Lewis Fellas is the former portfolio manager at Harvard University’s $35.7 billion endowment. He is now Chief Investment Officer at Bletchley Park Asset Management and he shares his journey of cryptocurrency investment, along with his unique point of view of the current crypto market.


Timothy Tam: Lewis, thank you so much for your time and welcome to Token 2049. I guess before we go into the fund itself and your background, do you want to tell us a fun fact about yourself that your investors or people don’t know because you’re obviously well known.

Lewis Fellas: Sure. Well, the funniest thing I do is, maybe it’s a bit kooky, but I collect fridge magnets.

Timothy Tam: Fridge magnets?

Lewis Fellas: So, every time I travel around the world, I’m buying one in those horrible gift shops you see inside. I’ve got this refrigerator now stacked from all the places around the world.

Timothy Tam: Okay. Alright. We’ll make sure we get a fridge magnet for you from the event before you leave.

Lewis Fellas: Please do.

Timothy Tam: So, cool. So, do you want to talk a little bit about your background?

Lewis Fellas: Sure.

Timothy Tam: I’m aware you are a professional investment manager, I think in the equity space, and then what brought you into investing in crypto?

Lewis Fellas: Yeah. It’s quite an interesting arc. I started off in the most traditional sense, working at JP Morgan back in 2000. From there it’s a transition to the buy side having worked in Asia, predominantly, for a number of hedge funds, Deephaven, Segantii. Shortly after that, I made a different kind of move within that, the equity and directive landscape to working for Harvard University Endowment. That’s still a buy-side role, but the focus there was slightly different, and that was a very intellectually rewarding experience, too, in such a prestigious university. And it was really there that we began to see, or I began to see that all the ICO phenomenon just taking off.

Lewis Fellas: And so, it kind of organically happened that as Harvard decided to close the internal management platform, the ICOs were really picking up, and that really forced me to think about what’s happening in blockchain, which, up until then, my mind was all about Bitcoin, and I really felt like I’d missed that move. I kept looking at the charts coming up, as any trader does, kicking himself, thinking, “Why didn’t I buy that?”

Timothy Tam: Should have bought before.

Lewis Fellas: Why didn’t I buy that? And so, my business partner and co-founder, Ronnie Patel, challenged me to really go back and evaluate what was happening, and it couldn’t have dawned on me that what we said was proof of concept in blockchain was in that methodology. And then, we were seeing second generation tokens coming around. People were utilizing this technology in much more creative ways, beyond store value, using smart contract and we got to see coins for a specific theme which is providing some real utility, and that, to me, was really very exciting, because that was really the start of a new asset clause. And it’s not often we see the birth of a new asset clause. The last asset clause that evolved in finance was actually CDS, back in the early 2000s, and we saw-

Timothy Tam: And what does CDS stand for? Is it Credit-

Lewis Fellas: Credit Default Swap.

Timothy Tam: Default Swaps.

Lewis Fellas: And so, the Credit Default Swap was quite a unique product, at the time, but then, suddenly, as it became standardized and the contracts more regular, the open interest in it exploded and, obviously, there was an explosion to the point where it was missold on CDS products as CDOs…

Timothy Tam: Yeah. It’s like the housing crisis.

Lewis Fellas: Exactly. So, it got a bit of a bad reputation on some of the more complex derivative products. But it’s very rare that we see a new asset cross the wall, and so, when I looked at cryptocurrencies and I got over the initial bitcoin concentration, I was very excited to try to move into the hedge fund space in cryptocurrencies.

Timothy Tam: Very exciting. So, going from Harvard, forming your own fund, actually buy asset management. Can you tell our audience an overview of what the fund does and, I guess, what is the strategy of the fund, and what you invest in?

Lewis Fellas: Sure. Yeah. So, we have three pillars of the fund. We look at ICOs, which actually represent the smallest part of our fund. The reason being, is the ICO component is actually, probably, the most high risk. Also, the most liquid, and so, we have to limit that exposure and match it to the profile of the fund itself.

Lewis Fellas: So, the other two real dominant pillars are arbitrage trading, to take advantage of the inefficiencies in the market; and then, also timed the market, or fundamental investing, if you will.

Timothy Tam: So, can you share with us, Lewis, when you mentioned previously on those three pillars, how do you determine the splits between each of the pillars? Is it a fixed split, or is it moving, and can you give us an idea of the ranges?

Lewis Fellas: Yeah. So, typically, the ICO is the only one with a fixed weighting. We try to limit that exposure to no more than 10 percent of the book value. Typically, it’s much lower than that, because there are projects, we have to monetize them, we just don’t invest. Our threshold for analysis on ICOs is incredibly high, and because of that, there are very few projects that meet our criteria.

