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StraBerry: Investment Letters

SQRT 20230623

This letter is exclusively for our StraBerry users. We kindly request that you do not circulate it.

Welcome back 👋

Welcome back to the StraBerry investment letter series.

Yi Sun-Sin has recorded a 0.1% loss over the past +2 weeks, reflecting the challenging period of downward trends in the crypto market.

Make sure to visit our Pre-genesis Season website (

HERE⁠

) to stay updated on your personal trading activities with Yi Sun-Sin, updated daily at 12:05pm KST.

Performance Review: Yi Sun-Sin

Trading period: 2023-05-19~2023-06-21 (34 days)

Average trade count (daily): ~1800 times

Average size of trading universe (daily): 30~40 cryptocurrencies (*)

Performance Summary (**)

⁠

(*) "Trading universe" refers to the set of cryptocurrencies a trader or investment strategy focuses on. Typically, the selection is made by a portfolio manager, but in the case of Yi Sun-Sin, it gets determined by the underlying logic of the strategy itself. (**) The performance shown above represents the average return of our StraBerry users' accounts, with minor variations observed among them.

Let’s Dive In

Stop loss triggered: Yi Sun-Sin has its own stop loss logic set to be activated at -2.5%. This means that we have a monitoring system in place to continuously assess Yi Sun-Sin's performance. If the performance falls below -2.5%, the positions held are gradually liquidated (a process that typically takes around 10 minutes) to minimize potential additional losses. This stop loss mechanism is an integral part of our risk management framework.

Yi Sun-Sin experienced significant dips in its performance on June 5th (-2.5%) and June 14th (-4.0%), resulting in the activation of a stop-loss order on both occasions. The stop loss triggered on June 5th marked the first instance since the launch of Project Strawberry. On June 14th, there was a significant and sudden price decline that exceeded the -2.5% threshold, leading to a loss of -4.0% despite the stop-loss activation. We are continuously working on advancing our method to mitigate losses in the future.

Significant decline in the alt-coin market: Alt-coins, referring to all cryptocurrencies except dominant cryptocurrencies such as Bitcoin (BTC) and Ether (ETH) saw significant drops. Despite Yi Sun-Sin's daily inclusion of 30~50 alt-coins and its consequent exposure to the alt-coin market, its performance remained relatively unaffected. This highlights the significance of hedging risks at the level of the trading universe.

⁠

BTC: The recent surge in BTC price is primarily attributed to the news of Blackrock’s filing for a BTC exchange-traded fund (ETF) with the U.S. Securities and Exchange Commission (the “SEC”) on June 15, 2023. A spot BTC ETF would track Bitcoin's underlying market price, giving investors exposure to Bitcoin without directly buying it. In the chart above, it’s interesting to see that Yi Sun-Sin exhibits a strong correlation with the performance of BTC, even though BTC is rarely included in the strategy’s trading universe.

Human intervention: One of the primary objectives of quant trading is to minimize human intervention, which is often influenced by human traders’ emotional impulses. While it’s tempting to be swayed by the current performance of a strategy and close positions that fall short of expectations, it’s essential that one considers the strategy's historical patterns, which most of the time involve a series of upward and downward trends. Making decisions with discretion based on rational analysis, rather than being driven by emotions, is key to minimizing the opportunity costs associated with prematurely closing positions.

⁠

Risk Management: Alpha Ensembles

Typically, a trading strategy consists of multiple alphas to mitigate the risk of over-reliance on any particular alpha. (FYI, Yi Sun-Sin is composed of a single alpha.)

What the heck is alpha anyway?

Quickly, alpha in quant trading refers to a mathematical model that evaluates the statistical probabilities of price movements in the market. Its objective is to generate an excess return on investment by identifying and capitalizing on opportunities that have the potential to outperform the market.

Conceptually, it can be stated that "alpha = strategy."

Visit our
FAQ⁠
section to learn more.

Relying solely on a single alpha can be risky, as it can go through periods of underperformance. Our multi-strategic approach, known as "alpha ensembles," aims to mitigate such risks to achieve more consistent and robust performance. This approach combines multiple alphas, preferably with low mutual correlation, through weighted allocation that aligns with the desired risk and return profile.

If you find this concept intriguing, visit our newly launched official website (

SQRT.WORLD⁠

) and go to the "

Build Your Own⁠

" tab. There, you’ll find our three alphas, Yi Sun-Sin, Napoleon, and Doraemong, with which you can build your own ensemble in two ways: 1) automatically by using our AI/ML optimizer, and 2) manually by putting in your preferred allocation weights. This flexibility allows you to customize your trading strategy to suit your preferences.

Example: Let’s use an equal-weight ensemble of Yi Sun-Sin and Napoleon to see how they perform against Yi Sun-Sin.

Alpha ensemble = 0.5 * (Yi Sun-Sin + Napoleon)

⁠

You can see in the chart above that the ensemble of Yi Sun-Sin and Napoleon shows lower returns compared to Yi Sun-Sin alone. However, it does a better job of maintaining a lower maximum drawdown (MDD), which is less than half of what Yi Sun-Sin exhibits, and a higher Sharpe ratio (SR). This signifies that the alpha ensemble can potentially provide a superior risk-adjusted return compared to investing in individual alphas of Yi Sun-Sin or Napoleon alone.

So, why should you care? This multi-strategic alpha ensemble approach will be a core part of our future service, offering our customers a wider range of trading strategies to choose from, catering to diverse risk and return profiles.

