Welcome back to the Radar Change with York Wealth Management. As it advises to some of the wealthiest families in the country, the Radar Change is a podcast designed to help you in the pursuit of building long-term wealth through the insights of some of the brightest minds in asset management. I'm your host, Murdoch Gadi, and in today's rock cast were joined by Clint, Maddoch, founder and director of digital asset funds management, or DFM, D-A-F-M for short. D-A-F-M operates multiple funds, including the digital income class, an income-focused fund in digital assets that applies a trading strategy originally developed by a hedge fund, a partner of theirs for traditional fixed income markets. If you're familiar with digital assets like Bitcoin and Ethereum, or you're still trying to figure out what exactly is a digital asset, this conversation will be very interesting for you. We explore with Clint broader questions about crypto markets like where is the industry headed? Has it matured beyond its early development and volatility? What if another Sam Bankman-freeed FTX style collapse happens? Can investors gain exposure to crypto in a way that avoids the extreme price swings? We've seen Bitcoin recently in the past five years, and is there a structured, regulated approach to integrating digital assets into various structures such as self-managed super funds? For me, one of the interesting takeaways is how the digital income class fund, which is established in 2021, has produced a three-year compound return of 48.21%, a 30.98% gain over the past year, and last month, as of time recording, did 4.05%. For context, since May 2021, Bitcoin, Villigan was side by side, has delivered an annualized return of 19.94%, but with substantial volatility, including deep drawdowns along the way. By contrast, the digital income class has maintained consistent returns with only one negative month in 44 months. For me, this really raises an interesting question. Is it long-term success in holding digital assets, as everyone likes to call it? Is it purely about the price appreciation and used hold on for dear life, and hope that is going to the moon in 10 years, or is there merit in still having exposure to this asset class in a more structured way or method that generates steady returns without relying on market direction? It's a good question. Another aspect worth unpacking is the strategy itself, originally developed to identify inefficiencies in traditional fixed income markets, such as Ben O'Limitoo, bonds, turn deposits, bank bills. It has since been adapted and refined for digital assets. One of the key reasons it continues to generate returns is due to the higher borrow costs in crypto markets compared to historic credit markets. When investors borrow Bitcoin or Ethereum, and why do they do it, essentially, they just borrow Bitcoin or Ethereum to leverage out the position because they want to go longer. They're using futures and forward contracts, which they often pay a premium for. This creates yield opportunities for those on the other side of the trade to essentially make money from this with the right strategy. This conversation of Clint is a lot of fun. Listen to him explain how all this works, the mechanics behind the strategy, and what it tells us about the broader evolution of the digital asset markets and where it's going. Before we get into this conversation, please remember, this real cast is made for entertainment purposes only. I encourage you to listen to the disclaimer at the end of the rock cast and keep your feedback coming. You can reach me at
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[email protected]. We'll have a look at your portfolio and see whether or not it's the right fit for you and your family. With that being said, I hope you enjoy this conversation as much as I did so sit back, relax, and enjoy it. Clint Maddoch. Welcome to the rate of change with your wealth management. My Maddoch. Thanks for having me. Good to have you on Clint. If anyone's wondering where I came across Clint, one of our guests that we've had on in the private lending space, so that we're looking into these guys personally. We're very, very happy that I should reach out. Why don't we begin like we always do and why don't you tell us a little bit about yourself and how you're going into financial markets? No problem. I look at Spain more years than I care to admit, but it's going right back. I found myself at UNSW studying engineering and I received an email from an uncle over in London. He said, what are you doing, what are you up to, and I'm not really sure, I'm not really enjoying engineering so much. He said, well, I'm working at a bank at a moment and there's these guys with our background similar to yours and they're making more money than they should. So if you like maths and engineering, then give it a crack. So basically carp a bond all of the investment banks and around the year 2000 and see where that got me and ended up at a market maker in Sydney that was just establishing their roots in Asia Pacific, called AMC back in the early 2000s and they're a market maker, a Dutch market maker and I think at the time they had around six employees and they had something like 1500 applicants, it's a pretty hot space to be and I was one of the four people that got off of the job back then and actually said no, at the time and for my tower between my legs and chased up the end there at the time so I've made a mistake, would you reconsider me and fortunately he did and the rest is history in terms of my career in the markets and especially in market making and my approach to the markets, it was set well over 20 years ago now. I've said it once, I'll say it a thousand times, I find some of the most interesting people in finance, never had the degree in finance, they always like start, I want to become an architect, you want to just start in a particular path and then you wake up one day and you go home in a second, if the market crashes, I might have to get a cab license because I've noticed phenomenal as the DeVinci key that you're studying next to and then you find yourself in finance and the world's just so much bigger, how interesting is when you meet people, the paths of how you got there is not where they started, it's so common isn't it? So I was studying aerospace engineering, of all things, yeah, of planes, I was in the Air Force for the two years of the Defence Force Academy and it wasn't for me so I was kind of drifting and yeah, you and I saw you introduced the Master of Commerce degree at the same time and yeah, that was, that was the path I was set on, a lot of chance, really isn't it? You know, when you're doing my thing and the sliding doors and now this opportunity presented itself and yeah, there you go, but it was around that time in finance when they were starting to take on the more quantitative guys from science, engineering, actuarials, it was around the early 2000s and nowadays most of the wires in the market making space and the banks will be from the more scientific background as much as economics and commerce. So I was kind of on the start of that. He's in an interesting, like if you look back at it, that was early, the other thing that was really early was like doing graphic design, which I did it personally just to get an architecture with washers and washers. I'm now you fast forward 20 years, everything's essentially