NEO Global Capital (NGC) Ventures, one of the largest institutional investors in the blockchain sector, is launching “NGC Ventures Fund II” — an “All-Weather Crypto Fund” specifically designed to capture market beta and secure consistent returns in both bloom and gloom market conditions.
With fifty-plus blockchain investments under its belt and a purported lifetime track record of seven to eight times ROI, NGC’s first fund was recognized by PitchBook as one of the top ten VC funds in blockchain by volume and scale. After realizing its self-proclaimed benchmarks with the first fund (all in times of unparalleled market turbulence), NGC Ventures is now launching a second “all-weather” crypto fund which, as the name already implies, deploys a wide range of specifically tailored investment strategies in order to secure returns in all four stages of the market cycle.
The size of the new Fund II is capped at $25 million and 80% of the fund is already subscribed upon launch. The investment vehicles employed to execute the all-weather strategy range from the acquisition of tokens, equity, and structured products (on both the primary and secondary markets), to fixed income and quant trading, arbitrage, mergers & acquisitions, staking, and mining.
The broad range of investment instruments may seem overly diverse, but NGC only focuses on two primary objectives. The first objective is to understand and predict (using various data points) the macro market cycles in order to allocate assets accordingly. To achieve this and secure a competitive advantage, NGC actively aggregates and interprets data sources across different streams using big data, AI, and artificial data analysis. The second objective is to create alpha by investing directly in projects, either through tokens or equity, and to help them grow before exiting for a profit. This could be a minority investment where NGC takes the typical VC approach to advise the company, or it could be a majority investment where it secures a majority shareholder position, grows the project, and flips it for a profit.
Breaking Down the “All-Weather” Strategy
NGC’s “all-weather investment strategy” is in huge part modeled against Merrill Lynch’s “Investment Clock” theory. Depending on the direction of growth relative to the trend and the direction of inflation, Merrill Lynch’s Investment Clock model splits the economic cycle into four separate phases: recovery, overheating, stagflation, and recession. By back-testing more than 30 years of economic data, Merrill Lynch has found that, in each respective phase, some investment instruments tend to outperform others. Appropriately, a rational investor should seek to allocate assets in line with the different stages of the market; buy stocks during the period of recovery, buy commodities during overheating, take cash during stagflation, and buy bonds during a recession.
While factors like central bank intervention, market gaming mechanisms, global economic integration, and buffering effects make the Investment Clock model quite unreliable when it comes to investing in the traditional financial markets, NGC maintains that the same restrictions do not apply within the field of cryptocurrency. In fact, the founding team at NGC believes that Merrill Lynch’s Investment Clock model should work even better for crypto because the aforementioned factors influencing its effectiveness are either not present or not very influential.
Of course, when it comes to the practical application of the investment clock model, NGC has appropriately customized it to adequately reflect the unique conditions of the cryptocurrency markets. The inflation factor from Merrill Lynch’s model is replaced with an emotional factor, whereby the price of Bitcoin is used as a benchmark for “market sentiment,” and the “GDP growth” factor is replaced by fundamental factors that represent the industry’s organic growth. These include but are not limited to: number of transactions, volume, number of wallets, number of dApps, leader entry and breakthroughs in technological development.
After accounting for the differences between the respective markets — both crypto and traditional — NGC seeks to find corresponding asset types in the crypto markets and then simply follows the same underlying logic described in Merrill Lynch’s investment clock theory. During the growth phase of the cycle, NGC focuses on equity-type assets, such as ICOs, IEOs (similar to IPO, first-and second-tier market spread arbitrage), platform coins such as Binance’s BNB (strong cash flow and repo ability), and commodity trading strategy quantitative funds (tracking cryptocurrencies on the rise).
Following the same logic during times of recession and stagflation, the fund seeks to reduce equity investments and turns to crypto-assets that most closely mimic fixed income products (for the lack of real ones on the crypto markets). In this regard, in 2018, NGC turned to crypto lending by investing in BabelFinance and to crypto staking by launching StakeX in collaboration with X-Order. Both ventures earned the fund steady returns in times when the crypto markets were losing money hand over fist.
Asia-Specific Alpha
Having crypto’s more global and more uniform nature (when compared to the traditional financial markets), we asked NGC Ventures whether they believed that there are unique opportunities in Asia that they could leverage to generate outsized alpha for investors.
Tony Gu, founding partner at NGC, said:
“Because the geographical differences are not that obvious in the crypto industry, the whole crypto market tends to move together, or in other words, share the same beta. Our All-Weather Fund is trying to capture the beta and maximize it by cycle-specific strategies”
Taking this into account, NGC believes that there are three unique aspects of the Asian markets that present some opportunities to generate outsized alpha — trading enthusiasm, technology adoption, and the mining ecosystem. Gu continued:
“Investors in Asia are looking forward to investing in good projects and when they believe they found one, they trade aggressively. This creates arbitrage opportunities between the Western and Eastern markets. In addition, this helps us get insights about where the market is moving so that we can deploy capital more wisely.”
In terms of technology adoption, NGC believes that Asian countries, especially those underdeveloped, are more open and eager to deploy new technologies (like distributed ledger technology) and that regulations in those countries are more friendly to blockchain-enabled innovations, which could incubate disruptive innovations that can’t exist in the Western world.
On the last assertion, Gu states:
“Crypto’s mining ecosystem is largely based in China. The whole value chain includes chipset production, miners, mining farms, trading, financing, and payments. This creates unique investment opportunities in each phase of the value chain, which we are well-positioned to capture. One example is BabelFinance (one of NGC Ventures’ portfolio companies). They have grown to be one of the biggest crypto lenders in the world by servicing the large miner community in China.”
What’s Next for the Crypto Industry?
When asked to forecast some of the next up-and-coming segments in crypto that they think will see the most growth, Gu said:
“Infrastructures like public chains (layer 0 – layer 2), oracles and privacy, etc. are still important and will still see growth. On top of the infrastructure, we expect to see the growth of applications. Ranked by magnitude, they will mainly be financial services (both crypto native finance, and adoption by traditional institutions), virtual economy (gaming, content, IP, data exchange, etc) and social (consumer marketing-related applications)”
While the team behind NGC is satisfied with their current results, interpreting the fund’s past performance as a definite validation of their modified investment clock theory would be overreaching, to say the least. Given the unique intricacies and the short history of the crypto markets — only time will tell whether there are parallels to be drawn between them and the traditional ones.
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