Finding stability with our new Delta & Market Neutral strategy

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Over the past few months, our development team has been diligently crafting a new investment approach designed to navigate the inherent volatility of the digital assets market: a Delta & Market Neutral strategy.

As institutional and professional investors increasingly enter the digital assets space, investment strategies are evolving to meet the demands of this growing market. While Delta & Market Neutral strategies are widely utilized in traditional financial markets, their adoption in the digital assets sector has been comparatively limited. This is surprising, given the unique advantages these strategies offer, particularly for managing the significant volatility characteristic of digital assets.

 

How does the strategy work?

The Delta Neutral & Market Neutral strategy is divided into two methods: the Delta neutral component and the Market Neutral component. 

 

Delta Neutral

The delta-neutral part of the strategy seeks to hedge against price movements in the underlying asset by balancing positions so that the portfolio’s overall delta is zero, making it insensitive to small price fluctuations. The main goal of a delta-neutral strategy is to profit from the asset’s volatility, time decay (theta), or other factors, without being exposed to the asset’s price direction.

 

Market Neutral

The market-neutral part of the strategy leverages market inefficiencies by buying an asset on the spot market and selling it through a futures contract. Although preliminary results can fluctuate, profits are locked based on the spread between both products, eliminating directional market risk.

 

Implementing the strategy in different market conditions

Since its inception, the digital assets market has demonstrated a recurring four-year cycle. While not identical each time, the pattern is notably consistent. This cycle can be broken down into four distinct phases: Consolidation, Markup, Distribution, and Markdown.

 

  • Consolidation: During this phase, price action remains relatively flat, fluctuating within a defined range.
  • Markup: This phase is marked by strong upward price momentum, driven by increasing market confidence and demand.
  • Distribution: High levels of volatility characterize this phase, with altcoins often experiencing significant gains.
  • Markdown: Commonly referred to as a bear market, this phase sees rapid price declines as market sentiment shifts.

 

During periods of market decline, commonly referred to as bear markets, the strategy tends to allocate a larger portion of capital to perpetual futures. This approach enables the fund to capitalize on rebates, enhancing overall returns. While some capital may still be allocated to fixed delivery futures during these periods, their performance is typically subdued, and they often require longer lock-up periods, making them less favorable in a declining market environment.

Conversely, during periods of market expansion or bull markets, the strategy shifts to allocate more capital toward fixed delivery futures, as the performance of these contracts improves. This allows the strategy to "lock in" returns with greater predictability. However, due to liquidity considerations, the majority of capital will continue to be allocated to perpetual futures contracts, ensuring flexibility and optimal capital deployment.

By integrating these strategies, our backtesting and live testing have demonstrated the ability to achieve an average annual return of approximately 10%.

 

How Hodl is implementing the Delta Neutral & Market Neutral strategy

While the Delta Neutral & Market Neutral strategy will be offered as a standalone fund, participants in our Genesis, Consensus, Oracle, and Numeri funds will also indirectly benefit from its implementation. Historically, these funds have employed either Actively Managed or Algorithmic-based strategies—or, in some cases, a combination of both. However, as of January 1st, these funds have transitioned into multi-strategy funds, allowing them to seamlessly integrate any of Hodl's available strategies, now including the Delta Neutral & Market Neutral strategy.

This evolution is highly advantageous for both current and future investors. For example, if a bear market is anticipated, these funds can leverage the Delta Neutral & Market Neutral strategy to minimize downside volatility while continuing to generate additional returns.

For those seeking direct exposure to the digital assets market solely through the Delta Neutral & Market Neutral strategy, we are pleased to offer it as a standalone fund. This exclusive fund focuses entirely on executing the Delta Neutral & Market Neutral strategy, providing a unique opportunity to invest in digital assets while mitigating market volatility.

To learn more about the Delta Neutral & Market Neutral fund, download the Key Fact Sheet through the form below.

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