like AI, can you market yourself, you know, can you sit in front of a screen, can you use essentially Adobe, like it's literally can you program or, you know, do you understand how social media works, it's amazing how fast the world has changed. So speaking about how fast the world has changed, with what you guys do, your world is essentially in the crypto space, correct? Yeah, look, we operate the investment strategy. Just just one second. So the firm is digital asset funds management, DAFM for short, correct? Sorry for coming off, I apologize, but why don't we just start here, why don't we just give you a bit of an understanding of, you know, who DAFM is, you know, what do you guys and girls do, you know, what's the philosophy and, you know, how do you operate, please? Yeah, the problem's so, being trading digital asset funds management is the manager of the fund, and that's been going for, thus shy of four years now. So we've got an Australian unit trust, which is the investment vehicle, and its primary focus is to trade digital assets, which let's face of the volumes in Bitcoin and Ethereum primarily, looking at, you know, 98% of the market volumes is going to be in those two products. So primarily we're trading Bitcoin and Ethereum in the derivatives markets. So we work, where do I'm going to go on the background of the DAFM? Why don't we start here, right? Because what's interesting about what you guys do is, you know, people here, crypto, they just think, essentially, I'm buying and holding Bitcoin, correct? But what you're doing is completely different, but in that space. And to my understanding, and please explain it, you're, you're taking the strategy of, you know, let's call it what is real world compared to crypto world, you know, that's how some people perceive it. But now crypto world's becoming real world. You're essentially taking algorithmic trading strategies, which worked at major investment banks, you know, in the futures market, and you've applied that to the digital world and digital assets. Is that how you best explain it or how would you explain it? So we've taken existing trading strategies out of the trade forward, the traditional finance well. And we've repurposed those exact strategies from the user interface at the front end through to the code base on the back end through to the teams running the strategy. So we've taken that from trade flight. And then we've applied that into the digital asset markets, primarily Bitcoin. So we're able to do that around 2019, because that's, that's when the digital asset, Bitcoin markets became mature enough that a derivatives market spring up around them, offering the ability to just as easily go long as short. So it really opened up our world in terms of the number of products we could trade in terms of the style of strategy that we could apply into these markets, which although the underlying asset Bitcoin is very different from what we might have been trading otherwise, you know, at SX200 stock or bond future, or bond, for example, instead we're trading Bitcoin and Bitcoin futures, but, you know, the core, code, the core strategy, it's, it's very similar in that respect. So, you know, we don't mind whether the market goes up, we don't mind whether the market goes down, all we care about is, can we model these instruments mathematically, can we work out what relationships exist that's when the underlying Bitcoin and the various products that exist on the fragmented markets that are popping up around the world that trade these crypto derivative products? So a lot of people, since 2019, just to kind of paint the picture, what's the level of volatility being so hypothetically if you just held Bitcoin, because you know, there's been some really large swings in comparison to the performance that you've had with the strategy? Yeah, that's a really interesting point. We launched our fund publicly on April May 2021, so just under four years ago. At the time, Bitcoin was around US, around 40, 50,000, so 60, 70, was it? It's annualized return since then to, well, at least to the end of January, to come off a little bit in the last month, but to the end of January, the annualized return was sitting around 20, 22% annualized. Our fund's performance was around 23% annualized, so it turns out that buying and holding Bitcoin performance was on a very similar level to our fund, however, what you don't see is what happened in the interim, from 2021, there's a big run out, 68,000, FTX collapse, Bitcoin was down around 16, 17,000, all US dollars, and then since we've seen Trump elected through November, hit all time highs of around 110,000 dollars, so you've been on this wild rollercoaster road with Bitcoin to achieve a return on power with a little, we're achieving market neutral, so we only had, in all that time, we only had one month where we lost money out of 45 months of being live now, so we had 44 positive months with Bitcoin on this wild ride. I think it's a pretty compelling argument to approach the market in a systematic, methodical way, and yeah, look, it's been our volatile markets, very volatile markets, and what would seem happen over the years is that as Bitcoin, especially, is more widely adopted, that we've seen some of the volatility at the Bitcoin reduce compared, especially compared to the trade market, say S&P 500, the VIX, for example, those volatility, the tillies are converging over time. That's fascinating, so what I'm understanding, because if you think about it, if you buy it in your whole spot, it all depends what price you paid for it, correct? And unfortunately, with crypto, having you found that the best time to buy is whenever it hates it, and you think it's going to go in the bin, but no one else. Like, as if they require the thing to go from $33,000 to $60,000 just to get confidence, and then they blink, and then they're paying $70,000, and then it hits $110,000, and it's like everyone should sell, but no one does. And then what we wake up this morning, $79,700 and one, I believe this morning, but what's fascinating about this as well, is last night in the US, stocks plunged, so today we're recording on the 11th of March, and pretty much it's sold off because the anxiety of tariffs and government fringes, and I think the Nasdaq 100 as an example posted its worst day since 2022, wiping off more than a trillion dollars in value. Meanwhile, Bitcoin briefly sank below $78,000, so it's very, very interesting markets, and well, look, why I'm painting this picture, and I wouldn't mind new explaining, but is it correct in my understanding that how you operate does bet I, you know, in sideways kind of markets, and essentially, you know, the big volatile moves, so you benefit from essentially like holding patterns, and like, how does it work, because, you know, if someone's looking here and going, what do I do? Do I, you know, wait to essentially buy Bitcoin on the dip, or is there another way to make Bitcoin that might be potentially a safer, less volatile means of doing. So, you know, in my understanding, that's essentially something that your company, you know, offers as a strategy. How does that all work? I think there's two things in that. There's market timing, especially of Bitcoin, and how do we, how do we profit from the volatility in the markets, and I would say that when it comes to market timing, look, that's not my strong point, that's not in my