This is not a complete description of the risks born by Alt Tab Capital Optimized I Ltd (the “Offshore Feeder Fund”), Alt Tab Capital Optimized Fund U.S., LLC (the “Onshore Feeder Fund”), and the Alt Tab Capital Optimized Fund Ltd. (the “Forerunner Fund”) (the Onshore Feeder Fund and the Offshore Feeder Fund shall hereinafter be referred to collectively as the “Feeder Funds”). Prospective investors must review the more complete description of risks in the respective private placement memorandums.
ALT TAB CAPITAL LTD. IS A MEMBER OF NFA AND IS SUBJECT TO NFA'S REGULATORY OVERSIGHT AND EXAMINATIONS. ALT TAB CAPITAL LTD. HAS ENGAGED OR MAY ENGAGE IN UNDERLYING OR SPOT VIRTUAL CURRENCY TRANSACTIONS IN THE FORERUNNER FUND. ALTHOUGH NFA HAS JURISDICTION OVER ALT TAB CAPITAL LTD., YOU SHOULD BE AWARE THAT NFA DOES NOT HAVE REGULATORY OVERSIGHT AUTHORITY FOR UNDERLYING OR SPOT MARKET VIRTUAL CURRENCY PRODUCTS OR TRANSACTIONS OR VIRTUAL CURRENCY EXCHANGES, CUSTODIANS OR MARKETS. YOU SHOULD ALSO BE AWARE THAT GIVEN CERTAIN MATERIAL CHARACTERISTICS OF THESE PRODUCTS, INCLUDING LACK OF A CENTRALIZED PRICING SOURCE AND THE OPAQUE NATURE OF THE VIRTUAL CURRENCY MARKET, THERE CURRENTLY IS NO SOUND OR ACCEPTABLE PRACTICE FOR NFA TO ADEQUATELY VERIFY THE OWNERSHIP AND CONTROL OF A VIRTUAL CURRENCY OR THE VALUATION ATTRIBUTED TO A VIRTUAL CURRENCY BY ALT TAB CAPITAL LTD.
Crypto currencies are not legal tender in the United States and many question whether they have intrinsic value. The price of many crypto currencies is based on the agreement of the parties to a transaction. Furthermore, crypto currency balances are generally maintained as an address on the blockchain and are accessed through private keys, which may be held by a market participant or a custodian. Although crypto currency transactions are typically publicly available on a blockchain or distributed ledger, the public address does not identify the controller, owner, or holder of the private key. Unlike bank and brokerage accounts, virtual currency exchanges and custodians that hold crypto currencies do not always identify the owner. The opaque underlying or spot market poses asset verification challenges for market participants, regulators, and auditors and gives rise to an increased risk of manipulation and fraud, including the potential for Ponzi schemes, bucket shops, and pump-and-dump schemes. This opacity in the underlying spot market may adversely affect the ability of the Forerunner Fund to effectuate trades in digital asset derivatives and thus lead to losses in the Forerunner Fund and, in turn, in the Feeder Funds.
Commodity interest markets are subject to comprehensive statutes, regulations, and margin requirements. In addition, the CFTC and many exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily price limits, and the suspension of trading. Future actions of this nature and changes to rules governing the markets for commodity interests could make certain trading strategies, including those employed by the Manager, obsolete.
The regulation of commodity interest and crypto currency transactions is a rapidly changing area of law and is subject to modification by government and judicial action. Specifically, crypto currencies currently face an uncertain regulatory landscape in the United States and many foreign jurisdictions. In the United States, crypto currencies are not subject to federal regulatory oversight but may be regulated by one or more state regulatory bodies. In addition, many virtual currency derivatives are regulated by the CFTC, and the SEC has cautioned that many initial coin offerings are likely to fall within the definition of a security and subject to U.S. securities laws. One or more jurisdictions may, in the future, adopt laws, regulations or directives that affect crypto currency networks and their users. Such laws, regulations or directives may impact the price of crypto currencies and their acceptance by users, merchants and service providers. The effect of any future regulatory change on the Manager’s trading programs or on the performance of the Forerunner Fund or the Feeder Funds is impossible to predict but could be substantial and adverse.
