Digital assets are going mainstream. The fact is that the rise of the crypto space has brought the idea of digital asset hedge funds as a use-case scenario for cryptocurrencies. So much so that this may be the next big thing within and outside the crypto space.
E-Crypto News reached out to Ulrik Lykke of the co-founder of ARK36 for insights into this new exciting field.
ARK36 recently was recently launched by Ulrik and a few other traders. The hedge fund is fully regulated within the European Union. Here is what he had to say.
Ulrik Lykke, Co-Founder ARK36
1. Why do you think there is a renewed interest in digital assets as far as investments are concerned?
In our opinion, there are many reasons why crypto assets are interesting as an investment and why they seem to be an important part of a newly emerging trend in the financial sphere. Below, we present 4 fundamental arguments that, in our opinion, best explain why the interest in crypto investments seems to be on the rise.
First, the expansive monetary policies set in place as a remedy for the negative economic consequences of the ongoing global pandemic have made the risk of inflation more relevant than ever. Investors worldwide are looking to put their capital to work in order to minimize the risk of inflation. Evidently, this has led to a “crack-up boom” where the stock market valuations in many places are soaring while the real economy remains fragile.
Second, the tendency to take money out of cash and put it into assets is reinforced by the banking sector as banks continue to impose negative interest rates on their customers.
Third, this “flight from cash” is creating an increasing demand for assets that offer diversification opportunities to investor portfolios. That’s another important reason why, at a time when the stock markets are still trading at high valuations and the bond markets seem largely unattractive from the return-on-investment perspective, there has been an influx of capital into crypto assets and precious metals.
Fourth, Bitcoin and other select digital assets have delivered superior RoI in comparison to most other assets tradeable on liquid markets. This last factor alone is the reason why many investors gravitated towards digital assets in the first place; likely, it is now encouraging many new players to take an active interest in this asset class.
2. Do you think that digital assets do better than traditional assets during times of uncertainty? Please give us reasons for your answer.
Figuring out which assets will perform best in times of uncertainty is always a difficult task. The most effective way to protect yourself and secure your portfolio in times like these is to make sure you have the necessary portfolio diversification.
In other words, it is in the investor’s interest to be on the look-out for assets that have a low or even negative correlation with each other.
Traditionally, commodities have served as a great hedge in times of uncertainty, with precious gold being an absolute favourite among investors. Interestingly, Bitcoin shares many traits with gold and is arguably even superior to it when it comes to attributes such as scarcity and divisibility.
On the other hand, Bitcoin is also a technical invention and thereby, unlike gold, has the potential to evolve and be used in new, innovative ways in the future.
Furthermore, not only does Bitcoin have a low to negative correlation with traditional assets but, arguably, it is also inversely correlated with the general public’s trust in national currencies.
This aspect is significant especially in the current economic situation which, as pointed earlier, is characterised by expansive monetary policies that seem to make people lose faith in government-issued money.
3. What are your strategies for attracting investors to your fund? Care to spill the beans?
We strongly believe that happy clients and word-of-mouth are the best advertisement any company can have.
We take pride in being trustworthy and fact-driven in the way we communicate about our company and the assets that we invest in.
We are not here to make naive and overenthusiastic claims or encourage anyone to invest in crypto assets indiscriminately.
Instead, we would like to provide guidance and advice to prospective investors about the risks involved in trading on the crypto markets so that they can make an informed choice.
We believe accurate and reliable information in the space is important and we are confident that our focus on this will continue to define our brand, projecting us as a respectable company with a responsible attitude.
4. What are your thoughts on the regulation of investment funds and similar structures? How can regulation help the crypto space?
Regulation always follows innovation. In the case of crypto, regulators have been struggling to understand and keep up with the constant development of digital assets.
It is encouraging to see financial regulators start to embrace this new asset class and provide the frameworks for setting up companies in the space.
The setup of ARK36 as a regulated entity in the European Union, under the supervision of the Cyprus Securities and Exchange Commission (CySEC), represents another important milestone for the industry as a whole.
This is a significant development because it paves the way for future companies seeking regulatory approval for their services.
Hard-core crypto enthusiasts have historically tended to criticize the involvement of regulators because it adds another level of complexity for service providers and customers.
However, at the end of the day, regulations are set in place to protect the investor by making it safer to invest. This will benefit the crypto space as a whole because it will attract more investors and allow them to participate.
5. Will digital asset hedge funds become a regular part of the investment landscape? Please give us reasons for your answer.
We are of course extremely biased in our opinion here but we believe that crypto assets will become commonplace in any portfolio in the not too distant future.
That said, it will likely take years before institutions as well as professional and retail investors obtain the necessary knowledge and competence to really reap the benefits of investing in crypto.
However, it has already become evident that many big players in the traditional financial world start to make strategic bets on the future of digital assets.
6. Could digital asset hedge funds have a direct impact on the mass adoption of cryptocurrencies? Please tell us the reasons for your answer.
Of course. Hedge funds are an integral part of the combined investment ecosystem. For an asset class as new (and complex) as crypto, the need for asset managers like ARK36 is arguably even bigger than for similar entities on the traditional markets.
Investors who have not yet engaged with digital assets will be able to perceive that “something is going on” in the space but will likely lack the competence and time needed to make the most of these markets.
For such investors, actively managed funds like ARK36 provide an opportunity to obtain exposure in the digital assets space and have their funds overseen and managed by experienced personnel.
7. What safeguards do you have in place to mitigate the volatility in cryptocurrency prices?
All funds administered by ARK36 are actively managed and, as stipulated by our Prospectus validated by the financial authorities, we are allowed to go both long and short in the market.
Essentially, this means that while we subscribe to the positive long-term outlook for crypto assets, we are still acutely aware of the short-term risks involved.
Through discretionary trading techniques, we constantly monitor market movements and events happening both in- and outside of the space to secure strategic exposure to selected assets at times when it is most beneficial.
When conditions on the markets become volatile or unfavourable, we can mitigate the risk of the entire portfolio by allocating to cash and thereby decreasing the overall risk factor.
In circumstances where we think the situation on the market may develop towards either of the extremes – either an upside or a downside – we also make use of different kinds of derivatives such as futures and options to optimize portfolio performance.
8. In the event of a black swan event, what strategies are in place for the protection of the client’s assets?
Because of the nature of digital assets, some risks potentially can have a severely negative impact on portfolio performance. We have several measures in place that will limit our downside risk in case of such black swan events.
These include but are not limited to: the diversification of counter-parties, insurance on cold storage funds, sophisticated IT solutions on our own infrastructure as well as strict company policies for security.
9. Where do you think ARK36 will be in say ten years’ time?
ARK36 will be a renowned and dominant player in the European investment industry in the area of digital assets and will have expanded its range of services both horizontally and vertically, providing access to other markets as well as new services to existing customers.
10. If you have three wishes for the crypto space and a genie that could make them come true what would they be?
For Bitcoin to continue to grow, not only in value but also in reach, importance, and recognition, while keeping its stability as an asset class intact.
For Bitcoin and other digital assets to be recognized for what they are – innovative yet reliable means of transferring value that is bound to be an increasingly important element of the financial world – not only by individual or institutional investors but primarily by national and international bodies and regulators in the financial sphere.
For more people to adopt cryptocurrencies and get access to digital assets and use them as a means of empowerment on both personal and societal level.