world at all. I'm just as emotional as the rest of you when it comes to trying to time my, my purchase in one of the hard lessons I've learned is to not try and to just stick with the market neutral approach. So, you know, personally, yeah, I'll hold some Bitcoin and other digital assets, but in terms of trading that, I've learned to just find hold, and for HODL, as they say, Bitcoin is a hold on for dear life. So, I think someone, someone misty belt holds on a, on a telegram chat, and it's just taken off, as HODL is in Bitcoin. So, typically people will buy their Bitcoin, and they just won't sell. And I think that teaches a lot about market timing as well, because when I was talking earlier about the wild ride that Bitcoin has been on, you know, if you do, it did have cash on the sidelines towards the end of 2022, and you manage to see, you know, all of the bad news is our big coins are low, it's not seen for quite some time in Bitcoin, and you're able to say, you know, I believe Bitcoin still has a future a longer term. You've got to remember, at the time, there were a lot of people out there, big names, saying, you know, Bitcoin is going to zero, has no intrinsic value, you know, you'd be right, you're not buying it, but, you know, if you had, and you know, bought it for, say, 20,000 US, you're sitting on a return of, you know, today, 4X, you know, at the highest, 4.5X, in a barely over two years, but like I said, when we launched our fund, it was sitting around 40, 50,000 US, so now you're looking at a return of, not even 2X, right, you know, 1.5, 1.2X, so, you know, depending on when you buy out and look at the market dynamics, and all the doom and gloom or not, you know, it makes a huge outcome in the, in the final, your final P&L, so that's, I think why there's, there is a lot of this modeling in Bitcoin, because there's the belief that over the long term, given it a scarce asset, that's not, you know, that's not what we do at DASM, what we do is we trade the ups and the downs in the market in a neutral fashion, and look for the small inefficiencies that exist in these markets. So, it's a new market, Bitcoin, you know, it's been around some 2009, as we know it, Bitcoin as we know it, but the derivatives markets that sprang up around it, you're looking for the 6 or 7 years, they started to get a foothold, probably around 5, 6 years ago, there was enough volume there for more professional, institutional, great outfit to start getting involved, like us, so you know, we, there's no point in us looking for nickels and dimes, you know, in a market that's turning over a few million dollars a day, you know, we need people to trade against, we need interest from the public and investors, and it wasn't until, you know, the late teens that know were of the belief that that was there, we did our internal market analysis and saw really quite huge inefficiencies in these leading derivatives exchanges in that space. So we built, like, so we modified our systems in order to take advantage of those inefficiencies and there just wasn't enough capital in the space to absorb the profitability that we saw, and that's why we decided to launch the fund, so we had been trading it for a couple of years, but the opportunities were just too big and so by 2021 we'd got all of the documentation together in order to launch that fund and try and raise money as quickly as we could in order to take advantage. How much money's in the fund? At the moment, we've got around 30 million Aussie, you know, and yeah, like I said, it's all market neutral, so you know, how many, how many funds are you operating? So we've got this value in the interest, which is the income fund, and then also sitting under that, sitting under that DAFM umbrella, we've got a Bitcoin tracker, which just, it's not only enough, that's the price of Bitcoin, any unit trust. So, is that paying any income on top of holding just a Bitcoin or? It doesn't pay out any income, however, what we do with the Bitcoin holdings within that unit trust is we loan it to our market neutral strategy and it nets, it nets around 3% per annum to the Bitcoin unit holdings. So, over the years since we launched the fund, the Bitcoin return is roughly 10 to 12% higher than the Bitcoin returns in Aussie dollar change. Is that net after phase? Yeah, everything that's all net after phase. You know, you've got the security of having the Bitcoin managed by professionals like us, so you don't have to worry about your private keys, you don't have to route losing your password to exchange, you don't have to worry about doing, you know, your customer on a crypto exchange, which you may or may not trust very highly, you're handing over passports driver's licenses. That's the deeds, the self managed super or family actions, you don't have to worry about all that and your accountant can get the tech statements in every year and there'll be enough to approve that as well. We're definitely going to get into how the ago works and everything, but since we're talking about it, I wouldn't mind actually digging into this a bit because, and the topic which we want to discuss is, as an example, super valuation funds, like self managed super funds, which are very, very tight. We had a client pass away and they deal with Westpac and the fact the client held Bitcoin directly made it a nightmare to deal with probate, right? They looked down the banking accounts and the process has should have taken a couple of months and it had become substantially extended to the frustration of the family, so we had to help with that process. But can you just explain what changes have been made in the industry and maybe touch on as well. There's been a launch of a number of ETFs, right? So these ETFs can now be held within 5-1Ks and essentially Australian super funds, right? So that's been the first launch, but then my understanding is firms like yourself are now becoming available, which means that we can now get access to essentially a crypto inside self managed super funds, because what I didn't like when I'm seeing these ETFs, is the ETFs are grouping so many fees out. What's interesting is your Bitcoin on the HODL side is still paying 3%, so you're performing better than, but if you're holding these direct ETFs, ETFs, I think it's about 10 of them, you actually work out that you're going to be receiving like a large percentage less than what the spot price is worth in say you held it for five years. Is that accurate? And do you want to give it a bit of color around like what's actually changed? That's led to this because that's quite interesting. Yeah, the ETFs are fascinating and they launched in the US last year, January 2024 and the demand was immense. They went from launching to when I checked the other week, they had 100 billion US dollars invested into those ETFs in 13 months. It was huge, huge. There's been nothing like it ever launched before. There's always the Bitcoin and gold comparison and if you look up their gold ETFs, they launched in 2003 and it took years, how many years? I'm sure how many, it was like nine years or something until they reached the similar kind of AUM, the Bitcoin reached in 13 months. Of seven years, seven years, it took for the gold to reach those sort of levels. ETFs, the mechanics of that, subscriptions and money flows in, the ETF issuers go to the spot market and they just buy Bitcoin. There's no two ways about