How Brevan Howard Finds Alpha In Digital Assets

  • Brevan Howard is a hedge fund co-founded by billionaire Alan Howard in 2002.
  • It is one of the best-known hedge funds to get into crypto, having launched BH Digital in 2021.
  • Peter Johnson, co-head of private investments at BH Digital, details their approach to finding alpha.

Earlier this year, venture capitalist Peter Johnson moved from one ultra-secret investment house to another, when hedge fund Brevan Howard poached him from Jump Capital, the venture capital arm of the proprietary trading company Jump Trading.

During his nine years at Jump, Johnson pioneered the company’s crypto investment strategy, which is now part of its crypto division, Jump Crypto. Now he co-heads private investments for Brevan Howard’s crypto arm, BH Digital.

Brevan Howard specializes in macro investing strategies and is one of the best-known hedge funds to enter the cryptosphere, despite his publicity-shy nature.

This shouldn’t be a surprise. Its billionaire co-founder Alan Howard has invested some of his personal wealth in crypto for years, including backing One River Digital Asset Management, a crypto wealth manager.

The company’s push into digital assets only began last year with the appointment of Colleen Sullivan to lead its “crypto private equity and venture capital businesses and the launch of its flagship BH fund. Digital Multi-Strategy Fund.

Speaking at the Crypto Bahamas Conference, co-hosted by 30-year-old cryptobillionaire Sam Bankman-Fried and think tank SALT, Johnson provided insight into how BH Digital is positioning itself in the digital asset ecosystem. .

The crypto strategy

“We’re a thesis-driven venture capital firm,” Johnson said. “And we combine that with active trading and participation in crypto markets.”

The new division, BH Digital, would have 30 employees and 12 portfolio managers, according to Bloomberg. The flagship digital asset fund invests in both liquid cryptocurrencies and venture capital-style positions in private companies.

Brevan Howard’s core investment approach is macro-focused, Johnson said. This does not change with their approach to crypto.

“That’s something we really do at Brevan is we focus on the big macro themes that we think are going to change the world and then we specifically tackle those and try to ignore d ‘other things,’ Johnson said.

With so much money chasing crypto deals right now, it’s worth taking a meticulous and targeted approach in certain areas, Johnson said.

“You can’t just be money, you have to provide more than that,” Johnson said. “You must be, can you provide


liquidity

to my token in centralized exchanges and decentralized exchanges? Are you an active user of my product? Will you be a customer?”

“Those kinds of things are what you need to do to be in the best deals,” he added.

Despite the competitive market, Johnson describes the strategy as “very active”, given that the fund has invested in around 20 companies.

But the new role still entails a change of mindset for Johnson, who is primarily used to managing equity at Jump and now caters to investors such as pension funds and endowments.

“Most of them know about it,” Johnson said. “The decision of people we talk to often isn’t, ‘should we allocate to crypto?’ They made that decision, they took that leap. They know they have to be in space.”

Stable Coins

One of the main areas of interest for Johnson as an investor is the rise of stablecoins – crypto tokens whose value is pegged to that of an underlying asset, such as the dollar, or a set of assets, and provides holders with more stability than a typical cryptocurrency.

“We’re investing in the big macro shifts we see coming,” Johnson said. “And one of them is the adoption of stablecoins, [which] will be a new way that money circulates in the world.”

Johnson has invested in Terra (LUNA), a stablecoin, at both Jump and Brevan Howard.

“We’re big fans of what they’re building, and overall big fans of stablecoin adoption,” he said.

He expects centralized and decentralized stablecoins, and the applications and infrastructure surrounding them, to become one of the biggest stories in crypto in the coming years.

Layers

Johnson also studies the emergence of Layer 1 blockchains through the lens of the new activities and features they can unlock. He shares how the launch of the solana ecosystem has enabled the development of Serum, which allows the decentralized management of a central order book.

“This has been tried several times on Ethereum,” Johnson said.

Solana’s speed and lower transaction fees made it possible to develop this type of product for a Web 3.0 ecosystem.

“That’s when I think things get really exciting,” Johnson said. “We’re watching a lot of them very closely to see, like, ‘okay, what’s that unlock you couldn’t do before?'”

The rise of crypto derivatives

Despite the launch of many crypto exchanges and trading solutions, the crypto derivatives market is still small, which creates opportunities for alpha, Johnson said.

“The options market accounts for about 3% of spot volumes in crypto,” Johnson said. “And in stock markets, it’s about 30 times the spot market. So he clearly has huge room for growth there.”

Over the course of this year, he expects to see more sophisticated derivative products to help investors have more nuanced views on managing risk and generating income.

NFT

Where Johnson sees less buzz in the institutional market is non-fungible tokens — a kind of digital collectible that resides on the blockchain.

Investors still want exposure to the sector, but not necessarily direct investments in NFT projects like Bored Ape Yacht Club or Moonbirds. They are more attracted to the technology behind these projects than the tokens themselves.

“I would say we’re also playing with holding some NFTs,” Johnson said. “But it’s really more of an R&D effort and being part of the community than an overall alpha-generating investment strategy. You can’t really scale that right now, but it’s really more of an infrastructure thing at this point.”

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How Brevan Howard Finds Alpha In Digital Assets


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