Interview by Katia Lang (Editor-in-Chief)
Orichal Partners is one of the first multi-strategy cryptocurrency investment and blockchain advisory firms in Asia. It was founded by a group of experienced finance professionals to venture into blockchain investments and to work with token companies, as a strategic advisor. We met Orichal managing partners Scottie Siu and Chris Kim to discuss their strategies for the challenges facing the global token market.
How was Orichal Partners founded?
Scott: The name of our company Orichal Partners stems from the mysterious Orichalcum, metal ingots, as valuable as gold, that were linked to the mythical civilisation of Atlantis; these were used as a commodity to transact. Established just over a year ago, we have grown to 13 staff, of which 3 are managing partners, across the two offices in Hong Kong and Korea. I have known Chris for six years in my hedge fund days, one of the most trusted people I know. He now runs the Korea office, and I have known Anthony, my other co-founder and managing partner for over 10 years. We began our careers together at JPMorgan and we all come from traditional finance backgrounds. I was fortunate to have worked for three high profile hedge funds, where I have shadowed and learned so much from the smartest people I know. Henry as a partner and our legal counsel, runs his own law firm that specialises in fintech and the crypto-space; his office of 25 members advise many of the top exchanges and industry players. His strong network-base has proven to be of great value to Orichal. Last year, no lawyers entertained us, as no one wanted to touch crypto, but with Henri’s support and belief in us, we are now on the industry’s radar. Unlike other block-chain and crypto-currency firms, having an experienced law-firm partnering with us, allows us to work at a higher calibre, to Tier 1 standards supported by a proper legal and compliance practice. It is our collective background, resources and our vision to build a long-term financial institution with utmost professionalism, which sets us apart.
What’s the purpose of your venture?
Scott: We are here to build the best-in-class investment vehicle to access the digital-asset class (crypto). The same mind-sets and standards that we have been investing, trading and think about in portfolio construction within traditional assets, are the same way we approach this new ‘crypto’ asset class. Orichal as a firm believes the value of portfolio construction, liquidity and risk-management, as well as portfolio and trading technologies, are all just as important as investment strategies design. We take a multi-strategy investment approach to navigate our exposure in the most efficient way, with a long-term view. We believe if any institutional investors are looking for exposure in this asset-class, they ought to benefit from investing with more of a long-term bias, rather than short-term.
At Orichal, we are constantly curious and adaptive to the markets. This is also where our value is. We realise there are lots of inefficiencies on this side, and as for any early stage of one asset class, there is a huge need to bring more professionalism and real application in this field; in order to open up the sector for mass adoption. For sure, there is a lot of risk and volatility in this industry, but to us, from a risk-reward perspective it is more interesting than any other asset class. My vision for Orichal is to become a true pioneer and role model in this space; to grow our intelligence and offer the best-in-class exposure vehicle to our private investors. Additionally, it is to continue to foster the blockchain industry through our advisory and collaborative works with trusted partners across the field.
Chris: Since my time as a ‘prop trader’, I’ve realised that finance has not really changed that much. It’s mostly permutations and hybrids of existing products. The way people and companies raise capital hasn’t changed much either. Moreover, the problem in the traditional finance space has been lack of transparency, gruelling and slow processes, plagued with over-regulation stemming from the aftermath of the financial crisis in 2008, all of which impede growth. There is a clear reason why blockchain is gaining interest across sectors. At the same time, there is a need for companies such as Orichal Partners to bring order to the chaotic crypto space that has historically had a lot of scammers and pyramids.
Our lawyers regularly liaise with regulators but unfortunately, there’s a tremendous gap between what the markets needs and wants to do, versus how fast regulators can provide the proper framework. This is due to a lack of understanding of what is required for this industry’s foundation and development. As a multi-strategy private capital, we at Orichal are attempting to bring traditional financial discipline and methodologies into the cryptocurrency sphere. By doing this, we are grateful that our brand is recognised amongst the community.
What’s your opinion on cryptocurrencies as a new asset class impacting financial service providers and investors?
Scott: Cryptocurrency has been around for about 10 years with Bitcoin being most prominent, but this asset class really drew serious attention last year. There is no doubt, this led many uninformed retail investors to follow the space, also courting more media attention for better or worse. Of course, with cryptocurrency’s secondary market, for the first time we are putting a live mark-to-market price mechanism to early stage companies on a tradable exchange. If we had done that for Uber back in the day, or even smaller companies, we would see the same volatility too. But this is a major breakthrough. Digital asset now gives people access to PE and angel type of investments, where they may not have had access earlier, but it also comes with a risk, meaning that this is not close to what we have been used to, i.e. it’s not a security currently that is backed by dividends or assets. It could may be very soon, but not at this moment. It’s a different way of accessing risk and reward in this jungle. So, you may see a little more volatility and it’s exactly why the market needs a company like Orichal Partners, to come in with the operational and portfolio management expertise in this space.