it. They want to reduce their tracking hour. To do that, they buy Bitcoin towards the end of the day. They can publish their net asset values versus the returns of Bitcoin. As long as they've done that towards the end of the day, they don't care how much they've driven up the price of Bitcoin. As long as they've got feelings twice to be closing. And so you're seeing literally billions of dollars flow in over just 13 months. We're talking 55, 60 weeks to get those sort of inflows. You'd be looking at hundreds of millions of dollars a day of Bitcoin purchases all focused towards that window towards the end of the day. So there's a huge tailwind for the price of Bitcoin. Like I said, you've seen that, you've seen that go to exponential last year, especially towards the end of the year with the Trump election. But primarily the ETFs are traded in the US. They're a handful trading now in Australia. But from what I've seen, the AUM is still pretty low. I think while you're also seeing the states, obviously they're US denominates. So as an Aussie, you're exposed to the US dollar risk. So that's not obvious investment for an Aussie. Aussie fund and they are charging fees as well, which I don't think they're too big in terms of fees charged, but relative to your index-tracking, index-climbing ETFs, yeah, the fees are a lot higher. And with competition, they'll come down. And it would be interesting to see what the ETFs do in Australia as well. That just doesn't seem to have been nearly the demand in Australia as there has been in the US, at least by looking at the AUMs at the ETFs here. Yeah, it's very interesting just the uptake. It's like everyone you can hold it outside. But look, what's interesting is, well, as an advisor in Australia, we're not allowed to essentially provide a client advice, even if it was a wholesale individual because it's unregulated. Look, technically, you know what I mean? And then essentially, you know, be reciprocated or emunerated for essentially that advice because it's not held within, you know, like the platforms, correct? But it was my understanding the vehicle which you're operating, you know, it can be put on the likes of net-wealth premium hub 24, right? And then held within, you know, a trust or a self-managed super fund, and then easily accounted for, correct? And then since you've got, just as something as simple as the Bitcoin, since it's Bitcoin, you know, plus 3%, you know, the ETFs are essentially the ETF minus, you know, the holding price minus the fee. Is that my understanding of what's funny happening here? Yeah, the ETF will be, like I say, the Bitcoin price will last at 50-100 basis points per annum, particularly the fees that I've seen, whereas our Bitcoin tractor will be Bitcoin plus approximately 3%, isn't that? Yeah, it's just so interesting, just the uptake. Especially, especially over if you're going to hold Bitcoin for a number of years, yeah, you'll see some significant outperforms. Yeah, okay. Again, we're going to get it back to the aga, but since we're here, we might as well just tuck into the mechanics. So one thing everyone's going to ask is, you know, what's the risks? Because everyone saw good old-fashioned Sam Beckman Freed go under and I think I saw the other day was a Tucker Carlson, preceded to interview him from prison. It was hilarious. He literally popped up within the week, like he's literally his hair is just still a mess, you know, biggest cook of the century, and he's doing an interview from prison, just going to house prison life, man. So which brings you to the question, right? You've seen this, you've seen Binance, you've seen a lot of essentially third-party softwares, you know, come up for London, but can you, for people that don't understand, can you please explain the difference between a cold wallet and essentially holding your, you know, Bitcoin on exchange? And what is the risk of holding an exchange and how do you mitigate against that? Because as you mentioned, right, you're doing high amount of aga, which require a lot of volume. So, you know, can you hold it in essentially a cold wallet or do you have to hold an exchange in order to get the liquidity? No. So, one of the biggest risks that we face as a fund is the counterparty risk. And the only way to avoid that and own Bitcoin, I actually made the distinction that we've got the Bitcoin tracker on, and we've got the market neutral fund. And our flag should find is the market digital. That's returns, it's actually returns more than what Bitcoin has returned since we launched without the volatility, but you know, a lot of digital assets, a lot of Bitcoin that's that's kind of my personal view. That's beside the point that's not what we're doing the fund. But look, if you want, if you want to own Bitcoin and not have the county partners, there's a saying, they say, not your key, not your Bitcoin, you know, like if you don't, if you don't own the password to access that Bitcoin, then it can be stolen, it can be hacked, it can be lost. Like it's not in cold storage. If you hold it in cold storage, you have the keys to that. You know, like you put it on a USB stick, you put that in your vault. And you know, you put that in your side, like that, then it's secure, it can't be stolen. But then again, someone could, someone could come and steal your vault, someone could steal a USB, you could lose, you could lose the password. And then again, you've lost, you've lost Bitcoin. So it's none of its without risk. None of us without risk. So we understand the risk and our risk with our Bitcoin backup is is a large extent. It's just the counterparty risk. Because we're a professional organization. And we know, we think we know better than others how to handle those risks. And that's counterparty risk. And we spread that amongst as many counterparties as we can. And we monitor our counterparties. You know, we have all risk management systems and fail safes to in place. So as best as possible, we avoid counterparty risk. And you know, there have been enough examples since we launched to the fund four years ago and be trading it along and up to, we've told it a few lessons, primarily that FTX lesson, which did burn us to some extent. So how do you deal with FTX? Is there a company which you can, like, my issue here is liquidity, right? Because you require it to essentially have these algos running all the time and settle, it's, you know, you can't just hold called storage, right? Like a give up trade, you know, on Aussie equities, you know, you know, hold it, it needs to settle, right? So in order for the speed execution and the settlement, like, are you doing that in-house? Or I think one of your colleagues mentioned that there's maybe a company which you use that provides that level of liquidity, which you can deal with, you know, how does that work? Yeah, we use that party custodian relationships to manage the equity between our wallets and between the wallets at the exchange and we'll have wallets at the custodian to hold the equity. So we try and hold as little as possible on exchange. We can't avoid holding our equity, some of our equity on exchange, because we're trading you just contracts. We need the equity there in order to hold our positions in order to open positions and hold our positions. We need to have equity there. So the more opportunities we see on the exchanges, the more equity we need to have hold there, to