Active cryptocurrency SMA aims to outperform Bitcoin

Even with the price of Bitcoin down about 47% from its April peak, the true believers in cryptocurrencies are moving full speed ahead to build out more infrastructure and access to the fast-evolving digital assets.

The latest example comes from Lake Oswego, Oregon-based upstart Leavenworth Capital, which claims to offer the first active separately managed account crypto-asset strategy.

While there are several SMAs already on the market offering access to crypto portfolios, the Leavenworth platform is designed to take advantage of the often extreme volatility found in the cryptocurrency space.

Funded with seed capital in December, the Leavenworth Digital Growth Strategy has a brief but impressive record that founder and chief executive Jack Shepherd believes can outperform Bitcoin.

Of the thousands of cryptocurrencies in existence, Shepherd said his strategy uses just Bitcoin and Ethereum in an active trading strategy to take advantage of the volatility.

“When it comes to the different cryptos, we only allocate to Ethereum and Bitcoin because they are the most transparent, and if we don’t understand the blockchain data we’re not going to allocate to it,” Shepherd said. “Our models use a number of key indicators, and during times of volatility, we’ve been able to protect on the downside.”

In March, the most recent monthly performance available, the strategy was up 33.6%, which compares to 29.1% for Bitcoin, 4.2% for the S&P 500 Index, and a 1.1% decline for gold.

Leavenworth Capital does not yet have its second-quarter performance through compliance, but Shepherd said the strategy continued to outperform Bitcoin from the start of the year.

Unlike other cryptocurrency SMAs that offer static access to digital currencies, Leavenworth is offering access to a long-only account that will see multiple moves in and out per week during times of peak volatility.

“Bitcoin is the number-one performing asset for the last decade, and we don’t know if it will continue outperforming, but we do know its correlation to other assets is virtually zero,” Shepherd said.

The strategy, which has a $25,000 investment minimum is geared toward financial advisory clients, and Shepherd expects initial investments to be small.

“When we’re talking to advisers, they’re only allocating 1% or 2% of a client’s portfolio to crypto, so you’re able to stomach the volatility,” he said.

According to Leavenworth’s back-tested models, even small allocations to cryptocurrencies can have a big impact on performance.

For example, from May 2016 through May 2021 a basic portfolio of 80% stocks and 20% bonds would have produced a cumulative return of 78.5%.

But a portfolio of 78% stocks, 20% bonds and 2% Bitcoin would have produced a return of 110.5% over the period.

Upping the Bitcoin to 4% would have resulted in a return of 146.1%, and upping the Bitcoin to 6% would have produced a cumulative return of 185.4%.

“Aside from its performance, what Bitcoin is able to do from a diversification standpoint is unbelievable,” Shepherd said. “The reason advisers allocate to alternatives is for diversification.”

While the investment minimum is not necessarily retail bite-size, and the fees starting at 3% are not low, the other appealing aspect of the Leavenworth Capital platform might be the direct ownership component through the Gemini Trust Co. custodial platform.

“Investors will have access to their key and can move their crypto to cold storage if they want to because they actually own the underlying, and that’s what’s really exciting,” said Justin Castelli, chief of staff at Onramp Invest.

“This is definitely a first seeing something that active, which something hedge funds are doing,” he added. “And it’s not a surprise the performance is able to beat Bitcoin. Clients are asking about crypto and having more options is a good thing.”

Ric Edelman, who is stepping away from the financial advisory firm he founded to dedicate more time to Digital Assets Council of Financial Professionals, said platforms like Leavenworth is “further evidence that digital assets are becoming mainstream.”

“It’s getting easier every day for financial advisers to add digital assets to client portfolios and integrate them into their practice management,” he added. “It won’t be long before digital assets are routinely included in client accounts.”