The Changing Faces of Fiduciaries
Things are moving faster than they ever have; keeping up is a full time job. You often hear this about Crypto and how its moving at the speed of light. By the time you learn about EIP 1559 and Ethereum’s new effort to move from proof of work to proof of stake, the network has forked and you’re already living in the past. This isn’t just true of crypto, it’s true in every industry. Biotech and life sciences is exploding with new information and new approaches to genetic mutation - you need to be an expert to keep up. Real estate is changing at blazing speed as what was once in vogue becomes defunct and what was once shunned becomes the new hotness. Consumer products and consumer choices have never been more plentiful and elaborate. All of this to say, that if you’re in the know, great, if you’re not, good luck or find your fiduciaries.
I was reminded of the importance of fiduciaries this week when two friends, one in real estate and one in venture capital EACH proclaimed to me that they were launching a crypto-fund. On the surface, my dubious mind said BUBBLE! It’s kind of like the ice fishermen in Iceland who ventured into home flipping in 2006 and 2007 only to later realize they probably should have stuck to what they knew, fishing! Anyhow, my two friends recognized something interesting. They had been dabbling with crypto, NFTs and the whole ecosystem for the last few years and learned quite a bit more than the average person. They certainly had the financial returns to show for it and believed their compounded knowledge base could be an on-ramp for a generation of investors who want exposure to the space but don’t have the time or interest to learn how the ecosystem works, so they decided to each launch a fund. They are venturing from solo-investor to fiduciary of other peoples’ money - a big step.
It seems to me that my friends are taking advantage of something called market beta. Beta is the systematic returns of a market or industry. Alpha is the idiosyncratic returns related to picking correctly within an industry. To simplify it, consider the S&P 500 is your benchmarked return threshold. If the S&P 500 returned 8% in a year but your portfolio of stocks that you hand select returned 10% then you could look at that and say you had a beta return of 8% (overall market direction) and an alpha return of 2% (specific bets paid off). Therefore your success was a bit of both market timing and choosing the right horses to bet on. That analogy is spawning the new age of crypto fiduciaries who are riding high off a market beta and perhaps bought a Bored Ape Yacht Club NFT to take their alpha returns to new heights.
The crypto markets are up, BIG, year to date. When the markets are up, even a mediocre investor with chips on the table can make money. What my friends who are becoming fiduciaries are saying to prospective investors however, is that they can find the alpha amidst the market noise. Alpha comes in the form of strategy and portfolio composition. My friends are telling investors that they can build the right portfolio of stablecoins, altcoins, NFTs and other crypto-assets to not only achieve alpha in an up market but hopefully keep them diversified enough to weather a bit of a storm in the bear case. They are staking their newfound claim that they can be a fiduciary of others’ money and create a return on their limited partners’ invested capital.
When there are major upswings in market beta, it encourages more innovation amidst fiduciaries and creates new fund managers. Over the last five years we’ve seen a huge amount of upstart venture capital funds on the backs of a very hot early stage technology funding environment. Many of the new fiduciaries in venture have spun out of existing funds. Each of these funds launches with a strategy to achieve alpha to outperform the market. With crypto, we’re seeing something entirely different. We’re seeing fund managers and fiduciaries spin up funds in a cross-over effort from their own personal investing and jumping from one area of the economy into the crypto-professional sphere. Real estate experts launching crypto funds, venture capitalists launching crypto funds, dry cleaning solopreneurs launching crypto funds, etc. This is the evolution of capital markets and when we see a new trend / industry emerge.
This is an exciting time for investors and the fiduciaries that will look after others’ capital to find alpha in a new crypto environment.