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Bailey McCann, Opalesque New York for New Managers: A new hedge fund is taking a research-based approach to crypto and web3. Aqxa Research was launched by ex Coatue and Iridian analyst Duncan Simmons in February.
Aqxa's approach is based on the skills Simmons built as an analyst doing fundamental research on technology companies. The long/short strategy looks for DeFi, NFT, Token, and crypto projects that are ideally already generating revenue or have a defensible path to profitability for the long book. The short book includes companies that aren't likely to become strong businesses or have high fraud potential.
"Initially, with crypto, it was hard to do fundamental research," Simmons tells Opalesque New Managers. "Bitcoin, for example, at the beginning was really more of a movement. It wasn't until the development of Ethereum, and later with tokens and NFTs that we started to get a market where you could do fundamental analysis. From there you can start to take a view on what is likely to become a profitable business."
While there has been a lot of volatility and a number of blow-ups in these areas so far, Simmons notes there are also several maturing companies that have viable revenue streams. Companies like Immutable X, offer games that run on tokens as well as NFTs. The platform has grown in popularity in part because gamers are already used to paying with virtual currencies in games. Immutable X also doesn't charge gas fees which improves pricing transparency on the platform. Gas fees are typically charged in addition to the token or crypto price to cover the costs of completing the transaction on the blockchain. These prices can vary and often spike if networks have a high number of transactions. Critics of gas fees argue that they limit the widespread adoption of blockchain-based technology because the fees are often significant and can come as a surprise to users.
"A lot of what we're seeing now is what it was like during the early internet boom. There is a lot of experimentation and when those ideas have a strong product-market fit - they can last," Simmons says. "If you can identify those companies there are a lot of opportunities. Gaming is one example."
Simmons adds that when innovations happen really quickly it tends to lead to a lot of hype and fraud but from that chaos, a few big winners emerge. "Liquidity has tightened up, there is more skepticism now, and all of that is fair," he says. "But I think if you look out two, three, four years from now we're going to see which companies made it through. I think you're going to see the liquidity come back and market caps increase."
The strategy is now open to outside investors.
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