A little-known virtual currency fund heavy on math and statistics is turning a steady profit under a lead trader who once oversaw a major cryptocurrency exchange.
Galois Capital, a San Francisco cryptocurrency hedge fund that launched in January 2018, said in an investor letter and financial filings that it increased its holdings from $10 million to $23 million in two years with high-frequency trading and funds from new investors lured by returns. A quantitative fund manager, Galois Capital computationally makes bulk volumes of speedy, precise trades shaped by its founder and lead trader Kevin Zhou, previously head of trading at American cryptocurrency exchange Kraken, and a team of technical talent.
“Most of us are math, physics or computer science folks,” Zhou told CoinDesk, adding that highly sought International Mathematical Olympiad competitors have been sending in their resumes.
Quantitative approaches to trading are wide-ranging. They might encompass regression modeling, direction and magnitude calculations for price prediction or stochastic processes for volatility modeling and options pricing, Zhou said. On the technology side, programming interfaces, trading software and hardware equipment enabling fast communications and data analysis with exchanges are used.
Galois Capital built much of this architecture from the ground up, with custom tools such as co-located servers and network adapters, due to what Zhou cites as a dearth of heavy-duty options for cryptocurrency traders found at Hudson River Trading and Jane Street Capital, two of the biggest Wall Street quantitative trading funds.
Read more: Hedge Fund Pioneer Turns Bullish on Bitcoin Amid ‘Unprecedented’ Monetary Inflation
Overall, the quantitative bent is still relatively tame at Galois Capital. For Zhou, sophisticated trading models and technologies, such as the machine learning software the fund experimented with and shelved, are sometimes overkill in this era of cryptocurrency markets.
“What works is a lot simpler than what would work in traditional markets,” said Zhou. “Some of these models that we have right now would not work in traditional markets, in more mature and more efficient markets.”
While trading is easier in the crypto-asset class than in traditional asset classes, Zhou said, the field has gotten more competitive since he managed from 2013 to 2017 at Buttercoin, a bygone bitcoin exchange backed by Silicon Valley-located startup incubators Google Ventures and Y Combinator, and from 2015 to 2017 at the trading desk at Kraken.
At Buttercoin, “the sizes of transactions were a lot smaller. The spreads were a lot bigger. I remember there were days where you were getting 100 bps [basis points] just trading $100,000,” said Zhou. “At Kraken, spreads tightened up a bit. It was like 40, 50 bps on $200,000. Now, it’s a lot tighter, probably a million dollars gets 10, 15 bps.” A spread is the difference between a financial…