After looking at hundreds of fund teams over five years, he found that focusing on four key points can lead to successful trading.
The following text is organized from a conversation between myself and @ma_s_on_, who is a FOF investor with years of family office experience. This is the 21st episode of #Conversations with 100 Traders, continuously updated, welcome to follow.
Mason's career began during the golden age of mobile internet, and for the past five to six years, he has been doing asset allocation in a family office with a technology background.
Mason's interest in the crypto space originated from the bull market frenzy in 2020. That year, they invested a small amount of money in several VC projects related to Digital Assets, achieving outstanding results with exaggerated returns.
It was also during this time that Mason connected with @SevenXVentures.
Mason's background gives him a unique market perspective, allowing him to gain top-down insights into the market as a whole, clearly seeing how different people participate in the market, which methods can make money, and how profitable strategies shift over time.
What common traits do good traders have?
When selecting funds and GPs, Mason mainly focuses on three core factors: performance, team, and strategy.
Let’s first discuss performance. The performance of funds must be supported by reliable data. However, in the crypto secondary market, information often lacks transparency, so the authenticity, sustainability of performance, and attribution analysis of past returns are very important.
Everyone says past performance does not guarantee future results, but identifying which past performances can represent the future and which cannot is the key to performance evaluation.
Let’s talk about the team. This includes team background, reliability, and communication, among other factors. This can be divided into three points:
First, integrity is a Red Flag. If trading independently, one must consistently adhere to discipline, resist temptation, and be honest with oneself; if managing assets, one must be honest with clients and provide good customer service.
Second, one must be hands-on. Many friends who make money often hire others to do the work while they spend more time and energy on company management, which is not good. From the perspective of team size, particularly good trading teams, whether self-operated or asset management, have core trading personnel limited to five or fewer, making them very streamlined, and the main person must be hands-on.
Third, one must have a global perspective and continuously evolve. When structural changes occur, founders must have the determination to make changes and execute them firmly. This determines the team's risk resistance and growth potential.
Finally, the strategy must align with current market demands and industry development trends.
Mason mentioned that the gap between the secondary markets in the overall crypto space and traditional markets is quite large. There is a long way to go in terms of back-end infrastructure, client system maintenance, strategy complexity, compliance, etc. But looking at it from another angle, this is also a huge opportunity.
How do good traders continue to improve?
The first point is to maintain communication with the market; there must be an influx of external information. However, while maintaining communication, one must have discipline, like taking only a single scoop from a river of weak water, and not being led astray by others, which is very important.
Traders who perform well are very disciplined; they do not believe others' opinions easily and focus solely on their own field.
The second point is to have a higher-dimensional perspective. By viewing from an overhead perspective, one can see different people's positions, what they are thinking, and ultimately discover many previously incomprehensible issues.
In traditional investing, it is often said that many Chinese investors should look at the world less from a Chinese perspective and more from a global perspective when viewing China.
Today, the same applies to the crypto field; we should use a global perspective less to view the crypto world and more to view the crypto field from a global perspective. This includes using a world perspective to view Asia less and using a global perspective to view Asia more.
Another set of keywords: Street Smart. This is a quality many traders possess.
Traders may be the professionals closest to the essence of things among all occupations. They face the most frontline buying and selling and the most real value judgments every year. In their eyes, long-term factors may not matter; buy orders and sell orders are the most important.
There is a category of strategies that can create extremely frightening excess returns, often driven by traders exercising their street smart. These individuals usually lack a financial or computer science background; they simply find patterns and pursue them vigorously.
The fourth point is to learn from good people because everyone is quite confused today, and many directions are not very feasible. So to truly break the deadlock, one needs to find some higher-dimensional people for guidance.
How do institutions allocate crypto assets?
The allocation of cryptocurrency assets by family offices varies greatly depending on individual preferences and the nature of the funds.
Personally, Mason prefers to focus on the secondary market.
Regarding the classification of the crypto secondary market, Mason believes there are four categories:
The first category includes Mining and holding cryptocurrencies, which involves mining or buying coins and holding them for a very long time.
The second category is more technical trading, whether through chart analysis or extreme Quant techniques.
The third category leans more towards subjective and 'value' based trading, some look at fundamentals, but these 'fundamentals' may differ from stock fundamentals. In short, there are subjective indicators to consider.
The fourth category is DeFi, which is singled out because it leans more towards a 'product manager' logic. In DeFi, the returns you ultimately earn can be traced back to which part of the product you profited from; it is more about understanding the rules of each game.
Trading cryptocurrencies is not the only solution.
The industry is always changing, and the participants at each stage are different, so investment strategies do not have fixed patterns.
So what are the strategies that have performed well in this cycle? Mason summarized three categories:
The first category includes some strategies that enhance the cryptocurrency standard, which can be further divided into two types:
1) TVL games, staking, and then receiving airdrops. This is a no-cost arbitrage, very comfortable.
2) Quant.
Crypto Quant is Mason's favorite asset class in the crypto field.
First, liquidity is very good, equivalent to T+0. You can invest today and withdraw today, or trade on your own; at most, you close positions without trading.
Secondly, scale capacity can be very large; for instance, having a single strategy running several hundred million dollars is quite common.
Finally, expected returns can be high or low and can be controlled, making risk management relatively easy. For example, set a forced liquidation line, liquidating all positions if the overall drop reaches 15%.
In the past few years, the most popular strategy in Crypto Quant has been funding rate arbitrage. In 2020 and 2021, it achieved an annualized return of three times without drawdown, which is quite exaggerated.
Of course, everyone knows this cannot be sustained in the long term; the returns of this strategy are also decreasing. However, even if they decrease, the returns are still very good because it has no drawdown, somewhat like cash management.
The second is to buy BTC at a discount or mine it. For example, when GBTC had a discount in the past, purchasing it allowed you to outperform BTC.
The third type involves strategies that can outperform BTC in phases, such as CTA. Many traders like to do CTA and follow trends, which can outperform BTC in the short term, but its weakness lies in limited scale and capacity.
Mason also recommended some books.
The first is (Principles of Professional Speculation), which systematically discusses the entire trading system.
The second is books discussing the history of central banks, monetary policy, and banking studies, to understand what central banks are doing, why they do it, and the benefits and drawbacks behind each action.
You can start with (The Alchemist); it discusses what three famous central bank governors did at critical moments in history.
The third category includes books about human nature, such as Chinese Ming and Qing novels, and short stories by French authors Maupassant and Flaubert.
Many times, it is found that while the real operations of this world involve technical aspects, the broader driving force is actually human nature. These novels can help everyone better understand human nature, avoid holding unrealistic expectations about it, and better handle many complex interest relationships in daily life.
Thanks again to @ma_s_on_ for participating in the conversation with traders. Previous Space audio sessions will be continuously updated on Xiaoyuzhou, 🔍 Conversations with Traders.
