Orca Global: August 2022 Investment Newsletter
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This was originally sent to investors of Orca Global Management on 12 September 2022.
Portfolio update following from the July newsletter:
As mentioned in the previous newsletter, we have been taking time to reconstruct our portfolio and have increased our gross exposure to 92% over the last month by deploying balances into the three main strategies of the liquid portfolio (includes a core and a frontier basket), leveraged topside derivatives (positions that give us inherent topside leverage, no outright leverage), and a Relative Value (RV) sub-portfolio (a market neutral strategy aimed to lower the variance and volatility of our entire book).
Although not fully deployed, we are comfortable with our current exposure and, all else equal, are planning to continue adding longs on dips.
August Review
Despite Ethereum approaching the Merge, August was another month where crypto was largely driven by the Fed. Risk assets slowly grinded up in the first half of the month until the Fed was compelled to verbally crash the party after a weak July CPI came in on the 12th of August. In the days following, Fedspeak was unanimous: the FOMC would remain cautious against the risk of stubbornly high price growth and that a loosening of FCI (financial conditions) would be unhelpful in their ultimate fight against inflation. What was important was the reiterating of a more restrictive policy into next year, as speakers signalled hikes in 2023. The inversion of the front-end of the curve hinted that the market believed that the upcoming hikes were simply policy front-loading which would eventually force the Committee to fold their cards on the softening of growth. However, it was enough to dampen the mood, putting a halt in the risk rally since mid-June: S&P500 fell almost 9% into August month-end, while Ethereum fell 30% before making a small recovery (Figure 1).
In our view (and probably objectively), the Fed speakers didn’t introduce anything new, and merely reiterated what they have been droning on for months - definitely not enough to warrant a 9% sell-off in stocks. We believe that the price action simply revealed the hesitant foundation the recent rally was built upon; perhaps momentum traders such as CTAs got a little ahead of themselves in buying, and a little prick to deflate the market was exactly what was needed. In any case, we were confident in sticking to our plan, and used the drop in prices to scale into long positions and accumulate promising tokens at depressed levels. As alluded to in the opening section of this newsletter, this was the main driver for our PnL in August as well as being long short-term volatility in the latter half of the month.
The Merge
Ethereum's Bellatrix upgrade, the first stage of the Merge where the transition on the Beacon Chain (the Consensus Layer) is activated, successfully went live on the 6th of September. The Merge will be finalised when the Proof-of-Work chain (the Execution Layer) migrates to Proof-of-Stake, which is currently expected to occur around September 15th (the exact timing is dependent on the hash rate in the intervening period). While we have some Merge-specific strategies/trades at play, we largely expect the update itself to be non-eventful. The expected value in change is small in our view. Since the market expectation is a successful merge, the upside in this case will be limited, while an unsuccessful merge will probably cause a sharp drop in prices: the expected value formula balances out. If anything, despite the bullish update, we are wary of a buy-the-rumour-sell-the-fact price action, and heading into the merge date we aim to be nimble with the right portfolio hedges in play.
Interesting crypto events in August
Nomad bridge was exploited for $165 million.
Michael Saylor steps down as MicroStrategy CEO, company takes $917 million charge on Bitcoin.
Solana had a $8 million hack that drained ~8000 wallets. The hack was linked to accounts tied with the Slope mobile wallet.
Further Disclaimer:
The following important information relates to the use of Orca Global Management’s substack publications. Orca Global Management is a fund registered in the Cayman Islands. This publication is directed only at persons who: a) Are expert investors who fall within the definition of Accredited Investor b) Are otherwise permitted to read this publication in compliance with the governing laws of their respective jurisdiction. It is not directed at or intended for retail clients nor general public dissemination. Any person considering an investment into Orca Global Management’s fund must ensure that they are suitably qualified, experienced and knowledgeable on such investments considering jurisdictional rules, regulations and restrictions, tax implications, residence or domicile and their financial circumstances. Past performance is not a guide to what may happen in the future. Prospective investors should be aware that the value of their investments could fall as well as rise. Any investment carries the risk of potential total loss of capital and investors may not get back the value of their original investment. Information on this publication may include data and opinions derived from third party sources. Orca Global Management does not accept liability for the accuracy or completeness of any such information or opinions which can be subject to change without notice. Furthermore, the information provided does not constitute an offer to buy or to sell cryptocurrencies or any other financial instrument, nor does it constitute investment, legal or tax advice. Details relating to the investment including the risk disclosures can be found in the Private Placement Memorandum. This brief statement cannot disclose all the risks and other significant aspects of the various markets traded by Orca Global Management.