Crypto Hedge Funds Bring More Diversity To Fintech

Traditional hedge funds have a huge diversity problem. According to a recent study by the Bella Research Group and the John S. and James L. Knight Foundation, women own just 4.3 percent of American hedge funds while minorities own around 8 percent. Combined, the study estimated these two categories control less than 1 percent of the industry’s assets.

Now, thanks to skyrocketing bitcoin prices and a broader cryptocurrency boom, crypto hedge funds specializing in blockchain-based digital assets are sprouting up all over. The crop of new funds could bring some much needed diversity to this lucrative fintech sector.

There are already at least 70 hedge funds investing in cryptocurrencies like bitcoin, a number that grows on an almost weekly basis. One of the most interesting funds in the pipeline is the brainchild of former Coinbase veteran Linda Xie. She’s co-founding Scalar Capital in San Francisco, which will focus on diverse tokens including privacy-oriented cryptocurrencies like monero, dash and zcash.

“One of the things both [co-founder] Jordan Clifford and I care a lot of about is financial privacy,” Xie told International Business Times. “The other thing we really want to focus on is governance...projects like Tezos.” Xie is a pragmatist. She wants to invest in sustainable projects, not quick flips. She also has a penchant for “real world compliance” tools like monero’s view key, which helps regulated organizations such as nonprofits accept anonymous transactions while still permitting selective transparency options for tax audits.

In the meantime, Xie continues to engage with the cryptocurrency community and follow bitcoin’s development. When she wrote a blog post about sexism in the blockchain industry, many social media users lashed out. “I got trolled a lot, I didn’t realize that was going to happen,” Xie said. “But I also received a lot of support, so I’m trying not to let that very vocal minority get to me.”

Although the cryptocurrency community is diverse compared to other tech sectors, the white collar blockchain industry still has a disproportionately small number of minority executives. Aram Barnett, the 20-year-old CEO of the Washington D.C.-based crypto hedge fund Alluminate, is one of the first black entrepreneurs at the helm of his own crypto hedge fund. It will soon close its first fund with $25 million.

Barnett started tinkering with cryptocurrency when he was just 14 years old. “I’ve always been the youngest person in the room, this young, scruffy black guy talking about blockchain,” Barnett told IBT. “I can count the amount of African-Americans in this space. We all know each other. And there are even less women.”

Alluminate is a relatively new hybrid fund, combining various aspects of venture capital similar to ConsenSys Ventures in New York. What Barnett’s team lacks in years and college degrees, they make up for in experience. The fund’s advisors include Ari Paul, co-founder of BlockTower Capital, and former NASDAQ Vice Chairman David Wield.

Xie sees this type of opportunity as one of the stark cultural differences between traditional hedge funds and new funds run by cryptographers. “The way you prove yourself in the crypto community is by knowing your stuff and showing you care about the technology,” she said. “It’s not about being a part of some crypto fraternity...I think it will change people’s perception of hedge funds.”

Barnett’s fund itself will soon split into two companies: The fund itself and an independent service provider called CoinScore, a proprietary token analytics technology Barnett’s team developed in-house. CoinScore will officially launch on October 19. The company is splitting up now to prevent any conflicts of interest down the road.

“The companies we [Alluminate] work with now, we don’t give them a [CoinScore] rating. We provide all the data but we don’t give them a score,” Barnett explained. So far they’ve indexed around 2,200 tokens and blockchain-based assets by analyzing 100 sources from news articles to blogs and technical papers, including sentiment analysis. A few regular old human experts complement all this software. “We have at least two people read and re-read the white paper,” Barnett said. “We do technical due diligence as well.”

All things considered, CoinScore will offer some of the most thorough analysis available to the public for a monthly subscription of $300 to $2500, depending on which features you want. Alluminate will continue to use the software as well, combined with the fund’s analysts and a uniquely hands-on approach to investments.

“We’re engineers first, investors second,” Barnett said. “We need to make sure the product is sound and the team behind it is the right fit...because a lot of people in this space just see a lot of money. We’re in blockchain for the long term.” They’ve got big plans for the future. Unusual plans for a hedge fund, to say the least, such as hosting monthly public meetups and launching an educational nonprofit called the Institute for Decentralized Technology later this year.

A handful of minority executives focusing on cryptocurrency is just a start. There is still a long way to go. “I’ve more or less had a very positive experience in the crypto community,” Xie said. “But I do have scenarios where I feel completely ignored in the conversation.” Like fellow female managing partner Kavita Gupta of ConsenSys Ventures, Xie wants to break the mold of traditional hedge funds. Xie will leverage her technical expertise to partner with projects throughout the token sale process. Xie, Gupta and Barnett represent a new mentality of collaboration.

Crypto hedge funds still want to make lots of money. Yet some of them also incorporate a hint of the bitcoin community’s philosophical ethics. “We want to stay very, very close to the crypto community,” Xie said. “Both Jordan and I are from the crypto world. We want to focus more on the technology. We’re not touting these crazy returns.”

This community-oriented approach raises new questions about what type of broader social impact hedge funds could have in the near future. “I’m super passionate about making sure that women and minorities are involved inside of this space,” Barnett said. “Just like tech, this industry is heavily dominated by white males and Asian males as well. If we’re moving towards a decentralized future, then everyone has to be included in that."