hold there. If there aren't opportunities, then we can hold that in the custodian. So there's this ongoing optimization of where we hold the equity, we've got real-time risk management systems to show us where equity is being held, where we're expose more than other places and when and where we should meet them. But that's something that we can't avoid because we're actively trading the derivative contracts and you have to have the equity on the exchange to trade them. Now the industry is moving away from having to have your equity on the exchange. They call it the off exchange settlement where we can use our custodian, we can use their relationship with the exchanges and then we can reflect our balances with the custodian onto the exchange. We have trading gains and trading losses. They can be settled at the end of the day, which will require our agreement, the custodian's agreement and the exchange's agreement in order to move those funds. There's something like FTX. We could have our equity at the custodian, that will be reflected onto the FTX account. We can trade FTX as much as we want. FTX pulls all the money out, fraudently trading losses, whatever we don't care. And then at the end of the day, our money is still with the custodian. FTX is falling over, we're still with it. And that's where the industry's moving. A lot of the exchanges have either set it up or in the process of setting it up and where in discussions with the custodians and the exchanges in order to have all of our accounts set up with the off exchange settlement and we expect that will happen in production in the next three to six months. So that biggest risk that we face, the counterparty risk will be largely remaining. Thanks for just discussing that. Because as you can appreciate, there's a lot of families which we deal with, a lot of intergenerational wealth, a lot of people understand it, don't understand it, but now it's happening with digital assets. Wind true agree, it's now becoming an asset class that people can't not look at anymore. It's now part of the human fabric. You know, mainly it's into woven. It's as much as prevalenting or gold or you know, Aussie or domestic. It's now just technically an asset class, right? But at the end of the day, when people were looking at this, sometimes they're like, everyone wants to make money, right? But I think some behavioral psychology says, if someone loses 10%, it actually affects the more than if they make 30%. You know what I mean? So thank you for explaining the risk and how you mitigate against that because to my understanding, the biggest risk after we saw FTX is that third party, everything is sitting on that particular platform and you find yourself in a world of pain where essentially the platform gets shut down, you money gets locked out, you know, and then which can happen in Aussie batteries as well, look at Robin Hood, like it can happen, right? But it's not unique, it's not unique, it's just that the popular press loves to beat up on concrete day. So they have a lot to beat up on what they don't understand as well. Yeah, no, it makes a lot of sense. It's a thank you very much for explaining that. So when we get into the fun part now, right, you know, how is how is the jam made, you know, how is this manufacturing, you know, how's the algorithm, how does it work? You know, can you give an example of, you know, today's the month of, you know, it's, it's currently March, right? You've got your futures contracts, like what are you doing here? These monthly futures, how does the process works as well? So the futures contracts, like most markets, you'll see the majority of the interest in the short term contracts. So I like it, I like it into trading yields. So whether it's turn deposits or bonds, you can think that there's, there's a lot of interest in whatever yields doing in the short term, you can have a lot of confidence in, you know, I want to turn deposit in three months, I can go to four different banks and I'll give me a pretty much the same price. But if you go out, you know, I want to turn deposit five years, maybe you struggle to get a quote, the process are quite a little bit, quite a bit different. Now it's the same with the futures we're trading. We know very precisely what's happening in the short term and in the long term, yeah, it's a little bit more uncertain. What our expertise is, isn't working out, what, what yield should the market be paying in the short term and the long term. And because we're connected to all of these exchanges, which, which are, which are quiet, I have to say, there's a lot of uncertainty in it with the index exchange, you know, there's jurisdiction issues, and we'll begin, say, Japan, from Singapore, some in Ireland, some in London, there are particular investors that can access some exchanges and not others, there might be some jurisdictional issues. And so we find that on the exchanges, they can be trading at different levels of yield, say, I want to get a term deposit in the UK, we might find that there's, there's a better rate there than there is in Tokyo, maybe it's because people, the style of investor changes as the world speaks. But what we do is we'll trade 24 hours a day, seven days a week. And we're able to do that at high frequency. So even little small changes in what those yields are doing, we're able to take advantage of those. We might be able to buy it by cheap in Tokyo and then sell a, sell a yield a little bit more expensive in London. But we do that all day, every day. You know, our turnover per month will be in the billions of dollars, just trying to chip away that making those markets more efficient. And so again, with the bond analogy, we might say, you know, I, some of the banks in the US, right, they, they, they, they sold, they sold yields at 1%, you know, 10 year yield 1%. You know, over the 10 years, they know they'll get their 1% return. But what happens in the meantime, yields might go 2, 3, 4, 5%, and that's what happens, no underwater. But they know if they can hold on with enough liquidity, they'll get their 1% yield. So we're doing the digital market, digital asset markets, it's a similar thing primarily on a, on a Bitcoin yield, maybe up to 12 months. We might be able to get 12%. That's a fairly realistic yield on Bitcoin out, out for one year. And we know that if nothing happens, we'll still make 12%. But if the yields go up, you know, we can sell that 14, 16%. If they come down 10, 8%, then we can take off the position and make money. So we make money from yields moving up and down and providing liquidity into their space. And we can make money because the yields on other exchanges are different relative to each other. So we're able to really actively trade the yields on one exchange versus another, but also actively trade the absolute level of the yields. And so combined, we're able to market neutral. So the direction of Bitcoin goes up or down. We don't really mind what we really care about or what are the what are the yields doing in that space because that that's what gives us the market neutral returns in that space. So just to understand correctly, the algorithm isn't looking, is the algorithm looking at, say, big prices on, you know, if Bitcoin's showing, you know, 80,000 on one and today it's 79,000 somewhere else. Are you looking at arbitrage? Are you purely operating inside the, you know, the fixed income