There are many aspects of risk management of digital assets – not just the market risk that is mostly talked about. It is important that each component involved in the investment life cycle is considered also from a risk perspective.
Counterparty risk is key in terms of bearer assets like digital assets. One must realize that every 3rd party service provider bring their own risk exposures/attack vectors – and it is always a trade-off of signing up a service provider vs. providing that capability in-house (if possible). The main aspects we look at before signing up any service provider are:
- Do they have a high-quality cyber security policy, and do they have the infrastructural muscle to support that policy?
- Are they located in a “safe” jurisdiction?
- What is the quality of the management?
- Is the venue reputable and have a consistent track record of prudent behaviour?
- If the venue offer custody of any assets, does it have insurance and what percentage of assets are kept in hot wallets vs. cold wallets?
Hilbert Capital deals exclusively with algorithmic trading which means that the market risk management needs to be integral to the trading strategies. Leveraged products are more challenging from a market risk management point of view than unleveraged ones. We mainly control market risk by means of 3 mechanisms across our products:
- Limits on position size.
- Stop-limits triggered by large market moves.
- Diversification in the underlying portfolio.
We constantly monitor the news flow and any idiosyncratic story that is detrimental may cause us to exclude an asset from trading – for example legal or regulatory action vs. any company that has been issuing tokens in our portfolio. For all our assets, we monitor any scheduled “corporate actions” such as forks, listings, de-listings and acquisitions etc. – and review whether that is a cause for portfolio exclusion.
When algorithms are managing capital, one must make sure to avoid performance detrimental bugs. Therefore, we perform extensive testing before deploying any algorithm/strategy into production. The most important step is running the algorithm on proprietary capital over a longer period in various market environments to see how it behaves. We exercise defensive trading which means that:
- The trading performance is not critically dependent on having a working connection to the trading venue(s) at all times. We anticipate (even expect) that from time to time the algorithms might be put off-line for a longer period of time.
- Each strategy validates all key data communication with the trading venue. One cannot allow trades to be placed based on “dirty data”.
Cyber Security Risk
We have several measures in place to minimize our exposure to cyber-attacks.
Hilbert Capital offers a range of solutions for obtaining exposure to digital assets in an easy and secure way. We cater to private individuals, family offices and institutions.