Setting the Stage

2018 has been a wild ride for all types of investors, in these volatile times it can be wise to take a step back and remind ourselves of how we got to where we are today.

2009 to 2018 has been the longest recorded period of economic expansion in the post war era. The recovery across all western markets began in 2009 and global synchronised growth has come to fruition in the last 2–3 years with nearly all asset classes seeing above average returns.

Worldwide stock markets have performed especially well in this period, partly due to aggressive stimulus from central banks and robust earnings from standout companies. The S&P 500 was trading at close to 800 at the beginning of 2009, today it is hovering around 2,600, a 223% increase. The DAX has performed similarly, moving from 4,000 in 2009 to 12,000 today, a 189% increase. The FTSE 100 has dragged behind a little posting 80% returns rising from a low of 3,500 in 2009 to trading just high of 7,500 today. The same is true for the MSCI Emerging Markets Index dropping in early 2009 to 500 before rebounding to trading close to 1200 today (140%).

Equities have been the poster child for the recovery, especially blue chip technology stocks in the US that are now in the race to the first 1 trillion dollar company (Apple, Alphabet, Amazon, Microsoft). Other assets have stayed pretty lacklustre in comparison throughout the period e.g. FX, bonds, commodities etc. but as we have seen signs of inflation in the past year (rolling back of quantitative easing, GDP slow down) ‘safer/physical assets’ have become more attractive….

Gold prices rose from 900 in early 2009 to a high of 1800 in 2011/2012 to then dip close to 1000 in 2015 and now having recently rebounded back to 1300 today. Oil is a similar story, $35 a barrel in 2009, then a price surge of 2/3x until 2014 before dipping to around $30 a barrel in 2015 and rebounding in the past few years to approach $70 a barrel today.

To put this into perspective Gold is up 2% this year, Oil is up over 10%, the S&P 500 is down 1%, the FTSE 100 is down 3%, the DAX is down 3% and MSCI EM is down 4%. Many people now in the financial world are talking about energy and financial stocks leading the pack in returns as higher commodity prices and higher interest rates make for a favourable environment for these sectors.

Amidst this slight equity pull back, commodity price pick up and slow down in quantitative easing the cryptocurrency phenomenon has burst into the investors consciousness in 2017/18 posting returns of over 2,000% in the last year rising from an insignificant market capitalisation of roughly 20 billion in the start of 2017 to just over 400 billion today. But unlike other assets cryptocurrency is far more volatile; already in 2018 highs have exceeded 800 billion and the lows been close to 250 billion. The market though is still dwarfed by the $8 trillion or so invested in gold worldwide and the $69 trillion invested across the world’s stock markets (graphic- Visual Capitalist).

We at Sharpe try to remind ourselves of this multifaceted past and surrounding landscape before we make any investment decisions across any asset class. Having a long term view of the past improves our short term view of the present. The irony of the cryptocurrency movement is that it originally spurred into existence in opposition to reckless financial management and resulting recession but now it sees its greatest growth amidst a bull run in traditional markets.

Looking at this conundrum, we ask ourselves the following question- does having a perspective on traditional markets give us a better understanding of the crypto markets? And the resounding answer is yes, this is partly why we have bucked the trend of being a ‘crypto fund’: we don’t see this as a wise or viable strategy for achieving the best returns possible. We see retail investors and to a lesser extent institutional investors across the world as having a diversified risk/reward appetite for all types of investments, whether that be ICOs, Stock or Commodities.

For the remainder of 2018 we are preparing for three possible inflection points across all asset classes- a blue chip equity sell off/correction in reaction to inflationary worries, positive performance for emerging markets / commodities that have been neglected amidst the focus on returns in blue chip stocks in developed markets and a positive inflow in the crypto markets as top investment banks and hedge funds hurry to open up operations to trade in crypto assets (this inflow we expect will help consolidate the crypto market into quality names).

Being aware of these likely trends we have decided to diversify our portfolio and hold positions across traditional markets and crypto assets. This is why we are waiting for an entry point if we are to take large positions in blue chip stocks in developed markets that have seen excessive returns and arguably inflated stock prices over the past decade.