component offering of Bitcoin and taking the up there? You're looking at spot or is it purely just the income side? We look, we look and trade spot, but primarily our offer is generated from looking at the yields in that space. You'll find that the spot markets now in Bitcoin are so efficient. Wherever the, if there's liquidity, those markets are so efficient, you can get, you can get some proper size away. If you want to, if you want to divide Bitcoin, you get some proper size away and you want to even move the market, they're so efficient. Sure, if you go to smaller, less trustworthy exchanges, yeah, you might find that, you know, that are pure arbitrage, but it's pretty rare, right? In these markets, there are enough professional players out there that, those are upset, have disappeared. Yeah, look, we, so far so false to summarize what this does. The algorithm does essentially in like a paragraph. I would say that the algorithm is taking advantage of mis, of different prices on yields over, you know, over a duration and you're essentially, you know, what you're really doing by the sound of it, you're essentially running a carry trade, you know, picking up money, you know, borrowing cheaper than in Japan and then essentially lending it out in UK, Australia or something like that, which all makes sense. But if you do that in, in essentially normal currency land, just like we've seen happen historically, when the Japanese yen ran up to, you know, 100 to one in Australia from 60, right in a very short space of time, it all unwound incredibly quick and anyone essentially borrowing in Japanese yen and then purchasing in video, proceeded to get their hands completely torched and then online really quick in it, you've got a short squeeze, right? Does that happen in the land of, you know, chasing yields in digital assets? Absolutely, you melt down. So the example you used, there was this big currency risk involved in that. That's correct. So we don't, we don't have the currency risk in what we trade. So everything's hedged back into Australian dollars for Australian investors. Essentially our exposure is US dollars and then we put an Aussie dollar hedge over that. So we don't, we don't have to worry about where people are borrowing and investing so much, although it would definitely, definitely that, that's a trade, that carry trade, that pure carry trade, you know, that exist, it's a part, it's a part of what we do, it's not a large group. But what we see happen is in times of exuberance, those yields in the digital assets space, they do get really heated. So we saw in the past 12 months, when it was last, last April, those yields got to around 25 percent in your life, digital assets space. So it's huge. You know, you could borrow, you could borrow a fair in the US four or five percent and you could invest that into the crypto markets, it's 25 percent, pure carry. Those, what you've, what we found is that the yields, as they get it up, might happen slowly over the course of months. But when they collapse, they collapse very, very quickly. And when we, when we launched the fund, we're very bullish on, on how we would go, the yields, the yields when we started, they got, you know, in our first full month of results, those yields got close to 50 percent in your lives. And so you see our first published month of performance, was just under 30 percent for the month, because that collapse in yields was so severe. We have this, we have these positions. And if nothing had happened, like I said, you know, you're selling, you're selling bonds, you're buying bonds with the yield of 50 percent, you know, you don't even mind if it takes six months or 12 months for that to play out, no other trades, you know, you're going to make that sort of return. But what we saw was, it didn't take six months to play out, to play it out over, over the course of, of one day. So instead of making 50 percent, annualized over six months, we made just under 30 percent in the first month alone. So that, that's, they're the sort of collapses we see, is this exuberance, people get leverage, leverage positions, integer assets, typically long. We can trade into that, we can provide efficiency. But when that leverage disappears, it disappears very quickly. And that's what leads to us, having some really good returns for fun. I suppose another simple question that I'll probably get asked, right, is, you know, people might completely understand, you know, how the borrowing game works, you know, in essentially the old world. Let's call the old world a new world, not so simple, right? You know, we've just had the interest rate cut in Australia. You know, interest rates went up, went down. And people can very easily see, compared to, you know, mortgage, you know, essentially the interest rates went from two to percent to six percent, right? And then everyone can feel that pinch at home. And then they can understand completely why, you know, if they're getting a probable lender, they might be getting IBA cash rate plus five six seven, right? And then people are taking a capital, borrowing that money, purchasing profit, properties, doing a business or something equivalent, right? So for people out there that don't really understand how digital markets work, why would borrower in digital asset land be seeking, you know, essentially an interest-based loan in digital currency? Is it purely from a trading perspective or other other assets, which you can now purchase since this markets become a lot, you know, more mature that you can actually quite literally borrow, you know, a million dollars worth of Bitcoin at 12% to do something else, like what's happening? It can only clear they're really just borrowing to get long the underlying. So you're borrowing, you're borrowing to get long, you're borrowing to get long, you're borrowing to get long. And if you believe that's going, you know, traditional finance markets, what's a good geoflase? It's 220%, 25%, right? Yeah, sure, in the hope it goes up that much, but a good year in digital assets, that's like, you know, Bitcoin going from 30,000 to 100,000, and that's like the bill with it. That's probably like your least leverage return, like Solana or any number of what they call shipcoins, they'll go up 10, 100 eggs. So what does it matter if I'm paying 12% to get that? Like I happily did that, if I'm so confident. And so that's what we're seeing is just this exuberance in the market and people are happy to pay for that. It's a completely different world, old world and you know, it's on steroids. Everything happens so much faster. Yeah, this is a great way to explain it. It's old world, new world, it's just on steroids, right? But yeah, now it's interesting. Okay, so if I'm understanding your strategy now and then starting to really make sense is what you're really trying to do is capitalize on the difference in yields. So you're not even, you're not really even taking a view on the main fund on what you're looking for as essentially liquidity pools. And what benefits you as essentially the market moves around, based on people's demand on what they're going to borrow for, right? If there's increased demand, and people think it's going to keep on running, those interest rates might go 10, 11, 12, 15%, you take advantage of that. And you're not doing it emotionally. You're an algorithm essentially looking around globally in a very high-liquid