By Staff Writer
Prime Factor Capital became the first investment firm focused on cryptocurrencies to win the stamp of approval from UK-regulated Financial Conduct Authority in July. We speak to Michael Wong, the co-founder and CIO of Prime Factor, on the firm’s mission and its various innovative strategies vis-à-vis crypto assets. Wong, formerly of Blackrock, also discusses in detail on how he is replicating traditional quant models in the crypto realm, and the risks and opportunities in the sector.
Q1: Please tell us about Prime Factor Capital and your journey into becoming the first regulated crypto investment manager in the UK?
I came across bitcoin while working as a fund manager at Blackrock in 2015. While I was intrigued by the technology, I hadn’t taken the time to research or had it explained to me why it should hold value. However I was fortunate to meet my co-founder Nic, who as a mathematician and derivatives trader and had closely followed the market for many years: he realised its value as a non-sovereign store of value, or in other words digital gold. As my primary expertise is as a macro portfolio manager, it became clear to me the investment potential as digital gold, particular in this time when governments are under severe pressure to monetise their deficits and hence debase the value of traditional money.
The decision to setup Prime Factor Capital as a crypto asset manager was straightforward. All of us in the team had been in the regulated space in our careers so it is second nature to operate with the highest standards in the investment funds industry. We are, of course, pleased that Prime Factor Capital is to our knowledge the first authorised crypto asset manager: had it not been possible, we would not have launched the fund in the beginning.
Q2: What is your investment philosophy and your various strategies/products?
Our investment philosophy is to identify the value drivers for cryptocurrencies and to take investment decisions based on these insights: if the drivers are quantifiable and repeatable we use systematic models, if longer-term in nature and technology-driven, we perform fundamental due diligence. A unique feature of cryptos are that they are both a new asset class and a technology, so we have evolved the systematic quant models that I had previously employed as a portfolio manager and adapted our investment process to capture alpha from the asset class.
Q3: What are the main challenges for a crypto hedge fund as opposed to traditional funds?
Cryptos have a positive and uncorrelated return potential, but create challenges from being a digital asset class. There are two aspects in particular: first, custody is unique compared to traditional financial instruments, so operational processes need to be robust with an uncompromising emphasis on security throughout. Second, the asset class has a relatively short history so there is less data to evaluate for cause-effect relationships. We overcome these challenges with a customised investment process as described above.
Q4: Who are your main clients? Your goals to expand in Asia?
Our clients are high net worth and family offices in Europe. However we have built an investment process and fund that we believe is best in class and ready for larger institutions! We are now looking to expand in Asia as investors in the region often has a strong interest in technology, are looking to protect wealth and would value that we are a manager authorised by the UK’s FCA, who are a highly respected regulator.
Q5: What do you think of Libra?
There are a few major implications – Facebook and their associated products have a userbase of over 3bn. By launching a cryptocurrency, it provides a stamp of approval for the technology and gives confidence that it is robust and likely a permanent fixture. However, the subsequent response from regulators has also been a cause for concern – it was somewhat surprising that not more regulators had been briefed prior to the announcement and regulators have to decide how they will regulate a payments rail backed by non-financial institutions. Bitcoin however, is an asset already over 10 years in existence and is well known to regulators. In my view, it seems unlikely there is a need for it to be as closely regulated.
Q6: Finally, your views on blockchain and cryptocurrencies in the future?
I believe the concrete use cases for cryptocurrencies at this time are as a non-sovereign store of value (a.k.a digital gold), and for payments (particularly when dealing with different currencies). There is also great potential for them to be used for smart contracts and other internet-native applications: these are speculative in nature and could be further reasons for further growth in the asset class.