Navigating Shark-Infested Waters
Level 4 - Turbo Autist
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Today’s post is not for the faint of heart. If you do not wish to face the grim realities of being a participant in sophisticated markets then stop reading here. If instead, you want to peel back layers of the onion and understand the adversarial nature of markets, carry on.
Being a friendly market participant is like saying you don’t want to fight while someone has you in a chokehold.
Herein lies the first mistake beginner investors make. Every aspect of markets exist for someone to take your money from you. The players up the food chain exist to eat your lunch and their job is to expand their advantage while eliminating yours.
This doesn’t only apply to public market participants like hedge funds and market makers.
Private market participants such as private equity and venture capital funds operate under the same laws of the jungle.
Total assets under management of investment funds globally is over $100 trillion. Do not equate sentiment on social media (Twitter, Reddit, etc.) to sentiment at institutions.
Hedge funds and private equity manage nearly $5 trillion AUM each. Another $2 trillion is allocated to venture capital. Huge resources are allocated around the world towards multiplying other people’s capital. That makes markets a competitive space where everyone is seeking an edge. Sometimes that means operating in riskier, less efficient markets (like crypto!). Other times that means competing more aggressively in markets that are less abundant in opportunity. For example, large established institutions with a lot of weight to throw around (such as potential fees to a bank) may try to negotiate off-market deals, or squeeze counterparties where smaller players can’t.
To say there is no difference in resources and ability is disingenuous. However, that hasn’t stopped retail investors, who represent an estimated 20% of trading volume. Now more than ever, people believe trading and investing directly in financial markets is a viable path to wealth creation. Naturally, we believe the same, but that doesn’t mean everyone can and will “make it.”
Amateur retail investors lost an estimated 30% of their portfolio in 2022, whereas hedge funds lost ~2.4%. The S&P 500 fell ~20% over that period. Institutions *on average* outperformed significantly while retail could not beat the S&P. Institutions are well aware of the rising participation from retail — they keep tabs on all counterparties.
Crypto hedge funds lost a whopping 55% in 2022 according to Reuters, compared to Bitcoin’s -65%.
But retail investors aren’t the only prey. Even sophisticated players like CEOs and boards of major companies get outwitted. Institutional investors also try to outwit each other and root for their competitors to fail (privately, of course).
There is no PVP vs PVE — it’s all PVP.
Everyone on our team has deep institutional experience and we’re also retail investors in crypto. We’ve seen both sides.
Today’s post is to eliminate any naivety people may have about markets being adversarial.
Learn more about how these players think, and don’t let them know what you think.