By Nedina Stevens
Nedina Stevens, head of ALTS content with
Markets Group, sits down with Zoe Cruz, founder and CEO of Menai Financial
Group, a leading provider of institutional-grade digital asset investment
products and trading services. Zoe will
be speaking at our ALTSCHI event July 20-21 in Chicago, where she will share
even more insights into how to make smart investments in the digital asset
space.
Markets Group: Zoe, you have spent decades at the
forefront of the financial services industry. How has the landscape changed
during the course of your career?
Zoe Cruz: When I began my career at Morgan Stanley,
finance was just beginning to globalize. Financial intermediaries put users of
capital together with providers of capital in the global arena. Globalization
led to changes in many financial intermediary business models. I see many
parallels from those early days of my career to the innovations happening today
in the crypto-blockchain ecosystem. Think about what crypto represents:
programmable value across trustless networks. This development, with all its
efficiency and scalability, is a real paradigm shift, the kind we haven’t
experienced since the dotcom era of the late-1990s. It’s a very exciting time
to be on the forefront of this digital innovation.
Markets Group: At Menai, you provide your clients
with opportunities to participate in the emerging digital assets space. What
should allocators looking to enter the market be aware of?
ZC: As with any new emerging asset class, investors
face a number of challenges that they need to address when allocating to
digital assets. First, you can lose all your money in any highly risky
investment; and while I don’t believe that will be a likely and permanent
outcome in digital assets, investors need to understand that is a possibility.
So, how do allocators address that risk? By only targeting a small portion of
risk capital within your strategic allocation.
From Menai’s conversations with investors, strategic targets
generally range from 0% to 5%, but I believe 0% is not the right number. The
asymmetric return potential of crypto-blockchain is something we haven’t seen
in 20-plus years – it’s effectively liquid VC and it’s accessible to all
investors. It warrants some target weight in strategic allocations of
institutional investors, and it provides an opportunity to harvest volatility
through active rebalancing, unlike traditional illiquid VC investments.
Two other important considerations for allocators that I’d
mention are diversification of idiosyncratic risk and operational diligence –
don’t put all your eggs in one basket and make sure your manager has built
institutional infrastructure, risk management processes and security protocols.
MG: On that note, how can investors build
operational frameworks that help them reduce risk when investing in crypto?
ZC: Well, operational alpha is critical at every step
of the process to secure your digital investments. However, it’s a massive
undertaking to build out the operational framework across multiple
jurisdictions and in a way that safeguards our clients’ assets. While investors
can take on that effort in-house, I think most allocators recognize the value
of operational alpha that a truly institutional manager delivers, which is why operational
due diligence (ODD) is critical for investors. We have active dialogues with
two institutional investment consultants that are really top-notch on the
digital ODD effort, very impressive. At Menai, I’m fortunate to have attracted
some of top operators in traditional finance and technology. While you cannot
eliminate operational risk, you can go to painstaking lengths to mitigate it to
manageable levels. We do this every day for our clients’ assets, as well as for
our own capital committed to Menai Markets, our proprietary market-making
business.
MG: How are you working with allocators to help them make
smart investments in the digital space?
ZC: We approach our relationships with allocators
with a philosophy of partnership and knowledge sharing. We want investors to
view Menai’s investment team as an extension of their internal teams. A core
tenet of Menai’s investment philosophy that we always talk about is
diversification. The thesis isn’t “buy Bitcoin and you will get rich” – it’s
about professional portfolio management backed by deep fundamental research.
When I started Menai almost two years ago, we intentionally
designed diversified products to mitigate idiosyncratic risk and provide
investors with strategic exposure to a rapidly developing crypto ecosystem.
Like in the dotcom days, where there were winners and a lot of losers, the true
winners in crypto will reveal themselves over decades. So, allocators must
manage strategic exposure actively as use-case applications shift throughout
cycles. To do this, Menai has a team of five crypto-native analysts that have
culled the universe of approximately 18,000 tokens down to 15 to 30 that we
invest in at any given time. Making our team’s intellectual capital available
to allocators is part of that partnership mentality that we value at Menai.
MG: How are you working with your clients to help them
understand the metrics behind valuations in the cryptocurrency space?
ZC: Valuation is one of the biggest challenges for
investors – how do you assign value to speculative technologies? Well, building
on the partnership focus, we take a consultative, educational approach to
helping clients understand the underlying use cases of crypto-blockchain
technology. Real-world examples help to guide the conversation. It’s not as
simple as applying a discounted cash flow (DCF) model, even to protocols that
generate token fees. We have to think like venture capitalists and active
portfolio managers, which is why I’ve hired experienced traditional investors,
crypto natives and technologists to help identify winning protocols and
potential for value creation.
When you bring to life real-world examples of how crypto is
disrupting in positive ways, such as Uniswap in decentralized cryptocurrency
trading, that really resonates with investors. And the value of liquidity and
flexibility from investing in liquid crypto alongside traditional VC deals is
something investors are beginning to see.
MG: What are the biggest operational risks and challenges
investors should be mindful of in the digital asset space?
ZC: Custody and exchange risk are at the top of the list
– all of which fall under operational alpha I mentioned earlier, which an
institutional-quality manager should be providing to investors. We at Menai
spent the majority of our time during the first 18 months of our existence on
these efforts. It cannot be underscored enough: pursuing best-in-class,
institutional-grade operational rigor is just as critical to the investment
outcome as token selection.
When allocators decide to take market risk in the digital
asset class, they don’t want to take uncompensated operational risks.
Investments should be made in building operational excellence, a robust tech
stack and focus on compliance. Managers that can solve for operational security
and technological redundancy will be successful when the institutional
allocation cycle begins in a real way.
MG: Looking into your crystal ball, what will the digital
asset space look like in 5-10 years?
ZC: Had you asked me this a year ago, my answer would
still come to the same conclusion – the future will be bright over the next
decade. Yet we cannot ignore the current challenges that all risk assets are
facing with a new regime of monetary tightening. Deleveraging and cleansing of
failed businesses or protocols are part of every cycle, which may continue in
the near term. But I believe that the digital asset class will be stronger over
the next decade as the strongest protocols become time-tested. When I see the
efficiency, scalability and accessibility of crypto-blockchain technology
today, the potential to transform business models and economies is tremendous,
especially in financial services. This is what makes me excited about the
future of digital asset and the potential value creation on the horizon.