market and then making those trades to pick up those numbers. Yeah, exactly. We're looking at the relationship between all of the exchanges, between all of the maturities of the yields and the algorithm's just rebalancing, which exchange do I have exposure to, which maturity do I have exposure to? How do I balance this? How do we, how do we bias the position? What are the absolute levels of the yield? You know, you know, if the, if the character is yielding 50%, we may as well, we may as well put everything into that because that's amazing. You know, like, yeah, so it's just constantly doing this, this rebalance and then we have the team in the background, yeah, well, analyzing the markets, you know, where are the opportunities? Which markets are hard? You know, what are the new products? You know, where are the volumes shifting? There aren't, is there any smoke on a particular exchange? Should we be, should we be pulling assets from there? For example, you know, there are the volumes, the volumes dying in a particular exchange. What's the reason for that? So that it's always, the team's always iterating and improving and looking around the most, the algorithm's just constantly trading, trading, trading, looking to the I'm just trying to get explained in case like, you know, you know, you talk like elevated talk, it's like, hey, you met it for me today. What do they do? It's like, you know, what's the elevated pitch? And I think I would say to someone now, it's like, do you remember, you know, essentially a while ago, you know, people ran that bond scamping strategy, like literally scamping yields? That's exactly what these guys are doing. They're using essentially an algorithm, so they don't have to do it manually to essentially scout interest-based yields, you know, via highly liquid digital assets and mainly Bitcoin and Ethereum. Is that probably the simplest way I can explain it? Yeah, absolutely. It's like, we don't care what the Aussie dollar is going, we don't care what the US dollar's going, we don't care where the yen's going, we're like, but what are the yields doing on the end? What are the yields doing on the dollar? You know, can we, can we arbitrage that and hedge it? That's all we're doing. That's it. That's the easiest way to explain it and understand it to you. You're track-fired, I like that. They understand what a term deposit is, they understand what a yield is. We're doing that through derivative contracts in the crypto space. Simple as that. The only question I have right now. This is just, can you take what you're doing and then proceed to, because you said it's US dollar base for the funds Aussie dollars, right? But the Aussie dollars just as volatile as any other currency, you know, in the old world, as we say. Is there a means to marry the two? Typically, the contracts are denominated in either US dollars or digital asset currencies themselves. No, no apologies. I understand that. But essentially, you're coming back and then essentially back to backing it, you know, when you receive the US dollars, you're back to backing it on the Aussie. So the clients are saving US dollars in their account, right? Do you have the capacity to essentially run an internal hedge? So even though you're benefiting on the main fund regarding the algo within the yields out, we're still taking currency risks in the form of as being an Aussie dollar dominator fund, right? Do you have the capacity to theoretically use the same mechanics which you're doing to improve how things are going in digital world, essentially, in a foreign currency land to essentially, well, technically double up, double dip, most old world and new world. You mean port the strategy into old world? Well, we'll hold, okay, so we're with the fund. Are you paying out monthly? We'll pay out quarterly. So you're paying out quarterly, right? Seeing that quarter, you're holding those dollars in the interim, correct? To get dispersed. One of our assets. So we get Aussie dollar investment. We'll turn that into either US dollars or Bitcoin. So all of our equity for the fund will be US dollars or Bitcoin. But we know how much that equities were in Aussie dollars. And so we will have a forward hedge on that in trade for our world. So even though we'll have all of the funds assets not in Aussie dollars, it is hedged back to Aussie dollars. So it doesn't matter where US goes. It doesn't matter where Bitcoin goes. Got it. All of our returns, you know, the question we sometimes ask, no, are you benefiting because the Aussies been so weak against the US for years now? No, we're not. Our returns will be way higher if we hadn't hedged it. But again, we don't take, we take as little risk as we can and it's very easy thing for us to hedge that Aussie US exposure. Well, maybe that's a very simple way of doing it since you've got the main fund, which essentially, you know, is hedged, right? It comes back nice and tidy. Would you consider opening up a second fund that's unhaged if someone wants to take their current serious? Yeah, we actually have that. We've got a came in fund that we just launched in November, which is exactly the same strategy without the hedge. Perfect. So it's a US dollar, US dollar fund. So its performance is a little bit higher than the Aussie dollar one because we don't have, we don't have to pay the cost of the hedge on that. What's the difference in returns? I think over, was it three months? Like one percent higher over the three months? Along those lines, don't blame me on that. I have to pull it up. But yeah, it's a good higher. Yeah, this is very, very, very interesting. Is there anything that I've kind of missed? When you have conversations with other people and they're digging into the grainer and the fund staff, right? Is there anything else people ask that's very interesting that, you know, yeah, I didn't think about that way. I think the way we've set it up, we want to give people the confidence to invest in this and one of those things that we've done is to pay out quarterly full of the income. And because our returns are so high, I've been so high, that the investor can get back their money, a good chunk of it relatively quickly. So in the last 12 months, 2024, our return just over 30%. And if you take that distribution, you don't have to reinvest it. There's an option to reinvest or you can say the distribution. But that's paid out quarterly. So we're looking to reward people for investing in this. So we're very liquid and it's monthly, monthly subscriptions or redemption. Because we're trading liquid instruments, we can process those very quickly without any harm to it's rather investors. And the markets are liquid and it's not going to affect their returns. This has actually been very interesting. I came into this conversation, how are you going? Oh, look, it's an interesting way to make money out of taking arbitrage on Bitcoin. But the more we have this conversation, what I'm starting to realise, in Australia right now, there's a number of players that present themselves as an income-based fund, right? So essentially using high-frequency trading to make margins around hybrid notes, various bonds, right? And then they're presenting themselves as essentially an income strategy in Australia market, which is actually a conservative means of generating seven, eight, nine percent as an income in a client's portfolio to generate income for a pensioner