Lewis Fellas: The other two, arbitrage and market timing, it’s a very dynamic allocation. So when we see arbitrage spreads trading very wide, we’ll tend to allocate more capital in; whereas, market timing, it’s an extremely volatile asset clause. So, we have a very disciplined framework using the stop-loss methodology for stopping out, and then we have the factor-driven model for timing our entry and exit points. The complicated component, really, is the fact that we use our market time beta exposure as our arbitrage inventory; which is a little bit difficult for some people to understand, and yet, if we exit all of our positions, then we have very little inventory for running arbitrage part of that.

Lewis Fellas: So, there’s a definite interplay between the two, and so, it’s a very dynamic model.

Timothy Tam: Okay. Maybe, can you explain to the audience what you mean by inventory, I think, a lot of these financial terms for some of the newer traders and new investors to the market are probably not familiar with that. So, what is the concept of inventory, and then, how does it really relate to an arbitrage trade?

Lewis Fellas: Sure. So, just to step back from the word “inventory,” if you imagine the holding position, Ethereum, for example, in order to arbitrage Ethereum, you need to own some Ethereum, to begin with. So that is what I would classify as inventory. If we’re holding the position in Ether and we see an arbitrage opportunity, we can continue to hold that position, but within the portfolio, I continue to arbitrage that position and maintain the position.

Timothy Tam: That makes sense. So, you’re already holding a period. I mean, there are a lot new ICOs and platforms coming on where they talk about coin lendings. Have you looked at borrowing inventory or coin from some of these platforms and then paying them some type of fee of providing or doing an arbitrage on them and making more? Is that something you’re currently doing or …?

Lewis Fellas: It is something we are currently doing and it’s something that will expand. I think what we’re seeing in cryptocurrencies, is a very rapidly maturing exchange program. Exchanges will begin to offer more services for lending, mirroring what we see in traditional IPT’s and fixed income, which I think for investors is actually a very positive thing. See, it allows them to take short positions, which means it can create more defensive portfolios, more balance.

Timothy Tam: And smooth out the volatility.

Lewis Fellas: Exactly.

Timothy Tam: So, Lewis, the common question we get asked a lot of the time, you know with the investment funds out there, people give money to those investment funds, how do those funds think about security, and then also I guess safe custody of those coin assets? I mean, what is your view on that, how the industry handles it, and then how do you individually handle within your own fund as well?

Lewis Fellas: Yeah, so. I guess we separate safety and security.

Timothy Tam: Sure.

Lewis Fellas: So, safety begins with a man walking to the office door, and so you lock premises and begin to walk all the way through every step of your day, from logging onto a machine to two-factor identification to logging onto exchanges. You’ve got to look at every single aspect of the security chain for working that or to executing a trade until we turn the lights out.

Lewis Fellas: So, we have a big focus on that, a lot of the information is proprietary, and just encourage people to that to evaluate the chain from the beginning of the day until the end. What measures they can improve.

Lewis Fellas: With regards to custody, it’s a very challenging piece. It is the most common question asked by my investors – how do you custody assets. There’s no easy answer to it because the hardware, which obviously provides the best security if you can use a deep, cold storage solution. When you move into an institutional space, the challenge there is the investors will want to know that those are assets are held in the name of the fund itself, never in their names. Very challenging to do with a hardware device which is stored in a different location. So we have to balance how much cold storage we do in-house versus using third-party providers such as Gemini for cold storage of Bitcoin and Ethereum.

Lewis Fellas: The other approach to take after we’ve kind of optimized what we are holding for storage is, the diversification across your exchange risk.

Lewis Fellas: And so there are some exchangers which have the best liquidity, the best token selection, however, really don’t wanna have all of your eggs in one basket. So we take the very old fashion approach of making sure that we hold certain fixed percentage of assets, many aren’t exchanged any one time. That way, if there is an exchange breach, then we know what our loss would be on that one exchange.

Lewis Fellas: It’s not the best approach, you know we would like to get further due diligence on our exchanges, so exchange selection is absolutely key if you aren’t into hauling the assets in exchange. So, it’s a combination of due diligence, and then also old-fashioned diversification using an independent third-party such as Gemini for custody.

Timothy Tam: Got it. So it sounds like you keep a certain amount cold storage, and then you use some very traditional risk management where you’re only picking good exchanges and then you’re also diversifying. So you’re not having like, all of your Bitcoin in one exchange.

