- SkyBridge has pivoted heavily into crypto from its traditional hedge fund of funds business.
- Anthony Scaramucci’s plan is to incrementally add more cryptos as they raise capital.
- Cryptos in the Coin Fund include algorand (ALGO), solana (SOL), and polygon (MATIC).
Cryptocurrencies may be in a bear market, but it hasn’t stopped the sector from going mainstream. What was once considered magic internet money is now making its way into the hands of institutional investors.
A survey conducted by the Alternative Investment Management Association (AIMA), showed that about one-third of traditional hedge funds are investing in digital assets. In that pool, 67% intend to deploy more capital to the sector by the end of 2022. The report, which was published in June by PwC, noted that another 29% of managers who are not yet investing plan to do so.
The hedge fund-focused SALT conference, which took place in New York City this year, reflected the growing interest in the sector. Approximately one-third of the panel discussions revolved around digital assets, according to SkyBridge Capital’s Anthony Scaramucci.
And while some funds may still be grappling with the question of how much exposure they should allocate to digital assets, Scaramucci is pedaling forward. Long term, he believes in the appreciation of digital assets, and he’s willing to pay the price of absorbing the volatility in the meantime.
“A hedge fund manager that doesn’t see what’s going on in crypto, it’s sort of like a dinosaur about to get hit with a meteor on the Yucatán Peninsula,” Scaramucci said. “And so if he can’t see that the sky is rumbling, I feel a little bit bad for that guy.”
His fear of becoming one of those dinosaurs prompted him to seek out a collaboration with his younger counterpart, 30-year-old Sam Bankman-Fried, founder of the crypto exchange FTX. The venture capital fund, FTX Ventures, agreed to buy 30% of SkyBridge in early September.
Although there is currently no co-invested fund between SkyBridge and FTX Ventures, Scaramucci believes that the firm’s products will benefit from the deal flow and intelligence sharing.
They sealed the deal during a crypto winter that caught some investors off-guard after interest rate hikes hurt risky assets. Both bitcoin and ether are down 73% since their November all-time highs. The plunge in digital assets wiped out $2 trillion in market value. Historically, about 90% of altcoins never recover.
The pivot to digital assets
SkyBridge has pivoted heavily into crypto and blockchain technology from its traditional hedge fund of funds business.
This week, the firm announced it was leading a Series A funding round for Vulcan Forged, a blockchain game studio and decentralized application incubator.
SkyBridge was set to roll out a new traditional venture/growth equity-style fund that will invest in privately held Web3 fintechs and in growth and late-stage crypto companies, sources told Insider in July.
Crypto exposure makes up roughly 26% of their core portfolio, which is well above the 4% average allocation traditional hedge funds have to digital assets, according to PwC’s report. From there, client exposure is diluted further as they have 1% to 5% exposure to SkyBridge in their portfolio, he added.
Overall, crypto and crypto-related investments currently represent 36% of the firm-wide $2.5 billion assets under management.
Scaramucci told Insider the plan is to incrementally add more crypto as they raise capital.
The firm’s primary exposure to crypto-related stocks is through its First Trust SkyBridge Crypto Industry and Digital Economy ETF and the SkyBridge Digital Innovation Portfolio, while actively managed investments in liquid tokens are done through its SkyBridge Coin Fund which holds eight to 10 coins at any given time. They include the two largest by market cap, bitcoin and ether (ETH).
The crypto in the Coin Fund portfolio are all long positions and chosen based on diversification with a focus on blue chip coins. They are not weighted on market cap. This is important because it steers away from ecosystems that may be popular but have bad fundamentals, like Terra Luna.
Additional altcoins in the coin fund are algorand (ALGO), which Scaramucci has been very bullish on, touting the technology that backs the layer-1’s proof-of-stake blockchain. Solana (SOL), is another layer-1 included in the basket. It has been dubbed the “Ethereum killer” for its speedy and low-cost transactions. Yet, year-to-date the network has suffered at least 12 outages, driving its price down by about 81% since January. Polygon (MATIC), a layer-2 on Ethereum is also part of the fund.
A portion of the proceeds that came from FTX Ventures, about $40 million, was to be allocated to purchase cryptocurrencies for SkyBridge’s corporate balance sheet as a long-term investment.
“When we took the money in from Sam and FTX Ventures last week, we bought a portfolio of cryptocurrencies that we all agreed upon and that we like. And our notion there is to hold it for a three to five year period of time,” Scaramucci said on September 15. However, it isn’t clear whether those cryptos are in the Coin Fund.
Arguing that blockchain technology is the future is different from betting on the right projects, Scaramucci said. He compared this period to the dotcom boom, a period which was fruitful for a few and a dead-end for many others. By the time the bust came around in March 2000, approximately $5 trillion in market value was wiped out.
Scaramucci recalled that some investors swore they’d never touch tech stocks again, which turned out to be a big mistake. The lesson he drew from that period was to focus on the underlying technology rather than the company.
Scaramucci is still betting on hedge funds
Although SkyBridge has shifted to cryptocurrencies and faced investor withdrawals earlier this year, Scaramucci is still bullish on the hedge fund managers that are currently in the portfolio.
Scaramucci specifically named Izzy Englander’s $57 billion Millennium Management and Steven Cohen’s $26 billion Point72 Asset Management as his favorite hedge funds for this market cycle.
If SkyBridge raised $500 million, Scaramucci would definitely invest more money in these funds. For now, he’s happy with the current allocations.
Millennium was up 1.6% for the month of August and up 8.3% year-to-date, whereas Point72 was up 1.9% in August and up 7.3% year-to-date.
“Those firms are not welded to any one specific strategy,” Scaramucci said. “Those firms are called multi-strat hedge funds and depending on the market environment they vary where they’re going to be and they’re varying where they’re going to go in the markets. And so for me, if you look at their performance this year, it’s been quite good and they’re helping our portfolio.”