets shut down, your money gets locked out, which
can happen in Aussie equities as well. Look at
Robinhood. It can happen, right? It's not unique.
It's just that the popular press loves to beat
up on crypto. People love to beat up on what
they don't understand as well. Yeah, no, it makes
a lot of sense. Yeah, so thank you very much
for explaining that. So why don't we get into
the fun part now, right? You know, how is the
jam made? You know, how is this manufacturing?
How's the algorithm? How does it work? You know,
can you give an example of, you know, today's
the month of, you know, it's currently March,
right? You've got futures contracts. What are
you doing here? These monthly futures, how does
the process work? So the futures contracts, like,
most markets, you'll see the majority of the
interest in the short -term contracts. So I liken
it to trading yields. So whether it's term deposits
or bonds, you can think that there's a lot of
interest in what are the yields doing in the
short term. You can have a lot of confidence
in, you know, I want a term deposit in three
months. I can go to four different banks and
they'll all give me pretty much the same price.
But if you go out, you know, I want a term deposit
for five years. Maybe you struggle to get a quote.
The prices are quite a bit different. Now, it's
the same with the futures we're trading. We know
very precisely what's happening in the short
term and in the long term. Yeah, it's a little
bit more uncertain. What our expertise is, is
in working out what yield should the market be
paying in the short term and the long term. And
because we're connected to all of these... exchanges,
which are quite, how should I say, there's a
lot of uncertainty within exchange. You know,
there's jurisdictional issues. Some will be in,
say, Japan, Singapore, some in Ireland, some
in London. There are particular investors that
can access some exchanges, not others. There
might be some jurisdictional issues. And so we
find that on the exchanges, they can be trading
at different levels. levels of yield say i want
to get a term deposit in the uk we might find
that there's there's a better rate there than
there is in in tokyo maybe it's because people
the style of investor changes as the world spins
but what we what we do is we'll trade 24 hours
a day seven days a week and we're able to do
that at high frequency so even little small changes
in what those yields are doing we're able to
take advantage of those we might be able to buy
it by cheap in tokyo and then sell a seller yield
a little bit more expensive in london but we
do that all day every day you know our turnover
per month will be in the billions of of dollars
just trying to chip away at making those markets
more efficient and so again with the bond analogy
we might say you know i some of the banks in
the us right they they sold they sold yields
at one percent you know tenure yield one percent
You know, over that 10 years, they know they'll
get their 1 % return. But what happens in the
meantime? Yields might go 2%, 3%, 4%, 5%. And
that's what happens. And they're underwater.
But they know if they can hold on with enough
liquidity, they'll get their 1 % yield. So what
we do in the digital market, digital asset markets,
it's a similar thing. Primarily on a Bitcoin
yield maybe up for 12 months, we might be able
to get 12%. That's a fairly realistic yield.
on bitcoin out for one year and we know that
if nothing happens we'll still make 12 but if
the yields go up you know we can sell that 14
16 if they come down 10 8 then we can take off
the position and make money so we make money
from yields moving up and down and providing
liquidity into that space and we can make money
because the yields on other exchanges are different
relative to each other. So we're able to really
actively trade the yields on one exchange versus
another, but also actively trade the absolute
level of the yields. And so combined, we're able
to market neutral. So the direction of Bitcoin
goes up or down. We don't really mind. What we
really care about are what are the yields doing
in that space? Because that's what gives us the
market neutral returns in that space. So just
to understand correctly, the algorithm isn't
looking, is the algorithm looking at, say, mixed
prices on, you know, if Bitcoin's showing, you
know, 80 ,000 on one and today it's 79 ,000 somewhere
else. Are you looking at arbitrage? Are you purely
operating inside the fixed income component offering
of Bitcoin and taking the ARPA there? You're
looking at spot or is it purely just the income
side? We look and trade spot, but primarily our
alpha is generated from looking at the yields
in that spot. You'll find that the spot markets
now in Bitcoin are so efficient. If there's liquidity,
those markets are so efficient. You can get some
proper size away. If you wanted to buy Bitcoin,
you get some proper size away and you won't even
move the market. They're so efficient. Sure,
if you go to smaller, less trustworthy exchanges,
yeah, you might find that pure arbitrage, but
it's pretty rare, right? In these markets, there
are enough professional players out there that
those ARBs have disappeared. So if I was to surmise
what this does, the algorithm does essentially
in like a paragraph, I would say that the algorithm's
taking advantage of different prices on yields
over a duration and you're essentially, you know,
what you're really doing by the sound of it,
you're essentially running a carry trade, you
know, picking up money. you know borrowing cheaper
in japan and then essentially lending it out
in uk australia or something like that which
all makes sense but if you do that in in essentially
normal currency land uh just like we've seen
happen historically when the japanese yen ran
up to you know 100 to 1 in australia from 60
right in a very short space of time it all unwound
incredibly quick and anyone essentially borrowing
in japanese yen and then purchasing nvidia proceeded
to get their hands completely torched and then
unwind really quick and you got a short squeeze
right does that happen in the land of you know
chasing yields in digital assets absolutely meltdown
so the example you used there was this big currency
risk involved in that yeah so we don't we don't
have the currency risk in what we trade so Everything's
hedged back into Australian dollars for Australian
investors. Essentially, our exposure is US dollars,
and then we put an Aussie dollar hedge over that.
