4 Reasons that an Actively Managed Fund is better for Crypto than an Index Fund
Index funds are the bee’s knees for traditional markets, but crypto deserves its own approach.
Back in 2007, Warren Buffett famously made a $1 million bet with a hedge fund: that a simple index fund would outperform them. He won.
It’s a common piece of financial advice — index funds are reliable, easy and provide pretty consistent returns over time. We agree — in traditional markets.
Crypto is not a traditional market. It doesn’t look or behave like a traditional market. Cryptoassets are volatile, the market is rapidly changing, and it never sleeps. That’s why Every Capital is an actively managed fund.
What’s the difference between a managed and index fund?
Just in case this is your first investment rodeo, here’s a quick explanation:
A actively managed fund tries to outperform market benchmarks. An index fund just tries to track the performance of a market overall.
An actively managed fund uses research, analysts and professional portfolio managers to make their decisions. An index fund buys a basket of assets (shares, bonds or currencies) which represents the overall market.
An actively managed fund can have higher fees, because there’s more work involved in managing the fund — an index fund has the edge here, because they’re pretty simple to run, so there’s typically lower fees involved.
When you let these two types of funds loose, very different things happen.
Here’s 4 reasons why we think it’s all about actively managed funds inCrypto:
1. Diversification
The table above shows the top 9 cryptocurrencies right now. Note the charts on the right — those lines all look pretty similar, huh?
An index fund usually picks something like the top 10, 20 or 30 coins by market cap and buys a basket of those, relative to their combined market cap. So the majority would be Bitcoin, followed by Ethereum and so on.
The thing is, most major coins track the movement of Bitcoin so closely that, well, you may as well just buy some bitcoin. It’s like the cool kid at school that gets a new haircut, so everyone else races to get the same one (actually, it’s way more technical than that. But you can ask me about it in the comments).
It’s not the same as a mature market where the top 300 shares might perform very differently to each other, but add up to a consistent, reliable return.
For the record, we don’t think just buying Bitcoin is a great strategy either — it leaves a lot of opportunities on the table, and also ignores that the market might be shaken up in the future.
2. Access and Investment Mandate
Unlike an index, an actively managed fund like Every Capital looks at the whole market for opportunities (there are lots of them!) and makes decisions on the best, with the help of our investment analysts and portfolio managers.
In Every’s case, we plug into our investment partner Astronaut Capital and also include research from their associates, Picolo Research and Crush Crypto.
One of the major draws of investing in cryptoassets are Initial Coin Offerings (ICOs). An index will never invest in an ICO— it’s not part of their mandate. They can only buy in once the token hits exchanges and if the market cap jumps up enough to fit into their index basket. And that means they miss out on one of the major opportunities this market presents.
Even better, as a major institutional investor, an actively managed fund like Every can get exclusive access to private sales and pre-sales, which often have better terms and bonus tokens.
There’s been a trend that ICOs are increasingly moving away from public sales, by and large because it’s easier from a legal and regulatory perspective.
That’s fine for the big guys, but everyday investors haven’t been able to keep up and take part in these promising sales unless they’re part of a pool of investors — like Every pools together our investors’ funds.
3. Information and Immaturity
We’re still in the early days of crypto. When people call it an ‘immature market’, they’re not necessarily criticising it — they just mean it’s new and behaves differently to something like the share market, which is relatively predictable (just don’t mention the GFC).
A new market is easier to manipulate, and the information that we get isn’t always that accurate. You need professional analysis to cut through the fog.
The biggest chunk of misinformation floating around in Crypto — and this impacts Index Funds in a big way — is the way market cap is measured.
To make it into the Top 30 coins by market cap right now, the total worth of a project’s coins needs to add up to roughly $480 million, give or take.
If a project raises, say, $20 million dollars by selling only 10% of their coins, their market cap becomes $200 million — all the coins out there technically add up to that amount.
If the individual coins increases in value by 100%, which is not uncommon in the crypto market, then they’re approaching a $400 million evaluation and just about in the Top 30.
Once that coin hits the Top 30, the Index Funds start to buy in and can distort the price even more. There are additional follow on effects that happen here — things like the ‘fiat to crypto multiplier’ (again, ask us in the comments).
In short though, through accounting tricks and market distortions, an Index Fund isn’t the best way to track the market, because measuring the ‘Top 10’ or ‘Top 30’ is not always an accurate picture of the true value of the market.
4. Volatility
This is the big difference between an actively managed fund an index fund.
Investing in an index fund is like jumping on a roller coaster. In traditional markets, that might be the kids’ coaster — a slow ride up and gentle swings down. In crypto, it’s a gut-wrenching wild-ride up and down, all the time.
An actively managed fund is more like sitting in a car. We can speed up, pump the brakes if necessary, and pull a U-turn if things are getting crazy.
It really cannot be understated: the cryptoasset market is extremely volatile.
Every has an eye on liquid or near-liquid assets. That means we can sell them and take profits when things are good, and do our best to ensure we aren’t holding those when things are bad. We can even take our investments out of the market, into stablecoins, during big crashes, and attempt to buy back in at a good time.
In a volatile market, we think it’s really important to be able to manage risks like that. We won’t get it right all the time — no one can predict every market movement — but we have the tools and flexibility to make calls based on solid research, analysis and trends.
There’ll always be an argument about the best way to invest — whether it’s a passive method like index funds or active investment like managed funds.
We really believe there’s a lot of reasons why Crypto — at least right now and for the foreseeable future — is better approached with an actively managed fund. Otherwise we’d be releasing an index fund instead!
Thanks to our investment partner Astronaut Capital, and leveraging institutional grade research in our investment decisions, Every has all the tools at our disposal to make the best possible calls for our investors.
Though past performance is not an indication of future performance, Astronaut Capital’s first quarter achieved unrivalled returns of 170% for their investors.
Their second quarter came at a challenging time in the crypto market, but they still outperformed major indexes in crypto: Ethereum, Bitcoin and the overall crypto marketcap. You can read about our partnership here.
Every Capital is Australia’s only retail cryptoasset fund. Every is opening to everyday Australian investors soon.
Reserve your place on our waitlist now at www.every.capital
