Today’s episode is from a 2018 conversation with Rick Marini, founder and managing partner at Protocol Ventures, the first fund-of-funds to focus exclusively on cryptoassets. We discuss how Rick manages his fund and adds value for clients but also why an investor might choose to go it alone. For the full conversation, check out Flippening episode 7.
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Clay: Welcome to Daily Wisdom from the Flippening Podcast. These episodes feature short, to the point clips from our full-length interviews. We talk to the men and women behind the trades, crypto exchanges, and regulations with the goal of helping you become a better, more informed investor.
Today, we hear from Rick Marini, founder and managing partner at Protocol Ventures, the first fund-of-funds to focus exclusively on cryptoassets. We discuss how Rick manages his fund and adds value for clients but also why an investor might choose to go it alone. For the full conversation, [00:00:30] check out Flippening episode 7.
This episode has two sponsors. The first sponsor is Nexo, which offers instant crypto credit lines. Check them out at Nexo.io. Our second sponsor is the Nomics Cryptocurrency Market Cap and Data API for institutions, fintech apps, and funds.
Without further ado, here’s my conversation with Rick Marini, founder and managing partner at Protocol Ventures. Enjoy.
Clay: How do you think about rebalancing and what would trigger that? A couple things I can [00:01:00] think of is if one fund is performing extraordinarily well, you might want to allocate more capital. But, you also–I imagine–might want to diversify potentially across different theses and approaches. Like every year when more funds pop up, you might have a quant fund, an algo fund, and maybe an ICO fund, and you just kind of want to diversify more. What triggers rebalancing for you [00:01:30] and how do you go about doing it, and how often can you realistically do it?
Rick: We rebalance every month, and the way that we do that is new capital comes in. All of the funds that we’ve invested in have a 12-month lockup, that’s pretty standard in the industry. We don’t do anything more than a 12-month lockup. Our LPs have the ability to redeem after that period. Really what we’re doing is that we’re trying to bring together a truly diversified portfolio. Some of our hedge funds have more of a buy-and-hold strategy, more like a Berkshire Hathaway. Some of them are actively traded.
[00:02:00] Some of them have a Wall Street background, which is increasingly important as Wall Street infrastructure starts to come into the crypto market in 2018. But what we’re doing is we’ve made bets across six different funds today, with different strategies, different thesis. And then as new capital comes in every month, we then deploy that into the funds, and we do that by basically rebalancing the funds each month. It’s not taking money out of any fund, because again, there’s a 12-month lockup.
It’s really how we deploy money [00:02:30] each month to rebalance a fund with new capital coming in.
That’s going to be based on a couple things as we think about how we deploy that. One is obviously going to be performance. It’s not necessarily how did you do last month, but you know, over a several-month period. Number two, I’m talking to the hedge fund managers on a weekly basis, so I know where they’re making their big bets. If their big bets are aligned with what I’m hearing in the market, what I’m thinking about the market, then I may want to put a little bit more with them. [00:03:00] Some of the hedge funds have more of a broader approach, some of them have more of a rifle approach. You want to be able to think about that as you think about deploying capital, and how to get the best returns you can with more of a moderate amount of risk, especially in a diversified portfolio.
Clay: Let’s talk about your offer for a second. What is your offer? What is your fee structure? What’s the lockup? What are the general parameters of what you provide to the market?
Rick: Sure, yeah, so we are the first fund-of-funds in crypto. [00:03:30] The main value-add is the ability to get diversified. One single LP investment comes into the fund, and then we can get you across 6, going to 10, funds. That’s important because we talked about access and pricing, but for many of these funds, their minimum is a million dollars. For us, our minimum is 500K, but I get you diversified across several funds instead of just one, at a lower price point. Our fees are 1 in 10 on top of the 2 in 20 that the funds charge, [00:04:00] so 1% management fee, and a 10% carry. The lockup period for all these funds is 12 months, so I can get liquidity after 12 months, and we do quarterly redemptions.
Clay: I think you make a really good point about the minimum requirements. For example, if I were looking to invest one million in a hedge fund, I know for certain that one of the funds that you invest in has a five million dollar minimum investment, so I wouldn’t be able to get into that fund theoretically, [00:04:30] but I could get exposure to the gains that that fund is going to have through a $500,000 investment in your fund. I think that’s a great service that you provide there.
What do you think are the potential downsides to working with a fund-of-funds? I realize this is a little bit like the interview question that people often get asked, like what are your weaknesses, but what are the weaknesses of a fund of funds?
Rick: I think there is potentially two. One would be, obviously, fees on fees, right. [00:05:00] Nobody likes to pay fees, nobody likes to pay taxes. But the way that I look at that is our 1 in 10 fee on top of whatever the funds are charging, 2 in 20, in some ways our fee is free. Many of these funds, if you went to them today, would be 3 in 30. Our fee, in many ways, is free.
We’re doing a lot of work here. We’re talking to 100 different funds. We have access to these funds. To me, we can definitely justify that fee. That’s definitely something that people think about. That’d be one.
The other would just be loss of control [00:05:30] in that a lot of people like to do their own investing, and I think that’s fine. That’s how I started investing as well, but then the portfolio got to a point where I said, okay, I’ve got a fair amount of capital in here, this is not just a hobby anymore. I’ve got to really think about how I can best optimize that.
As I met some of the best hedge fund managers over the last couple years in the crypto space, I realized that the top 10 managers are head and shoulders above anyone else investing in the space. If I really want to get the best returns [00:06:00] on my money, and I’m not just doing it as a hobby, I should really start investing in the funds. For me, if you like to do it on your own cause you think it’s fun to do, great, continue to do that. If you’re a serious investor with real capital that wants to get the best returns, then I think a fund-of-funds makes sense.
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All opinions expressed by podcast host or guest are solely their own opinion and do not reflect the opinion of Nomics or any other company. This podcast is for informational [00:07:00] and entertainment purposes only and should not be relied upon as the basis for investment decisions.
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