So we don't have to worry about where people
are borrowing and investing so much. Although,
look, definitely that's a trade, that carry trade,
that pure carry trade. That exists. It's a part
of what we do. It's not a large part of what
we do. But what we see happen is in times of
exuberance, those yields in the digital asset
space, they do get really heated. So we saw in
the past 12 months, I think it was last April,
those yields got to around 25 % annualized in
digital asset space. I mean, it's huge. You know,
you could borrow fiat in the US, you know, 4%,
5%. And you could invest that into the crypto
markets at 25 % if you were carrying. What we
found is that the yields, as they get bit up,
might happen slowly over the course of months.
But when they collapse, they collapse very, very
quickly. And when we launched the fund, we were
very bullish on how we would go. The yields,
when we started, they got, you know, In our first
full month of results, those yields got close
to 50 % annualized. And so you see our first
published month of performance was just under
30 % for the month because that collapse in yields
was so severe. So we had these positions. And
if nothing had happened, like I said, you're
selling bonds or buying bonds with a yield of
50%. You don't even mind if it takes six months
or 12 months. for that to play out no other trades
you know you're going to make that sort of return
but what we saw was it didn't take six months
to play out it played out over over the course
of one day so instead of making 50 annualized
over six months we made just under 30 in the
first month alone so that that's they're the
sort of collapses we see there's this exuberance
people get leverage leveraged positions into
digital assets typically long We can trade into
that. We can provide efficiency. But when that
leverage disappears, it disappears very quickly.
And that's what leads to us having some really
good returns for the fund. I suppose another
simple question that I'll probably get asked,
right, is people might completely understand
how the borrowing game works in essentially the
old world. Let's call it the old world or the
new world. Nice and simple, right? We've just
had an interest rate cut in Australia. Interest
rates went up, went down. And people can very
easily see compared to their mortgage, you know,
essentially their interest rates went from 2
% to 6%, right? And everyone can feel that pinch
at home. And then they can understand completely
why, you know, if they're getting a private lender,
they might be getting IBA cash rate plus five,
six, seven, right? And then people are taking
that capital, borrowing that money, purchasing
profit, properties, doing a business or something
equivalent, right? So for people out there that
don't really understand how digital markets work,
why would a borrower in digital asset land be
seeking, you know, essentially an interest -based
loan in digital currency? Is it purely... From
a trading perspective or are there other assets
which you can now purchase since this market's
become a lot more mature that you can actually
quite literally borrow a million dollars worth
of Bitcoin at 12 % to do something else? What's
happening? Economically, they're really just
borrowing to get long the underlying. So you're
borrowing to get long Bitcoin. You're borrowing
to get long Ethereum. You're borrowing to get
long some point. If you believe that's going,
you know, traditional finance markets, what's
a good year for the ASX? 220%, 25%, right? Like,
yeah, sure, I'll borrow in the hope it goes up
that much. But a good year in digital assets,
that's like, you know, Bitcoin going from $30
,000 to $100 ,000. And that's like the bellwether.
That's probably like your least leveraged return.
