This crypto hedge fund founded by a deep value investor killed it even as crypto markets crashed

Crypto hedge funds are a somewhat new phenomenon. One fund explained to ValueWalk how they take the principles and practices of other hedge funds and apply them to the crypto market. Alpha Sigma Capital is not only negatively correlated to the non-crypto market, including regular hedge funds, stocks and bonds, but also negatively correlated to the crypto market.

Get The Full Seth Klarman Series in PDF

Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q2 2020 hedge fund letters, conferences and more

 ASC posted astonishing returns even when the crypto market was crashing earlier this year.

Mangrove Partners Narrowly Avoids “Extinction-Level Event”

Nathaniel August's Mangrove Partners is having a rough 2020. According to a copy of the hedge fund's August update, a copy of which ValueWalk has been able to review, for the year to August 5, Mangrove Funds have returned -38%. Over the trailing 12-month period, the funds returned -44%. The S&P 500 produced a positive Read More


ASC is headed up by Enzo Villani and Michael Onghai. CEO Villani is a serial entrepreneur who has been a chief strategist for Fortune 500 companies, private equity firms and venture capitalists for 20 years. He co-founded Nasdaq Corporate Solutions and served as chief strategy officer for two M&A consolidations in shareholder management and financial technology.

Onghai is a partner at ASC, and he's a two-time entrepreneur, author, inventor and speaker. He has founded and invested in several top blockchain companies, including Coinbase and TZero. Onghai also advises several internet incubators and FundersClub. He also has a background in value investing, having graduated from Columbia Business School's Executive Management Certificate Program in Value Investing. Onghai created a Warren Buffett quotes up earlier in his life.

How Alpha Sigma Capital applies hedge fund practices to the crypto market

In an email to ValueWalk, Villani said they apply hedge fund research and other practices to the crypto market by focusing on the companies rather than the crypto they sell. He said like the stock markets, the crypto markets have undervalued companies and organizations, which means the market is not efficient.

"We focus on the company and the fundamentals," he told ValueWalk. "This means channel checks through our multiple relationships within the industry, speaking to management and having key analysts and contacts to verify claims and offerings."

The ASC team calls themselves "active investors in the blockchain economy." They focus on funding undervalued and under-discovered companies executing on their business plans but still in need of support from independent investors.

"We don't look at the market and the hype machines or try to play that route," he explained. "We're taking it back to the fundamentals. There are companies that are executing with revenue and adoption of their ecosystems, and we are actively seeking them out."

Quant Network and its Overledger OS

One of ASC's recent theses was for Quant Network, a blockchain-as-a-service platform that is trying to solve one of the biggest barriers to widespread adoption of blockchain technology, which is the lack of interoperability. The company's main product is Overledger OS, an operating system that connects enterprise networks with various blockchains and enables companies to launch and scale enterprise-grade multi-chain applications.

Overledger allows data to be easily transferred between multiple blockchains. Businesses can upgrade their legacy systems and utilize DLT technology using Quant Network's operating system, and Villani believes the OS could lead to "mass adoption of blockchain technology."

Quant Network was founded in 2016, and it states that its mission is "to interconnect the world's networks to blockchain and make this technology accessible to all." Interoperability is seen as a major barrier to mass adoption of blockchain technology because it is necessary for smooth sharing of information, smart contract execution, partnerships, solution sharing and user friendliness.

How Quant Network makes money

Quant Network has already signed many major partnerships, including with Oracle, SIMBA chain and others. Overledger provides four major revenue streams for the company. The first is the Quant App Store, in which developers will be able to build and sell MApps. Quant Tokens are used for in-app purchases.

The company will also offer a number of software-as-a-service products targeting specific industries like financial services, supply chain management, government services and healthcare. Additionally, Quant Network will provide enterprise middleware products that will target certain industries that have a greater need for connectivity between networks. Finally, the company will license its intellectual property to other enterprises.

The Alpha Sigma Capital team also said Quant Network has some advantages over competing projects. For example, the company's operating system has almost no limit as far as the blockchains customers are required to use.

However, other interoperability projects usually force customers onto at least one particular blockchain. This enables customers to easily implement Quant Network's solution without having to overhaul their existing systems first.

How Quant Tokens work

Quant Network is already producing revenue and brought in almost $10 million before the coronavirus hit. ASC's base case suggests the company is expected to post a loss of $500,000 this year but become profitable in 2021 with profits rising steadily thereafter. The fund's upside case suggests a profit of $4.3 million for this year with even more sizable growth in the coming years.

The company's Quant Token is used within the Overledger network and to develop MApps. The ASC team said the token supply is fixed at about 14.6 million, and Quant expects to issue no new tokens. They said the dynamics of a fixed supply support appreciation of the tokens because they will become scarce. As more and more organizations adopt the network, scarcity should increase, boosting the price.

The Swiss Financial Market Supervisory Authority regulates the Quant Token as a utility token that provides access to the Overledger Operating System. The cost of access via the tokens will be fixed based on fiat rates, and the amount of tokens needed for access will vary based on the token price.

Alpha Sigmal Capital's Quant Network thesis

Alpha Sigma Capital sees significant opportunities for Quant Network's valuation to increase significantly if the company can solve the interoperability issue with blockchain technology. The fund sees many growth opportunities for the company, including in financial services, supply chain management, government services and healthcare.

The ASC team said all of these industries work on outdated and often inefficient systems, which are the perfect place for blockchain interoperability to disrupt and enhance operations. DLT is expected to see a compound annual growth rate of 76% over the next five years, and within that growth there will be the need for Quant's Overledger OS to enable these systems to communicate with each other.

They believe Quant could become the industry standard for interoperability, although one risk is that the company fails become the standard and loses out to competition. They see greater rewards than risks in investing in Quant Network as the company sees significant opportunity to solve blockchain interoperability problems.

Further, Quant Network has several notable partnerships to increase adoption and interoperability in multiple industries. The ASC team also expects the company's revenues to grow significantly in the next five years and had high praise for Quant Network's management team.

ASC has several other blockchain-related investments in the pipeline. With Villani and Onghai's track record in picking blockchain investments, they have a bright future ahead of them.

This article first appeared on ValueWalk Premium.