Trading 101: Spot vs futures trades

Spot trading refers to the immediate exchange or delivery of financial instruments, including securities, commodities, foreign currencies, and cryptocurrencies. It involves the direct ownership of the underlying asset, such as buying and owning BTC itself.

Futures trading does not involve the direct ownership of the underlying cryptocurrency. Instead, it involves owning futures contracts that represent the value of a specific cryptocurrency. These futures contracts can be executed on various centralized exchanges (CEXs) (e.g., Binance, Bybit) and decentralized exchanges (DEXs) (e.g., dYdX).

As for Yi Sun-Sin, all trades conducted on Upbit are spot trades; they involve the immediate buy and sell of cryptocurrencies. On the other hand, Napoleon and Doraemong involve futures trading, which utilizes short positions.

The availability of short selling might be one of the key advantages of incorporating futures trading as part of a strategy, as short positions provide opportunities to hedge against various risks in the market. For instance, Napoleon is designed to minimize exposure to the market index (i.e., beta exposure) by utilizing short positions, which is known as market-neutral strategies.

However, futures trading also entails its own set of risks due to potential liquidation and the amplified impact of leverage, which can lead to higher losses compared to those incurred in the underlying assets. Therefore, it is generally not advisable for inexperienced or non-professional traders to engage in derivatives trading on their own.

Reflections on the Market

Lies, lies, & more lies...: Haru Invest and Delio, two South Korean crypto-related businesses, are facing serious allegations of mishandling their customers' savings and intentionally concealing this information. According to reports, they have halted the withdrawal of their investors' funds.

Both platforms primarily offered CeFi* staking, which enabled users to stake their cryptocurrencies on the platform and receive a guaranteed annual percentage yield (APY) ranging from 10% to 15%.

*What’s CeFi?

CeFi stands for centralized finance, which stands at the opposite end of decentralized finance (DeFi) in crypto trading and transactions.

CeFi is similar to traditional finance (TradFi) in that CeFi systems are regulated through centralized platforms, such as centralized crypto exchanges (CEXes) that require Know Your Customer (KYC). One of the main perks of CeFi is that it combines the convenience and security of TradFi with the yield benefits of DeFi.

Here, what’s DeFi then? DeFi refers to the wide variety of financial products and services that do not require third parties and centralized institutions, such as banks and centralized exchanges. This decentralization is made possible by blockchains and smart contracts. DeFi enables peer-to-peer transactions in lending, borrowing, trading assets, and so forth, thereby giving individuals greater control over their investment decisions and assets.

As such, there are significant differences between CeFi crypto exchanges (i.e., centralized exchanges; CEXes) and their decentralized counterparts (i.e., decentralized exchanges; DEXes) in terms of how transactions are processed and assets managed. In the case of CEXes, a central authority oversees transactions, facilitates trades, and holds the ultimate decision-making power over users' assets. In contrast, DEXes allow users to maintain exclusive control over their private keys. This self-custody feature ensures that users have complete authority over their assets.

Given the prevailing bank interest rates at around 3-4%, and the prolonged downturn in the crypto market lasting over a year, individuals with some knowledge of finance and/or the crypto space have raised concerns (and doubts) about the feasibility of making such profit claims, especially when these platforms have not disclosed their sources of profit generation. This lack of transparency triggered suspicions regarding the sustainability of their business models. And more critically, it has placed many unsuspecting retail investors at serious risk.

Despite these platforms’ previous claims of thriving even during major market events, such as the LUNA and FTX collapses, it has since then been revealed that those claims had not been true. Haru Invest and Delio are now confronting serious charges related to violations of financial laws and perpetrating fraud. This serves as a reminder for every retail investor that although the allure of high returns may be tempting, one should exercise caution. When suspicions arise in the market, there is usually a reason.

Trust through transparency: Transparency should be at the center of crypto transactions and investments. While numerous DeFi protocols and services have emerged to address the issues of over-centralization and sub-par degree of transparency in crypto finance (remember “Defi Summer” in 2020 anyone?), they also face their own set of challenges, such as technical complexity, lack of reliable quality signals and legal safeguards, vulnerability to malicious actors, and even the risk of simple user errors.

The ongoing debate between CeFi and DeFi reflects the progress being made across various layers of society, including technology, finance, culture, and social awareness, with regards to how best to utilize the wealth-creating potential of crypto/Web3. It’s still too early to determine which approach is better (though, we think choosing one over the other misses the point anyway, especially when the majority of the world’s population may not have been properly exposed to crypto to make informed decisions). What cannot be emphasized enough, however, is the importance of transparency and its ability to instill trust in the crypto investing market as a whole.

Our stance: Top of our mind at SQRT is how to achieve efficient transparency in our offering of quant trading strategies. What we mean by that is we don’t want to simply shout out the word “transparency” for the sake of the optics or just to fit in the world of crypto/Web3. We want to incorporate relevant operational and social mechanisms in our product both at the infrastructure and strategy levels, so that you, as a user, can actually benefit from our transparent actions—whether that be a better UX/UI, a wider range of options for building wealth, or simply a greater peace in mind.

We, along with other mindful players in the space, strive to make meaningful contributions to the collective effort of fostering trust, integrity, and self-consistency within the crypto investing market. Why? Because at the end of the day, a better system will better our lives.

Once again, we’re glad you’re here with us. Have a wonderful weekend.

With gratitude,

Your friends at SQRT

Welcome back 👋

Performance Review: Yi Sun-Sin

Let’s Dive In

Risk Management: Alpha Ensembles

Trading 101: Spot vs futures trades

Reflections on the Market

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