Quant Fund Kbit Says Stay in Crypto Despite Quick Returns From ETFs

(Bloomberg) — While hedge funds are using tried-and-true strategies like base trading to profit from the recent flood of Bitcoin and Ethereum ETFs in the U.S., quantitative fund Kbit says it’s more profitable to stay in the digital asset world.

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“The bigger opportunities, the higher yield opportunities are in the crypto native markets,” Ed Tolson, founder and CEO of Kbit, said in an interview. “So you need to get exposure to centralized crypto exchanges, token trading, perpetual swaps, and the derivatives themselves.”

Kbit, which manages more than $100 million in assets, uses a market-neutral trading strategy that aims to profit from both rising and falling prices while minimizing overall market risk. The firm, incorporated in the British Virgin Islands, is also a market maker. It declined to disclose the fund’s performance due to client confidentiality.

In traditional markets, hedge funds use underlying trading to profit from price differences between an asset and futures tied to the same asset. With the successful launch of Bitcoin and Ether ETFs, Tolson said, the same hedge funds have started doing this by buying ETFs and shorting Bitcoin futures on the CME.

“The same style of trading is more profitable if you do it in local crypto instruments — buy spot crypto and short perpetual swaps,” said Tolson, who was director of trading technology at Citadel Securities before founding Kbit in 2017. Perpetual swaps are futures contracts with no expiration date that are available only to clients outside the U.S.

“We’re a quant shop that trades anything that has volume, that creates opportunities for us and inefficiencies where we can trade capital,” Tolson said, estimating that Kbit trades around 500 different tokens. “So we’ll definitely trade tokens even if we don’t like the fundamentals.”

Kbit this year hired Thomas Johnson, former senior quantitative developer at Citadel, as principal research engineer and made seven new hires, including Sean Slotterback, who spent five years at Highbridge Capital Management. Slotterback is leading expansion efforts in forecasting and portfolio risk management.

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Eddie Markman, who served as chief financial officer and chief compliance officer at Sun Mountain Capital for eight years, recently joined as chief financial officer. The team has doubled in size in the past year to 14 people.

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