Stockholm (HedgeNordic) – Cryptocurrencies might be the most fascinating, yet head-scratching and controversial, investment opportunity in recent history. The outstanding performance of Bitcoin and altcoins – alternatives to Bitcoin – relative to any other existing asset class has led to an avalanche of retail investors embracing cryptocurrency investing and has, at least, caught the eye of institutional investors.
It is somewhat difficult to picture that Bitcoin was only officially launched in 2009. During this relatively short amount of time, cryptocurrencies have evolved from being a niche digital asset to one widely used in several applications (e.g., method of payments, decentralized applications, non-fungible tokens, etc.). Both retail and institutional investors are now flocking to the crypto space for potential outsized returns and diversification benefits to their portfolios. The bottom line is, cryptos cannot simply be ignored any longer.
Bitcoin has substantially outperformed the tech-heavy Nasdaq Composite over the past five years, indicating that investors putting their wealth in Bitcoin would have done tremendously well. According to calculations by the team at crypto-focused Hilbert Group, a Sharpe-maximizing trading strategy would allocate 65 percent of a portfolio in Nasdaq and 35 percent in Bitcoin. “Such trading strategies would yield a Sharpe ratio of about 1.50, which is to be compared with the Sharpe ratios of 0.90 for a Nasdaq-only allocation and 1.35 for a Bitcoin-only allocation,” says Niclas Sandström, the CEO and co-founder of Hilbert Group. “Although Bitcoin had 1.5 times higher Sharpe ratio than Nasdaq, it would have been favorable to allocate about twice as much wealth to Nasdaq compared to Bitcoin.”
“For most investors, however, allocating twice as much wealth to Nasdaq compared to Bitcoin probably sounds too much,” argues Sandström. Even so, a ten percent allocation to Bitcoin in an otherwise full-blown equity portfolio would have led to a Sharpe ratio of 1.20 and a drawdown that is one-quarter lower than holding a Nasdaq-only portfolio. “There is no justification in assuming that out-of-sample returns can be estimated from past realized returns,” acknowledges Sandström. “While these two trading strategies had roughly equal volatility, the return of a portfolio with ten percent allocated to Bitcoin was almost 1.5 times that of Nasdaq over the last five years.”
Hilbert Group: Striving to be The Nordic Region’s Crypto-Focused Blue Chip Firm
With institutional investors increasingly aware of the diversification benefits and return potential of cryptocurrencies, more clarity on regulation and investment-grade infrastructure remain some of the last barriers to mass institutional adoption of cryptocurrency. On the heels of increasing institutional adoption, Nasdaq First North-listed Hilbert Group has been building a fully integrated platform with a strong infrastructure that can serve as a one-stop shop for investors seeking to seamlessly onboard the cryptocurrency market. The digital asset investment firm’s platform offers access to crypto-focused investment funds, data and analytics, as well as private equity investments, among others.
“We are a blue-chip company in the digital assets space with a high-quality setup and infrastructure.”
“We are a blue-chip company in the digital assets space with a high-quality setup and infrastructure,” says Niclas Sandström, the CEO and co-founder of Hilbert Group. “Many of the big institutions that we have been in contact with put a lot of emphasis on the infrastructure around our firm and our funds,” he emphasizes. Some of their most commonly asked questions include: “Do you have the right banking set up? Do you have the right administrators? Who is the custodian and how do you actually execute the asset subscription and redemption?”
“Institutional investors put a lot more emphasis on that because operational risk can be very large, even larger than market risk in the cryptocurrency space.”
“Institutional investors put a lot more emphasis on that because operational risk can be very large, even larger than market risk in the cryptocurrency space,” warns Sandström. The team at Hilbert Group has put together a due diligence questionnaire (DDQ) that assists investors and their third parties in the due diligence process to understand the operational setup around Hilbert Group’s funds. “Going through an operational DDQ is more frequently demanded as the first request from investors even before talking about strategy and performance,” points out Sandström. “That is a positive shift in the industry that we have been observing,” he continues. “Hilbert is fully staged for that as our focus on the operational setup and transparency have been in our DNA from day one.”
“Being a public company certainly adds to the trust factor alone.”