or something equivalent. I actually placed you essentially as technically like offensive, but you know, an hour ago kind of perspective, but the more I'm chatting to you, when I'm trying to realise is is it accurate in this conversation that you're actually more of an income strategy, using essentially an algorithm to trade yields to essentially generate an income. Very, very similar to what people have been doing for years. I understood this correctly, because you're an income player. That's what they call a digital income fund, because we're providing income. And I think what people do struggle to get their heads around is like, it is an income fund like our, I'd like to think our peers are those players and those funds operating in that space. It's just that our returns are off the charts relative to those. And so there's three times, three, four, three and a half, four times the amount of what, you know, a normal income fund, the Australian markets essentially delivering. So there's naturally going to be doubt about what we're doing. There's no free lunch, right? No free lunch. We're very actively traded fund in this very inefficient space, but we've been doing it for four years. And our, some of our best returns have come in the last 12 months, as there's been this renewed interest in Bitcoin and this big run up with the tower winds of ETFs, especially in US, the tower wind of Trump talking about a strategic reserve of Bitcoin, Ethereum, Ripple, Casano, a basket of assets. There's this huge interest. So we're playing in this inefficient space, generating income without, without the returns. And people think digital assets, look at the returns, it's too good to be true, typically it is. Look, it's, it's what, it's what I've done for 20 years. Now, I've got a team of almost 30 people in the company working on it, right? Like, there's a lot of work that goes into it. It's not two guys in a basement at their mum's place with the top plan. It's this professional team that have been trading the trade by markets for decades that have turned their resources towards the digital asset markets. And you've got 30 people. Are they all in Sydney or these just 30 people across the world? Round 20. They're potentially working in the mum's basement with a poor plan, hopefully like a game boy, like, you know, an Xbox or a playing Fortnite or something, doing something in a tanning, but you know, I would say like, is this like your work from anywhere time thing? You just get in the smartest minds to operate. Yeah, to an extent, roughly 2,000 of the employees are in Sydney in the Sydney office. So we have satellite officers in New Zealand's, we've got a bit of a larger office in Bordeaux in France, which is a really great office, isn't it? That's just an excuse to go to France and enjoy great wires. On the die of the taxpayer, I love it. Now comment, but it is a good business trip. Great business trip. We've recently hired a young guy out in Sao Paulo, looking after that. That's one zone as well, which we used to cover out of France. So we've put a team around the clock. A lot of hard work goes into it, and it's not easy to get those returns. Perhaps it'd be easier to sell if the returns were 15%, and they're not 23% annualised. It'd be more believable. We're still developing and we're still trying to milk as much as we can while the opportunity is there. There's plenty of things have happened in the last 12 months to lead us to believe that there's still going to be opportunities in the future. Well, this is the reason why I have these conversations, right? I came into it thinking one thing, thought I'd learned a lot, and I've already spoken a number of hours and done a bad bunch of it on myself, and I've still misplaced it. So it's just good to have these conversations and just go on tangents and understanding how it all works. But one question I had in the back of my head is, this algorithm began all-world and the now it's called New World. Nice to say. How much does it cost? How much time energy resources did it take to essentially get this algorithm right? How many years of development? Some people might go and ask an algorithm, someone cooked this up and we go four years, it cooked us up for four years. But how long has it taken to the full cycle of getting this algorithm to where it is today? It's high frequency training and algorithmic training. It's a constant game of iteration. So you look at every time we make a new change to the algorithm a tweak, we make a release, a new release of the software. And the software version is currently in the 460. 460? Over what how many years? Six years, iteration. So that tells you how frequently we're making changes to the strategy, how frequently we're making the improvements. But this algorithm was essentially born from the other firm, previous before we were counted digital. Our trade fire trading firm. How long was it operating there and being developed before you moved into digital assets? Other six years prior to that. So it's essentially been 12 years worth of in development and fine cheney. Yeah, a lot of lessons learned, a lot of risk processes built into it, tried and tested and we've seen some huge validalities and some some prices over the years that you know it's traded through and it's very stable now. So and then like I said, I'd like to just be able to point to the results to give people confidence. Well that's why we're having this conversation, right? You know, it all it all does what it does. Well Clint, this has been very, very interesting and I really appreciate you coming on. Is there anything else that we haven't covered that you and I'll leave listeners with about what you guys and girls do? Look, I think the current state of the world's in and the uncertainty and the trajectory that digital assets are on, you know, I think to think about where portfolios will be in what the world will look like in five or ten years. Bitcoin and digital assets they're not going to the fringe asset. It's been 15, 16 years they're here to stay and whilst your portfolio might not currently entertain having Bitcoin or or a market neutral exposure, I think what about in one year or five years or ten years? It's hard to believe there's a world in which it's not much greater part of your portfolio. We're here to educate and to be part of that journey and hopefully be one of the leaders in that space at least in Sydney and Australia and help people diversify and hopefully people think of us when they're looking into that space at least to have a chat, not be more involved. Brilliant. Well, Clint, thank you very much for coming on the right to change with your qualif management and looking forward to catching up with you later on down the track and I'm definitely going to dig into this in a lot more data. So I really appreciate you coming on. All right, have a good one. Thanks, Clint. Any use of this recording does not represent the view of any other third party and other sole personal opinions of the speaker. Any reference to financial products does not constitute advice or recommendation and before any action you should seek proper advice from your financial professional. Australian listeners should head to www.moneysmart.gov.au to find more information on obtaining financial advice. To get in touch with York head to our website www.yorkwellf.com.au
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