Solana and any number of what they call shit
coins. I'll go up 10, 100x. So what does it matter
if I'm paying 12 % to get that? I'll happily
do that if I'm so confident. And so that's what
we're seeing is just this exuberance in the market
and people are happy to pay for that. It's a
completely different world, old world and new
world. It's on steroids. Everything happens so
much faster. Yeah. That's a great way to explain
it. It's old world, new world. It's just on steroids,
right? But yeah, it's interesting. Okay, so if
I'm understanding your strategy now and it's
starting to really make sense is what you're
really trying to do is capitalize on the difference
in yields. So you're not really even taking a
view on the main fund. What you're looking for
is essentially liquidity pools. And what benefits
you is essentially the market moves around based
on people's demand. on what they're going to
borrow for, right? If there's increased demand
and people think it's going to keep on running,
those interest rates might go 10%, 11%, 12%,
15%. You take advantage of that. And you're not
doing it emotionally. You've got an algorithm
essentially looking around globally in a very
high liquid market and making those trades to
pick up those numbers. Yeah, exactly. We're looking
at the relationship between all of the exchanges,
between all of the maturities, of the yields,
and the algorithms just rebalancing. Which exchange
do I have exposure to? Which maturity do I have
exposure to? How do I balance this? How do we
bias the position? What are the absolute levels
of the yield? If the carry trade is yielding
50%, we might as well put everything into that
because that's amazing. It's just constantly
doing this rebalance and then we have the team
in the background analyzing the markets. Where
are the opportunities? Which markets are hot?
What are the new products? Where are the volumes
shifting? Is there any smoke on a particular
exchange? Should we be pulling assets from there?
For example, are the volumes dying in a particular
exchange? What's the reason for that? So it's
always... The team's always iterating and improving
and looking around whilst the algorithm's just
constantly trading, trading, trading, looking
for the opportunity. I'm just trying to explain
it in case. You know, you talk like elevator
talk. It's like, hey, you met a fund manager
today. What do they do? It's like, what's the
elevator pitch? And I think I'd say to someone
now, it's like, do you remember, you know, essentially
a while ago, you know, people ran that bond scalping
strategy, like literally scalping yields? That's
exactly what these guys are doing. They're using
essentially an algorithm, so they don't have
to do it manually, to essentially scalp interest
-based yields via highly liquid digital assets,
mainly Bitcoin and Ethereum. Is that probably
the simplest way I can explain it? Yeah, absolutely.
It's like we don't care where the Aussie dollar
is going. We don't care where the US dollar is
going. We don't care where the yen is going.
We're like, but what are the yields doing on
the yen? What are the yields doing on the dollar?
Can we arbitrage that and hedge it? That's all
we're doing. That's the easiest way to explain
it and understand it to your TradFi guy. They
understand what a term deposit is. They understand
what a yield is. We're doing that through derivative
contracts in the crypto space. Simple as that.
The only question I have right now, this is just,
can you take what you're doing and then proceed
to, because you said it's US dollar base, but
the fund's Aussie dollars, right? But the Aussie
dollar is just as volatile as any other currency.
you know, in the old world, as we've seen, is
there a means to marry the two? Typically, the
contracts are denominated in either US dollars
or digital asset currencies themselves. No, no,
apologies. I understand that. But essentially,
you're coming back and then essentially back
to backing it, you know, when you receive the
US dollars, you're back to backing it, you know,
on the Aussie. So the clients are receiving Aussie
dollars in their account, right? Do you have
the capacity to essentially run an internal hedge?
Even though you're benefiting on the main fund
regarding the algo, ripping the yields out, we're
still taking currency risk in the form of this
being an Aussie dollar denominated fund, right?
Do you have the capacity to theoretically use
the same mechanics which you're doing to improve
how things are going in digital world, essentially
in foreign currency land to essentially, well,
technically double up, double dip both old world
and new world? You mean port the strategy into
old world? Okay, so with the fund, are you paying
out monthly? We'll pay out quarterly. So you're
paying out quarterly, right? So in that quarter,
you're holding Aussie dollars in the interim,
correct? To get dispersed. All of our assets,
so we get Aussie dollar investment. We'll turn
that into either US dollars or Bitcoin. So all
of our equity for the fund will be US dollars
or Bitcoin. But we know how much that equity
is worth in Aussie dollars. And so we will have
a forward hedge on that in Tradfire World. So
even though we'll have all of the fund's assets
not in Aussie dollars, it is hedged back to Aussie
dollars. So it doesn't matter where US goes.
