Crypto Hedge Fund Focused on ESG Buys Algorand, Polkadot

by Arthur · October 4, 2022

(Bloomberg) — Modular Asset Management’s crypto hedge fund has bought tokens such as Algorand and Polkadot in a bet that coins with stronger sustainability qualities will outperform after a $2 trillion shakeout in digital assets.

The Modular Blockchain Fund, launched in May, has also stepped up purchases of Cosmos in recent weeks, Chief Investment Officer Daniel Liebau said in an interview.

Liebau seeks to get an edge in choppy markets by choosing coins he believes will better withstand increasing scrutiny of the environmental, social and governance attributes of crypto — a trend that has gripped other asset classes such as stocks and bonds over the past decade.

So far, Liebau’s picks have had a mixed performance. Polkadot and Algorand have fallen 43% and 39%, respectively, since Liebau’s fund launched on May 10, compared to a 34% decline in the MVIS CryptoCompare Digital Assets 100 Index. Cosmos has outperformed, falling around 6%.

“In digital asset markets, we believe that the use of platforms is largely linked to good sustainability characteristics,” Liebau said, adding that an ESG strategy can take time to pay off. “Not all of these sustainability characteristics provide clear additional returns today.”

While the energy requirements of Bitcoin mining have long been a point of contention, this year’s market carnage has drawn attention to other aspects of ESG where crypto lags far behind.

The collapse of the TerraUSD stablecoin in May has sparked investigations in the US and South Korea, and its creator is wanted by Korean authorities. Several digital asset lenders have frozen deposits and filed for bankruptcy, and a prominent crypto hedge fund is winding down, prompting a series of lawsuits and allegations of fraud. And crypto-asset applications that had touted their role in making finance fairer and more equitable have found themselves at loggerheads over governance.

Read more: South Korea moves to freeze $67 million of Bitcoin linked to Kwon

Modular, which manages about $1 billion, was spun off from Izzy Englander’s Millennium Management in January 2020. Liebau has been working with the firm since mid-2021 to develop an ESG-focused blockchain strategy. He declined to disclose the strategy’s assets under management. From its inception to the end of August, the Modular Blockchain Fund outperformed Bitcoin by 7.3 percentage points, according to Liebau. It beat the MVIS CryptoCompare Digital Assets 100 Index by 4.8 percentage points in the same period. The fund does not take short positions.

Modular is “capitalizing on the trend of crypto being included in asset allocation and ESG integration frameworks,” said Bloomberg Intelligence analyst Jamie Douglas Coutts.

Cutting technique

Liebau said his fund studies about 25 ESG values for the underlying blockchain or smart contract platform when deciding whether to buy a token. They include energy consumption, changes in the distribution of assets between wallets and the composition of validators on the network. Validators help order transactions on a blockchain to ensure it runs smoothly, usually in exchange for a fee paid in the protocol’s native token.

The fund currently has about a dozen tokens, Liebau said. It is overweight Polkadot, whose blockchain uses sharding, a scaling solution that lowers the cost of packaged transactions. Other blockchains such as Ethereum also implement sharding.

Liebau said he invested in Algorand because of what he says is its secure and energy-efficient consensus mechanism. Algorand network nodes can run on relatively simple computers, which means the blockchain can use a more decentralized system, he said. A poorly designed consensus mechanism can be tampered with, undermining trust in the blockchain, according to Liebau.

“One of the reasons we like Cosmos is its deterministic consensus mechanism, Tendermint, which provides instant finality when a transaction is added to a block,” Liebau said. “Finality guarantees the integrity of the ledger – this is especially important for financial applications.”