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Matthew Idemir
The recent rise in cryptocurrencies as an asset class is spectacular. Incredible returns have, of course, led to a surge in demand from investors seeking access to cryptocurrencies.
In short, cryptocurrencies are generally digital currencies that are not controlled by central authorities. Of these various cryptocurrencies, Bitcoin (BTC-USD) Is the dominant token with a market capitalization of about $ 900 billion and currently accounts for about 40% of the world’s cryptocurrency market capitalization.
CME Group began offering Bitcoin futures in late 2017 to take advantage of the growing demand for exposure. Almost four years later We have now seen Bitcoin futures enter the ETF And added them to ourselves WisdomTree Enhanced Commodity Strategy Fund (GCC).
As part of our goal of continuous innovation and enhancement Managed Futures products, Wisdom Tree Managed Futures Strategy Fund allocated 1.5% exposure to Bitcoin futures (WTMF) Early January 2022. WTMF does not invest directly in Bitcoin.
WTMF is a systematic trend-following strategy for equities, commodities and currencies through futures contract positions to achieve positive total returns in up or down markets that are not directly correlated with a wide range of market equity and fixed income returns. , Provides exposure to interest rates. We believe that the addition of Bitcoin futures not only further distinguishes WTMF from other managed futures ETFs, but also provides investors with Bitcoin exposure in a risk-aware manner.
Motivation
Ultimately, we believe that what makes Bitcoin attractive to investors is the potential for great absolute profits.
However, Bitcoin has other attractive additions to managed futures products. Specifically, Bitcoin has historically been an excellent diversified investor from other traditional asset classes.
The chart below shows the correlation between Bitcoin spot rates and other asset classes. Investigate the correlation between Bitcoin spot rates and other asset classes, approximately dating back to December 31, 2017, when CME Bitcoin futures began trading.
Spot returns can be very different from futures returns, but when looking at correlations, spot rates are expected to be a reasonable substitute for Bitcoin’s previous month’s contract.
It turns out that Bitcoin was weakly correlated with other asset classes during this period.
We believe that the low historical correlation between Bitcoin futures and other asset classes is a good sign to strengthen the risk-adjusted return profile of multi-asset funds like WTMF. Significant changes to WTMF in June 2021 With the aim of improving risk-adjusted returns, it is worth investigating the correlation between Bitcoin and restructured funds. Since the reorganization on June 4, 2021, we can certainly see that Bitcoin spot rates have a weak correlation with funds.
Get exposure
Bitcoin futures exposure at WTMF is achieved through futures contracts traded on the Chicago Mercantile Exchange (CME). CME Bitcoin futures are currently highly liquid, with an average daily volume (ADV) of approximately 7,700 for 60 days as of November 30, 2021. Assuming the fund’s AUM is around $ 155 million, trading on a 3% allocation would be only 0.23%. 60 days ADV.
strategy
When designing a strategy, it is important to have clear goals. The incredible rise in Bitcoin prices in recent years is certainly a source of excitement. However, be aware that Bitcoin has historically been extremely volatile. Our purpose is simple. It provides investors with Bitcoin exposure through a systematic strategy designed to reduce volatility compared to long-term-only strategies, while capturing some of the upside potential that Bitcoin offers. ..
Due to the high volatility of Bitcoin in the past, we are currently assigning only 3% nominal exposure to Bitcoin exposure. The goal here is for the Bitcoin component to contribute meaningfully, but not to dominate the fund’s volatility profile.
Since WTMF is a systematic trend-following fund, Bitcoin strategies need to be able to dynamically adjust their exposure according to the strength of the price trend. To enhance protection from long-term drawdowns, we employ momentum signals that respond more quickly to recent information. The nominal 3% amount we invest depends on the strength of the trend signal.
Finally, Bitcoin has been on an upward trend in the long run, which currently limits models from taking short positions. Instead, simply allocate to cash. This can reduce the volatility of the model. The following figure shows the long / flat model of the Bitcoin component.
Current positioning
Click for the current list of holdings here..
At the January rebalance, the fund will take a long position of 1.5% on Bitcoin futures (represented by the crypto sector in the chart above). In particular, the fund remains netlong in most commodity sectors, equities, and US dollar indexes. The fund is also a short-term interest rate contract.
Conclusion
As part of its goal of continually improving managed futures products, WTMF is currently the first systematic trend-following ETF to provide investors with access to Bitcoin futures exposure. The fund is currently long on 1.5% Bitcoin futures after the January rebalance. We believe that adding Bitcoin futures exposure will not only improve the risk-adjusted returns of the fund, but may also diversify the components of the fund. Our aim is to provide investors with this exposure in a risk-managed manner through a systematic long / flat trend-following strategy that responds quickly to changing market conditions.
Significant risks associated with this article
There are risks associated with the investment, including the potential loss of principal. Investing in this fund is speculative, carries considerable risk and should not constitute the entire portfolio of investors. One of the risks associated with a fund is the complexity of the various factors that contribute to the performance of the fund and its correlation (or non-correlation) with other asset classes. These factors include the use of long and short positions in commodity futures contracts, currency forward contracts, swaps, and other derivatives. Derivatives are volatile, less liquid than other securities, and may be more sensitive to the effects of various economic conditions.
In addition, Bitcoin and Bitcoin futures are relatively new asset classes. They are exposed to unique and substantial risks and have historically been affected by significant price fluctuations. The Bitcoin futures market has grown significantly since Bitcoin futures began trading, but there is no guarantee that this growth will continue. Bitcoin prices can fall sharply (including zero) and are expected to have a similar impact on Bitcoin futures prices. The fund should not be used on behalf of taking long-only (or short-only) positions in commodities or currencies. Funds can lose significant value during periods when long-only indexes rise (or short-only indexes fall).
The fund’s investment objectives are based on historical price trends. There is no guarantee that such trends will be reflected in future market movements. Funds typically do not make monthly adjustments, so if the market violates the fund’s established position on a monthly basis, it can incur significant losses. Markets without sustained price trends or markets that quickly reverse or “whist saw” the fund can suffer significant losses. Since the fund is actively managed, the ability of the fund to achieve its objectives depends on the effectiveness of the portfolio manager. The fund’s investment strategy has the potential to provide higher capital gains distributions than other ETFs. For more information on the fund’s risk profile, please read the fund’s prospectus.
Matthew Aydemir, Research Analyst
Matt Aydemir began his career at WisdomTree in January 2020 as a research analyst. He is responsible for quantitative research of WisdomTree products and maintenance and reconstruction of WisdomTree indexes. Prior to joining WisdomTree full-time, he worked as an intern on a research team, developing tools for portfolio analysis. Matt received a master’s degree in financial engineering from Columbia University in 2020 and a bachelor’s degree in chemical engineering from the University of Waterloo in 2016.
Editor’s Note: The bullet points in the summary of this article have been selected by the editors of Seeking Alpha.