It may also not make sense for a traditional institution, or a family office to come in to try to tackle this space themselves, in having to learn about custodian and legal issues and how to value certain tokens, as they may wish to make better use of their own time. Instead, these institutions are coming to us as we have all of the management experience in place i.e. we have the legal component, we understand how to work with custodians, the security of hot wallets and how the ICO structure works. This goes on top of all the investment strategies and portfolio management tools that we have built internally. Even when there is a high correlation in this asset class among all the token-assets, investors can diversify correlation to some degree with multi-strategy approach. The same way our portfolio operates. We specifically constructed our portfolio with 3 strategies such as the Research/Tactical strategy, ICO strategy, and Quant-Algo strategy, balanced in one single portfolio. We believe this is the best portfolio construction approach for the long-term.
Chris: In terms of these strategies, on the Quant side we are co-developing trading algorithms between our Korea and Hong Kong offices. So, everything is completely automated and everything is going into the exchange via APIs. We see this as a key component within our portfolio to exploit market inefficiencies and reduce costs. For instance, one of our algorithms reads 150 plus coins within one exchange and it reads all three pairs, four times in one second and it calculates the spread on each three pairs and shoots the order automatically at the range that we input and the entire trade finishes within 2 seconds. So, we leave it on 24 hours and it’s creating about 1% every two days, in terms of profit. Orichal is focusing not just on the performance generation, but also on the tech of our algorithm, our portfolio management systems, and also on our legal side.
As partners, we wanted to build the Blackrock of cryptocurrency – this is the early stage, but we want to build a structure where we have everything under one roof with tech, legal, and strategy-all with a proven track-record.
Scott: If I may just take a step back, we are in the early stage of cryptocurrency so a lot of the token metrics and traditional, fundamental valuation approach don’t really apply at this time. Characteristics are almost a hybrid between foreign exchange, angel investments, and maybe high growth equities. With all the moving parts, I would say regardless where we are in the investment cycle you need the best vehicle for the right exposure to it, if you believe digital-assets and blockchain assets are here to stay. Right now, institutional investors are very keen to look for an exposure early – they want to find the best vehicle with the best security system that knows how to rebalance the portfolio in the most sophisticated manner. While absolute performance is important, investors are looking for trusted managers to help them navigate the volatility. Our private capital consistently outperform the broad markets with significantly higher Sharpe. We try to be very dynamic and adaptive to market conditions. Even when the market is very bearish, we are using quantitative methods to take in Big Data, to analyse fund flows, sentiment analysis and this data is calculated and trades are executed automatically via algo. So, when there is any inefficiency in the market, our quantitative strategy captures these opportunities right away. These are 5 seconds to 3 minutes holding period’s type of play and works 24 hours, much smaller gains relatively to 10x ICO returns we saw in 2017, which we don’t see this year, but they add up and attributes to alpha even in a bear market. Our interaction affects the market and although we are not a 100 percent Quant fund, this strategy helps to dampen volatility. So, from top down, this is how we are positioned
Where did the initial investment come from for Orichal Partners?
Scott: All of us have invested our own private capital but we are opening for external investors in Q1 2019.
Chris: We also have a lot of commitments from some big Korean institutions and we are preparing paperwork with legal. These companies are from the Top 10 crypto institutions globally that require everything to be 100 percent compliant, as everything traces back to them.
Scott: We were lucky that we started last year when the price was going up and then, later, going down. Using our own capital, we test run the strategies and it’s an ongoing development, consequently, we have learned from this bear market as well. Over the past four months, we have been expanding the Quant team for instance an ex-tier 1 investment banker of 15 years, who was heading their FX systematic trading has joined us; he had built the back-end trading engine for the bank’s electronic trading platform. He has now brought that type of discipline and mentality to Orichal and is building a market-making engine for us to test our strategies
What is the need for the two offices in Korea and Hong Kong?
Chris: Korea is a much localised market in terms of FX regulations. There are strict rules with regards to money in-flow and out-flow to and from Korea. Cryptocurrency regulation in Korea is following closely with Japan, but is very different from other countries, especially those in Europe. So, working just in Korea has its limitations. A company can have a Hong Kong office and work worldwide, but Korea has a very large cryptocurrency market that is impossible to ignore. If you look at the top 10 exchanges, at least three of them are Korean.