It doesn't matter where Bitcoin goes. Got it.
It's hedged back to us. All of our returns, the
question we sometimes ask, are you benefiting
because it's been so weak against the US for
years now? No, we're not. Our returns will be
way higher if we hadn't hedged it. Again, we
take as little risk as we can, and it's a very
easy thing for us to hedge that Aussie -US exposure.
Maybe that's a very simple way of doing it, since
you've got the main fund, which essentially is
hedged. and it comes back nice and tidy. Would
you consider opening up a second fund that's
unhedged if someone wants to take that currency
risk? Yeah, we actually have that. We've got
a Cayman fund that we just launched in November,
which is exactly the same strategy without the
hedge. Perfect. So it's a US dollar fund. Its
performance is a little bit higher than the Aussie
dollar one because we don't have to pay the cost
of the hedge on that. What's the difference in
returns? I think over, was it three months? Like
1 % higher over the three months. Along those
lines, don't quote me on that. I have to pull
it up, but yeah, it's a bit higher. Yeah, this
is very, very, very interesting. Is there anything
that I've kind of missed? When you're having
conversations with other people and they're digging
into the granular and the fun stuff, is there
anything else people ask that's very interesting
that you didn't think about that way? I think
the way we've set it up, we want to give people
the confidence to invest in this. And one of
those things that we've done is to pay out orderly
all of the income. And because our returns are
so high, or have been so high, that the investor
can get back their money, a good chunk of it
relatively quickly. So in the last 12 months,
2024, we returned just over 30%. And if you take
that distribution, you don't have to reinvest
it. There's an option to reinvest, or you can
take the distribution. But that's paid out quarterly.
So we're looking to reward people for investing
with us. We're very liquid. There's monthly subscriptions
or redemptions. Because we're trading liquid
instruments, we can process those very quickly
without any harm to other investors. The markets
are liquid and it's not going to affect our returns.
This has actually been very interesting. I came
into this conversation, hey gang, oh look, it's
an interesting way to make money out of... you
know, take an arbitrage on Bitcoin. But the more
we have this conversation, what I'm starting
to realize, like in Australia right now, there's
a number of players that present themselves as
an income -based fund, right? So essentially
using high -frequency trading to make margins
around like hybrid notes, you know, various bonds,
right? And then they're presenting themselves
as essentially an income strategy in Australian
market, which is actually... you know, a conservative
means of generating, you know, 7%, 8%, 9%, you
know, as an income, you know, in a client's portfolio
to generate income for a pensioner or something
equivalent. I had actually placed you essentially
as technically like offensive, but, you know,
in an algo kind of perspective. But the more
I'm chatting to you, what I'm trying to realize
is, is it accurate in this conversation that
you're actually more of an income strategy, using
essentially an algorithm to trade yields to essentially
generate an income? Very, very similar to what
people have been doing for years. Have I understood
this correctly? Because you're an income player.
And that's why we call it a digital income fund
because we're providing income. And I think what
people do struggle to get their heads around
is it is an income fund. I'd like to think our
peers are those players and those funds operating
in that space. It's just that our returns. are
off the charts relative to those. Yeah, three
times. Three, three and a half, four times the
amount of what a normal income fund in the Australian
market is essentially delivering. So there's
naturally going to be doubt about what we're
doing. There's no free lunch, right? No free
lunch. We're a very actively traded fund in this
very inefficient space, but we've been doing
it for four years. Some of our best returns have
come in the last 12 months as there's been this
renewed interest in Bitcoin and this big run
up with the tailwinds of ETFs, especially in
the US, the tailwind of Trump talking about a
strategic reserve of Bitcoin, Ethereum, Ripple,
Cardano, a basket of assets. There's this huge
interest. So we're playing in this inefficient
space generating income without the returns.
People think digital assets, look at the returns.
It's too good to be true. Typically it is. Look,
it's what I've done for 20 years. I've got a
team of almost 30 people in the company working
on it. There's a lot of work that goes into it.
