A 27-year-old raised $10 million from venture capitalists for an unusual hedge fund

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A 27-year-old has raised $10 million for an unusual hedge fund –
with support of venture capitalists
like Andreessen Horowitz and Union Square
Ventures.

The 27-year-old in question
is 
Olaf
Carlson-Wee, and he’s
launching a strategy that invests in
cryptocurrencies. 

To be clear, the $10 million managed by Carlson-Wee’s Polychain
Capital is peanuts in the hedge fund world. But Polychain’s
strategy is rare, with few other funds trading in
cryptocurrencies. Most hedge
funds trade stocks, bonds, and currencies, with
variations of different strategies.

So what is a cryptocurrency?

A cryptocurrency is basically a digital, encrypted
currency that is decentralized, so no one single power
oversees its value. Bitcoin is the most famous of
cryptocurrencies – nobody
knows who created it – and it’s divorced from any
government. It’s considered a secure, private currency, drawing
the attention
of antigovernment and privacy-minded folks. But it’s not the
only one – several other cryptocurrencies exist and are being
developed.

Transactions for these currencies are recorded in blockchain,
a private (encrypted) ledger. 

Carlson-Wee is betting that he can choose the cryptocurrencies
that will go up in value – and he expects hundreds of them to
enter the market.

“The challenge for someone running a hedge fund is how to
build a portfolio across that spectrum of risk and how to choose
which of the new issues are going to become important, and which
are not,” said Brad Burnham, partner at Union Square Ventures,
which is investing in the fund.

Olaf Carlson-Wee
Courtesy of
Olaf Carlson-Wee

Polychain, based in San Francisco, will be small, hiring only a
handful of people – and Carlson-Wee is not looking for
traditional Wall Street types.

“An amateur trader in the
cryptocurrency market may have a more relevant background than
someone who has had a traditional background on Wall
Street,” Carlson-Wee said.

Carlson-Wee, a Vassar
College grad, wrote his undergrad thesis on bitcoin.”I was
immediately enamored and sort of obsessed,” he said. “I thought
the prospect of [bitcoin] had massive implications.”

He then went to Coinbase, a digital asset
exchange, and headed risk, overseeing things like fraud
prevention and account security, he said.

Not only is his background
unusual for hedge funds – so is his strategy. For instance, the
normal research avenues for common hedge fund trades are
unavailable, though there are some parallels.

Qualitative research

Instead of talking with sell-side
researchers or looking at credit agencies (there are none),
Carlson-Wee spends his time reading through the white papers that
describe the protocols, interviewing the lead developers,
and looking at a protocol’s machinations in the GitHub
repository.

“This qualitative research is
supplemented by market data such as price and trading volume as
well as network data such as transactions per day, dollar value
transacted per day, and the estimated cost of a network-scale
attack,” he said.

He also embeds himself within the
groups that are using the protocols to get a sense of how they
are interacting with them, he said. Patrick Lux/Getty
Images

That model is similar to other
funds that have launched in the space. MetaStable,
another small San Francisco-based hedge fund, launched in 2014
with a handful of employees. The firm manages a few million, said
Lucas Ryan, one of MetaStable’s staffers.

Its investors tend to be those that are already sold on
blockchain, but “aren’t necessary sold that bitcoin has solved
all the problems,” so they are seeking to invest in other
cryptocurrencies, Ryan said.

Ryan, who has a programming background, says his job is to
evaluate the protocols that people are developing and the
problems they are trying to solve.

“The market is so immature, and requires a high degree of
technical understanding to wade through the stuff that
isn’t bulls***,” Ryan said. “A lot of stuff I couldn’t do if
I wasn’t a programmer with a cryptography background. There’s not
like a ratings agency for any of these [currencies].”

Still, like with Polychain’s strategy, there are parallels.
Ryan meets with protocol developers and tries to get a sense of
how serious they are, and whether their source coding is
legit.

To be sure, this world of funds is very young. Until
recently, Ryan was working on the fund part-time, he said.

And it’s unlikely for these kinds of funds to grow large.
Bitcoin, the most popular coin, has about a $13.7 billion market
cap.

“Bitcoin 
is
like 80% of the total market of coins,” Ryan said.
“It 
would give
someone pause to start a $50 million fund.”