What’s the position with cryptocurrency regulation in Korea?
Chris: Regulation is still vague as they do not have a clear stance on accepting cryptocurrency in the mainstream market. But the retailers love cryptocurrency and so you see everyone trading cryptocurrency at coffee shops. There are coffee shops supporting cryptocurrency payments popping up everywhere around town. That is how popular blockchain and cryptocurrency are in Korea right now. So, Korea is the only country where cryptocurrency traded at 50-60% premium in the past versus other countries because there’s so much demand for it. In addition, it also trades at a premium because it is very hard to move money between countries and it’s very difficult for Korean investors to have access to foreign markets.
Scott: The premium is much smaller now but one advantage is that with some of the arbitrage strategies, we have onshore and offshore access so we can buy and sell at the same time, whenever the opportunity arises. With Korea being a huge retail market and Hong Kong being the huge capital market, the succeeding wave of institutional money is around the corner and will be the next catalyst for the industry. A lot of the Asian fundraising activity will happen in Hong Kong.
What’s your take on utility tokens versus security tokens
Scott: A security token is going to be something that most institutional investors will be greatly familiar with, as it will be connected to further cash flow and have more asset-backed like features, so we would have different evaluation metrics at play. Security Tokens potentially could be the next phase of growth requiring more regulatory framework all around. These will be huge for the industry because again it’s all about giving access to a new generation and a new audience to PE or angel investment.
Chris: People say security tokens are the future and utility tokens are dying, because “there is no utility in it.” Utility tokens are dying not because of the effectiveness of the utility but the immaturity and the malpractice that is happening in the market right now. When you do an ICO, you are raising capital to build an ecosystem and to build infrastructure so that the utility token itself has an actual utility; the problem lies with a lot of ICOs that they are misappropriating or mismanaging the funds. Moreover, there are no regulations to follow how things should be done, and many scams have managed to get away without accountability, unlike in a regulated market with a traditional IPO. There are barely any governance models to perform actual financial reporting or auditing available to token holders. One year from now, I think that security tokens will be the next big thing. However, when regulations do come in with set rules to regulate utility tokens, only tokens that create an actual infrastructure will survive, regardless of being either a Utility or Security token. At the end of the day, the purpose of raising money through cryptocurrencies, means you are raising money off of a product or service based off blockchain technology
So, what’s the prospect for security tokens and giving people access to a different asset class, property and commodities?
Scott: I think that utility tokens hold a different kind of risk as you are really backing an angel investment, it’s a different kind of risk and finding another kind of gem such as the next Facebook is one in a million chance, and so I think most of these utility tokens will go away. With the STO (security tokens), it’s more formalised. STOs would have more regulations around them, they may have an asset-backed to them, and they may pass through dividend, or through the rent if it’s a REIT, i.e. if it’s a real-estate backed kind of STO. This gives the investor a little bit more comfort and a baseline in terms of evaluation. It’s a different type of asset and the STO will be a bit more attractive and comfortable for certain investors as it will be seen as more closely aligned with what one sees in stocks and this is what we will see as the greater influence going forward.
Chris: To be honest, I think it’s all going to be about regulation. I think regulation should differ between countries. In Korea, I think going forward there will be set standards for doing an ICO, similar to an IPO and regulations are already appearing whereby regulators are going to require a company to have an X amount of initial working capital and Y number of employees etc. So, all tokens may be classified as the same.
Scott: We agree that whether ICO or STO, it all needs to be regulated. STO may be more attractive to a certain investor type and ICOs may be less so, but that will play out in an equilibrium fashion. At the moment, there is not a lot of STO due to a desire to avoid regulatory sensitivity. As a new market opens up, everything will settle down so people can choose according to their risk profiles and with regulation coming in, this will be helpful to the market. Institutional players will take a little longer to come in due to lack of certainty in regulations, the immaturity of custodian services and immaturity of the infrastructure overall – there is no ETF and futures volumes are very low. We are waiting for these things to develop, for institutions to come. Also, if regulation comes in, then taxation is one of the biggest issues that many are not talking about. At least in Korea, they haven’t been able to find a way to tax this. Yet, for example, a US person pays, similar on properties or equities returns. But in Korea, you pay zero tax currently. That is why US regulators are so against it because there is a huge market that is being created in terms of growth that is outpacing traditional markets.