The cybersecurity risks of crypto currencies and related “wallets” or spot exchanges include hacking vulnerabilities and a risk that publicly distributed ledgers may not be immutable. A cybersecurity event could result in a substantial, immediate, and irreversible loss for market participants that trade crypto currencies. Even a minor cybersecurity event in a crypto currency is likely to result in downward price pressure on that product and potentially other crypto currencies.
Furthermore, crypto currencies and digital asset derivatives are controllable only by the possessor of unique private keys relating to the addresses in which the cryptocurrencies are held. The theft, loss, or destruction of a private key required to access a crypto currency or digital asset derivative is irreversible, and the Forerunner Fund would not be capable of restoring such private keys. A custodian’s loss of access to its private keys or its experience of data loss relating to the crypto currency and digital asset derivative holdings of the Forerunner Fund could adversely affect the NAV of the Forerunner Fund and in turn that of the Feeder Funds. Any loss of private keys relating to digital wallets used to store assets of the Forerunner Fund could result in the loss of the assets controlled by such private keys. Although the Forerunner Fund and its custodian(s), if any, assiduously keep the private keys both private and safe from loss, it is possible that one will be lost, destroyed, or illicitly copied. Such an event would trigger a loss of value by the Forerunner Fund and in turn potentially by the Feeder Funds.
The relatively new and rapidly evolving technology underlying crypto currencies introduces unique risks. For example, a unique private key is required to assess, use or transfer a crypto currency on a blockchain or distributed ledger. As described above, the loss, theft or destruction of a private key may result in an irreversible loss. The ability to participate in forks could also have implications for investors. For example, a market participant holding crypto currency position through a crypto currency exchange may be adversely impacted if the exchange does not allow its customers to participate in a fork that creates a new product. These events as well as other technological issues could lead to a loss of value of the Forerunner Fund and in turn by the Feeder Funds.
A principal risk in commodity interest trading is the tremendous volatility (or rapid fluctuation) in the market prices of commodities. The profitability of the Feeder Funds and the Forerunner Fund will partly depend on the Manager’s ability to anticipate and act upon fluctuations in market prices. Commodity interest prices are affected by a wide variety of factors that are complex and difficult to predict, such as changing supply and demand relationships, weather, government trading and fiscal policies, national and international political events (including terrorist activity), changes in national and international interest rates and rates of inflation; currency devaluations and revaluations, emotions of the market participants, changes in interest and currency exchange rates, and any report or data released regarding COVID-19 and the accessibility of a vaccine.
Furthermore, the price of a crypto currency is based on the perceived value of the crypto currency as well as the cost of “mining” the crypto currency (if the currency may be mined), which makes these products highly volatile. Certain crypto currencies have experienced a daily price volatility of more than 20%. The volatility and rapid and substantial price movement of crypto currencies could result in substantial losses. None of these factors can be controlled by the Manager, and no assurance can be given that the Manager’s services will result in profitable trades for Forerunner Fund or that the Feeder Funds will not incur substantial losses.
At any time and from time to time, the Manager may be unable to liquidate positions held in the accounts of the Forerunner Fund due to “thin” trading in a particular contract, or suspension of trading in that contract. Furthermore, crypto currencies and digital asset derivatives can be traded through privately negotiated transactions and through numerous exchanges and intermediaries around the world. The lack of a centralized pricing source poses a variety of valuation challenges. In addition, the dispersed liquidity may pose challenges for market participants trying to exit a position, particularly during periods of stress. Trading in a contract may be indefinitely suspended due to factors including “limit moves” in a market, regulatory action, cybersecurity issues, or terrorist or other catastrophic events. During an illiquid period in which trading is thin, suspended, or halted, the Forerunner Fund— and thus indirectly the Feeder Funds — may be exposed to adverse market moves indefinitely, and significant or catastrophic losses could result.
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08 July 2023
From the Terra Luna crash to the fall of FTX, 2022 was a year of high drama for digital assets. Larger investors may have taken a step back, but investment managers are as bullish as ever about the future of digital asset hedge funds. What’s more, so are traditional hedge fund firms. Why? Read Hedgeweek’s latest Insights report – Building Back Better – to find out.