With transparency requirements different between non-listed and public companies, Hilbert Group’s focus on transparency can be supported by the decision to list the company on the Nasdaq First North Growth Market in October 2021. “It is a very cumbersome process to become a public company,” says Sandström. Transparency and trust are essential in the still-young cryptocurrency space, a nascent asset class that is changing at a breakneck pace with no signs of slowing down. “Being a public company certainly adds to the trust factor alone,” argues Sandström, who co-founded Hilbert Group with Magnus Holm.
Hilbert’s Crypto-Focused Fund Range
With a growing number of institutional investors looking to allocate a percentage of their portfolios to digital assets, Hilbert Group’s asset management arm has two funds that can meet some of that investor demand. The Hilbert investment team has mostly focused its efforts on managing Hilbert Digital Asset Fund, its flagship fund that seeks to offer broad exposure to the crypto market. In late 2021, Hilbert Group launched a second fund, Hilbert Syrius Bit+ Fund (HSBF), in a joint venture with Hong Kong-based strategic advisory firm Oracle Strategies Limited.
Launched in January 2019, Hilbert Digital Asset Fund “is algo traded altcoin-focused fund with the bulk of the portfolio always exposed to altcoins, other coins than bitcoin,” according to Sandström. The fully-invested fund relies on a long-only strategy that systematically rebalances the portfolio of a large number of altcoins based on what Sandström and his team call “volatility harvesting.” According to Sandström, “this fund employs a higher risk, higher return strategy, with the alpha coming from the portfolio rebalancing according to a pre-defined set of criteria.”
“Hilbert Digital Asset Fund is algo traded altcoin-focused fund with the bulk of the portfolio always exposed to altcoins, other coins than bitcoin.”
The alpha stemming from “volatility harvesting” has reached an annualized 30 percent since inception. Usually maintaining diversified exposure to more than 50 altcoins at any given point in time, Hilbert Digital Asset Fund has managed to generate an annualized return of 105 percent since launching in early 2019. “Our objective with Hilbert Digital Asset Fund is to achieve as high a return as possible,” says Sandström. “The price you pay for high returns is volatility,” warns the co-founder of Hilbert. “But we are comfortable with that and our investors should be comfortable with that.” After all, Hilbert Digital Asset Fund is designed to be an institutional quality product that gives broad-based exposure to the cryptocurrency space.
“Our objective with Hilbert Digital Asset Fund is to achieve as high a return as possible. The price you pay for high returns is volatility.”
Hilbert Syrius Bit+ Fund relies on a systematic algo-based strategy that focuses on the most liquid segments of the cryptocurrency space, namely Bitcoin and Ethereum. “The fund can have a small allocation to altcoins of up to ten percent of the portfolio,” according to Sandström. Hilbert Syrius Bit+ Fund seeks to outperform Bitcoin on a risk-adjusted basis by focusing on limiting drawdowns. “This fund is a lower-risk, lower-return product that seeks to generate attractive returns with much lower volatility than the most liquid segments of the crypto space.”
“The core strategy is powered by Oracle Strategies’ AI-based algorithms that adjust the risk-exposure according to the inherent cycles within cryptocurrencies,” explains Sandström. “The strategy is trend-following utilizing AI methods,” he elaborates. “A large part of the time since inception the fund has had a big chunk of the portfolio in cash, with cash positions reaching 60 or even 70 percent at some points this year.” In up-trending markets, Hilbert Syrius Bit+ Fund seeks to capture most of the upside. As downward signals start hitting the screens, the fund systematically switches bigger and bigger portions of the portfolio into cash.
“When bigger institutional investors will start jumping on the bandwagon on a larger scale, Hilbert Group will be there to serve their needs.”
With two up-and-running funds, a white-label fund and trading offering, plus more fund launches planned in the future, a proprietary trading desk, and a data and analytics arm, Hilbert Group is focusing its pioneering efforts into becoming a one-stop shop for Nordic institutional investors looking to learn more about the cryptocurrency universe and tap into the potential of this space. “When bigger institutional investors will start jumping on the bandwagon on a larger scale, Hilbert Group will be there to serve their needs,” concludes Sandström.
This article features in HedgeNordic’s “Nordic Hedge Fund Industry Report.”