Tom Richardson, AFR Markets Reporter and Commentator. See the AFR article here.
Australian venture capital investor and entrepreneur Mark Carnegie will launch an unlisted crypto fund which he claims can use complex decentralised finance (DeFi) and crypto-trading strategies to generate 30 per cent annual returns for investors.
Speaking in a whirlwind of energy from his Madagascan holiday home, Mr Carnegie repeated prior views published in The Australian Financial Review that investors should allocate 1 per cent to 2 per cent of their net worth to crypto as a hedge against inflation risks.
Mark Carnegie is preparing to return to Sydney at Easter before launching an unlisted crypto fund.
“The money printing is a risk and you’ve got to think what you’re going to do to protect yourself against it,” he said. “Now, with Australia the general solution is buy a house. The problem about that is you forgo a tonne of liquidity if that’s your only solution.”
Mr Carnegie, who cursed himself for not recognising the potency of DeFi and crypto earlier in his career, has teamed up with Russian-born crypto entrepreneur Sergei Sergienko to launch the MHC Digital Asset Fund for sophisticated investors with a minimum $50,000 investment.
It will invest 45 per cent to 75 per cent of its assets in cryptocurrencies such as bitcoin and ether with a market cap of at least $US1 billion ($1.3 billion), and 30 per cent to 60 per cent into stable coin denominated DeFi strategies generally known as ways of transacting directly without intermediaries.
Mr Carnegie and a handful of undisclosed private investors have already put some money together with Mr Sergienko to successfully trade a prototype fund.
“Sergei’s got a whole lot of what I call proprietary alpha in that he knows a lot more people that are real in this community,” Mr Carnegie said. “He’s proven and therefore access to his proprietary deal flow allows you, for not a huge amount of capital exposed, to get a disproportionate upside in some of those things.
“So we think we can put together a portfolio. It’s not going to get all the upside of the crypto market, but it’s going to take some sting out of the downside.”
One DeFi strategy the fund will employ is staking, where market participants can make assets available as a type of market maker on a blockchain network in exchange for a yield.
“We also think we’re going to be able to make intelligent asymmetric bets in the options market,” said Mr Carnegie. “We aren’t a typical investor in this space in that we’re prepared to trade away some of the upside [to target the 30 per cent return].”
Mr Sergienko has made a name in Russia as a celebrity crypto millionaire and active user of the Clubhouse app for crypto enthusiasts. He spent part of the past decade shuttling between bitcoin mining sites in abandoned Siberian factories with abundant cheap electricity and Sydney’s Paddington, which he now calls home.
Mr Sergienko used surplus electricity supplies in abandoned post-Soviet Siberian factories to mine bitcoin in the 2010s.
“We use automatic market makers and the discrepancies in returns in stable coins to produce a greater return for the fund,” he said. “Effectively, we’re providing liquidity to automatic market makers on DeFi market protocols and receive commission from the trades executed on those protocols. We do it on different blockchains, thereby also taking advantage of different pricing for commission on different blockchains.”
The fund will harness upside from the rise of bitcoin, but Mr Carnegie thinks the leading cryptocurrency is less sophisticated compared to the ethereum blockchain’s potential to mould a more libertarian world enlightened by decentralised finance.
“It’s hard, hard, hard to understand it [DeFi] and turn it into a language for people from the outside,” he said. “The reason I’m doing this rather than HODL, which is buy bitcoin and hold on for dear life, is it’s just for me a weak part of your investment thesis, the strongest is proper DeFi and proper smart contracts.”
Ethereum is an open-source blockchain that powers cryptocurrency ether, with potential to deliver smart contracts similar to digital escrow accounts used by the Airtasker platform to ensure a tradie receives payment on completion of a job.
“I thought ether was going to outperform bitcoin and everything else. So the bitcoin people have done better than me,” Mr Carnegie said. “But I thought it was better to try and put together a more complicated portfolio with Sergei, because this thing is so dynamic. All the success in DeFi is going to pull bitcoin higher with it.”
Mr Carnegie declined to discuss the circumstances that led him to ride out the COVID-19 pandemic in Madagascar, other than to say he had looked at a Zambian blockchain business as an investment opportunity. He plans to fly into Sydney and undertake two weeks’ quarantine around Easter.