It's not two guys in a basement at their mum's
place with a top plan. It's this professional
team that have been trading the TradFi markets
for decades that have turned their resources.
towards the digital asset markets and you know
it's not 30 people are they all in sydney or
are these just 30 people across the world around
and they're potentially working in their mom's
basement with a plant hopefully like a game boy
like uh you know an xbox or playing fortnight
or something doing something entertaining but
you know i'm just saying like is this like your
work from anywhere type thing you just get in
the smartest minds to operate this thing yeah
to an extent Roughly two -thirds of the employees
are in Sydney in the Sydney office. So we have
satellite offices in New Zealand. I've got a
bit of a larger office in Bordeaux in France,
which is a really great office to visit. That's
just an excuse to go to France and enjoy Grant
Wires on the dime of the taxpayer. I love it.
No comment, but it is a good business trip. Great
business trip. We've recently hired a young guy
out in Sao Paulo. looking after that time zone
as well, which we used to cover out of brands.
So we've got a team around the clock. A lot of
hard work goes into it and it's not easy to get
those returns. Perhaps it would be easier to
sell if the returns were 15%, not 23 % annualised.
It would be more believable. We're still developing
and we're still... trying to milk as much out
of it as we can while the opportunity is there.
There's plenty of things that have happened in
the last 12 months to lead us to believe that
there's still going to be opportunities in the
future. Well, this is the reason why I have these
conversations, right? I came into it thinking
one thing. I thought I'd learned a lot and I've
already spoken a number of hours and done a bunch
of it myself and I've still misplaced it. So
it's just good to have these conversations and
just go on tangents and understanding. how it
all works but one question i had in the back
of my head is you know this this algorithm began
old world and then now it's gone new world nicest
way to say it how much does it cost how much
time energy resources did it take to essentially
get this algo right like how many years of development
because this is you know and some people might
go oh it's an algorithm someone cooked this up
and like you know we go four years it cooked
us up at four years but how long has it taken
to the full cycle of getting this algorithm to
where it is today? High -frequency training and
algorithmic training, it's a constant game of
iteration. So you look at every time we make
a new change to the algorithm and tweak, we make
a release, a new release of the software. And
the software version is currently in the 460.
460. Over how many years? Six years in iteration.
So that tells you how frequently we're making
changes to the strategy, how frequently we're
making the improvements. But this algorithm was
essentially born from the other firm, previous
before it came to digital? Yeah, our Tradfire
trading firm. And how long was it? Operating
there and being developed before you moved into
digital assets? About six years prior to that.
So it's essentially been 12 years worth in development
and fine -tuning. Yeah, a lot of lessons learned,
a lot of risk processes built into it, tried
and tested, and we've seen some huge volatilities
and some crises over the years that it's traded
through and it's very stable now. So, you know,
like I said, I'd like to just be able to point
to the results to give people confidence. Well,
that's why we're having this conversation, right?
You know, it all does what it does. Well, Clint,
this has been very, very interesting and I really
appreciate you coming on. Is there anything else
that we haven't covered that you want to leave
listeners with about what you guys and girls
do? I think at the moment, the current state
the world's in and the uncertainty and the trajectory
that digital assets are on, I think to think
about where our portfolios will be and what the
world will look like in five or 10 years, Bitcoin
and digital assets, they're not going to be a
fringe asset. It's been 15, 16 years. They're
here to stay. And whilst your portfolio might
not currently... entertain having Bitcoin or
a market -neutral exposure. I think what about
in one year or five years or ten years? It's
hard to believe there's a world in which it's
not a much greater part of your portfolio. We're
here to educate and to be part of that journey
and hopefully be one of the leaders in that space,
at least in Sydney and Australia, and help people
diversify. Hopefully people think of us when
they're looking into that space, at least they
have a chat, not be more involved. Brilliant.
Well, Clint, thank you very much for coming on
The Rate of Change with your quality management
and look forward to catching up with you later
on down the track. And I'm definitely going to
dig into this in a lot more detail. So I really
appreciate you coming on. All right. Have a good
one. Thanks, Clint. Any use of this recording
does not represent the view of any other third
party and are the sole personal opinions of the
speaker. Any reference to financial products
does not constitute advice or recommendation
and before any action you should seek proper
advice from your financial professional. Australian
listeners should head to www .moneysmart .gov
.au to find more information on obtaining financial
advice. To get in touch with York, head to our
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