Lewis Fellas: Absolutely. There’s always a tradeoff between wanting to trade fast. It’s a very volatile market, but also you really want to have that security to it as well. And so, if you were to set yourself a personal limit of whether it’s 25 percent or five percent, at least you’d know your own risk of it – how much money can I lose if this exchange is met.

Timothy Tam: And then Lewis, being a professional fund manager in the cryptocurrency space, obviously markets are very volatile compared to traditional assets. Recently, we’ve seen a huge correction. I mean, what are your thoughts and general views on the current market environment, and then can I ask what your predictions for this year as well, too, for the remainder of 2018?

Lewis Fellas: OK. Let’s see the current weakness in the market is really being precipitated by some of the finance hacks, SEC ruling on exchanges in the US, we’ve been hit with a lot of negative views in sense to bring the markets lower. At the same time, the positive catalyst for encouraging new investors in would be the traditional or the kind of newer media formats. So Twitter, Facebook, Google, and unfortunately, all three platforms that recently banned cryptocurrency.

Lewis Fellas: So, it’s not bringing in the same amount of new money. And so what we’re really looking to see now is actual catalysts coming out of the ecosystem itself. So, we need to see a project begin to deliver, whether it’s scaling solutions or the actual utility tokens coming into fruition and delivering the viable product that people can begin to utilize.

Lewis Fellas: Gonna look at 2019, begin to predict how the markets will trade. The most obvious trend to me is that regulation will increase, and I believe people will start to see regulation approximately beginning close to an equity type of regulation. And that will force out some of the bad participants of the ICOs, which I think will be very helpful. But at the same time, it will create headwinds throughout the market. And so I think if I was an investor and I was trying to time this market, and so we’re very cognizant of that regulatory action, so they have to time advances in the technology versus advances in regulation in this space.

Timothy Tam: I guess from what you’re saying, it seems like once we see a stabilization in the regulatory environment, and you see some projects come to fruition then, hopefully, we see an uplift in the marketing year.

Lewis Fellas: I think so, I think so.

Timothy Tam: Okay, so you can give us an exact date, right?

Timothy Tam: October 11th, 2018.

Timothy Tam: maybe, no no. [laugh]

Timothy Tam: Lewis, can you talk a little bit about the cash exposure in your fund, and how you look at that exposure and how it changes, as well?

Lewis Fellas: Sure. This is actually a quite difficult topic for us when we speak with investors because every investor has a different perception of what the fund should achieve, or what an investment should achieve, and ultimately, the key is always preservation of capital. And so, a number of investors would just want an entire 1 beta exposure, i.e. fully invested at all times, other investors would like us to deliver an absolute return, whether or not to lower drawdowns. And so, there’s always a slight juggling act to balance that, but ultimately, the way we choose to manage things is basically a disciplined risk framework. We use trailing stop losses to manage our positions. And so, given a very highly-correlated asset clause, where all coins tend to move in sync, in certain periods, we do have times when we get the stock down naturally, and that’s just disciplined trading.

Lewis Fellas: And so in this periods, hopefully, we’ve caught an upswing then we then get stopped out on the trading basis, and then go into a higher holding with cash, and we then look to evaluate whether there’s a better entry into the market. And so our cash holding can vary quite dramatically. In December, for example, the beginning we were nearly fully invested. By the end of December, we were only 30 percent invested.

Timothy Tam: Okay, interesting.

Lewis Fellas: Now set us up for a very defensive position throughout January and February, where we saw higher volatility.

Timothy Tam: Well, it’s probably a little painful in January, but right now you look like a genius, clearly right?

Lewis Fellas: I don’t know. Let’s not talk ourselves up. March is gonna be a challenging month.

Timothy Tam: Sure, sure. Can you talk a little bit about the trends that you’re seeing in the sector in terms of investment funds, and also just institutional players looking to invest in the space, and where do you see it going this year?

Lewis Fellas: The expansion of the hedge funds, the managers in the space is set to continue. At the beginning of 2017, we had 37 hedge funds in this place. Six months later, we got to around 100. Right now, there are 226 funds. I would expect to see that continue to grow, but generally speaking, the AUM (assets under management) of these managers is quite low,. Also, the barrier to entry when the asset class is largely unregulated is also very low. So let’s come back to the earlier point about trends and regulation. I think the regulation will come in, and it will probably slow down and cause a few players to exit. So, we may see a pick up to a peak level of new managers, I would expect as regulation increases that to actually go in the other direction.

Timothy Tam: Thank you so much for your time, Lewis. I really, really appreciate it.

Lewis Fellas: It’s an absolute pleasure, thank you for having me.

Timothy Tam: Thank you.


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