Traditional Markets

We are currently focussed on emerging markets / sectors / commodities that will see an upswing in this stage of the economic cycle and / or be sheltered from underlying herd like market movements, instead being tied to fundamental growth, demand pick up and technological trends. We have begun spreading investments across EM/Frontier ETFs focused in the Sub-Saharan African region as well as South East Asia where we believe ‘frontier and soon to be emerging markets’ will lead the way in posting returns over the next 1–5 years as socioeconomic factors and free market regulation make for a positive development trajectory whilst growth in the West begins to slow.

We have also made investments into ETFs that are focused on fundamental technological / social trends: lithium production, clean energy infrastructure and the growing legal marijuana industry. We believe lithium to be the white gold of the 21st century, the bread and butter of humanity’s growing reliance on battery technology to power most devices that reside in our homes/pockets today. We also understand clean energy as an essential part of the future from both an environmental and economic perspective, providing a cost-efficient solution to increasing energy supply around the world (also relying on lithium as a raw material for energy battery storage). We are furthermore bullish about the legal marijuana industry as legislation creates a positive environment for new players and existing tobacco companies attempt to make the most of this new market that is expected to be valued at $40–45 billion in the US alone (graphic- Southbank Investment Research).

Crypto Assets

On the cryptocurrency side of things we have stuck to a fundamental philosophy across all our investments: token utility and likelihood of adoption.

Our investments have been consolidated in projects/companies that we believe are truly building the next generation cryptocurrency economy, most notably this includes EOS that we believe is leading the way in creating the first scalable, usable and fast solution for dApp infrastructure in the blockchain community. In conjunction with EOS, we continue to value BTC and ETH as the entry point to the crypto economy for exchanging assets and building robust dApps and see holding these two coins as a wise strategy for shouldering against risk.

We’re paying close attention to how the decentralised exchange landscape will mature over time and this is why we believe projects such as Republic Protocol (REN) and Hydro Protocol (HOT) have significant growth potential, through the solutions they are implementing to address DEX liquidity challenges and removing trusted third parties from trading.

We also continue to be excited by projects that are bringing stable coin solutions to the cryptocurrency ecosystem, as we believe this to be a huge enabler to mainstream adoption of decentralised technology. Havven (HAV) and DigixDAO (DGD) we believe are two projects that show great potential to revolutionising the stable coin landscape, providing innovative mechanisms for regulating price movements and tying crypto assets to commodities such as Gold.

Other areas of our crypto portfolio are focused on innovative financial / accounting solutions that are bridging the gap between the crypto world and the real world. We continue to see TokenCard (TKN) as the market leader in providing ease of access retail payments in crypto. PayPie (PPP) is a company with a bold vision to reimagine risk score analysis and create fraud proof accounting via the blockchain.

Algorithmic Trading

Beyond taking a top-down approach to long term investments, we’re investing substantial capital and effort into algorithmic trading. The infancy of cryptocurrency markets presents huge opportunity to develop investment strategies that have not worked in traditional markets for many years. It’s widely known that the efficiency of equity markets has resulted in HFT firms constantly competing with each other to locate their servers closer and closer to exchanges, and trade over time horizons of sub one second. This is not the case in cryptocurrency markets, and we’re experiencing market inefficiency and volatility that is completely unprecedented.

As a result, we’re seeking to take advantage of the market volatility, whilst reducing our overall risk exposure to cryptocurrencies by developing predictive models and algorithms that will trade many times per day. The work has already commenced in this area and German Leonov, our Senior Data Scientist, has already started building complex models that are showing promising signs of predicting 5–10% intraday price movements 2–6 hours before they occur.

We’re really excited about this work-stream and looking forward to deploying our first models on time according to our roadmap in July of this year. By the end of Q3 we anticipate that we’ll be monitoring tens of millions of data points across 10 major exchanges, constantly scouring for trading opportunities on intraday cryptocurrency volatility.

Wrapping Up

We are confident that our unique multifaceted approach to investing, utilising both qualitative and quantitative inputs and investing across all asset classes will bring greater returns in 2018 as we are able to dynamically adjust to market movements and spread capital across many areas of the old and new economy.

We anticipate this to be a volatile year across all markets, one in which an active investment approach, helped by algorithmic identifiers and thoughtful methodology will outperform passive funds that are unable to quickly diversify and act on their convictions. We expect to lead this new approach to investing across 24/7 and Monday-Friday markets that requires a new breed of analysis and work ethic to stay adept of all market ongoings.

Thank you for your attention.

All the Best from the Sharpe Team!