Investor Letter - 8th August 2022

Photo by Anne Nygård on Unsplash

This week, we’re sharing a copy of an investor letter which we circulated to our fund investors earlier this week with our factsheet. Certain pieces of performance-related information have been removed from the version of the letter shared here in compliance with regulations around financial promotions.

8th August 2022

Dear Investors,

When we decided to start our own business, one of the promises we made to ourselves is that we were going to build it from the inside out. What this means is that we wanted to build it in a way that is meaningful to us. We would not take what we think people would like us to do and then build to meet that expectation in the hope of riches but rather build things in a way that is consistent with our deepest and thickest desire - freedom. Freedom means different things to different people. To us, apart from the obvious financial freedom it meant freedom from not being true to ourselves. We didn’t want to build a business with an endgame of making loads of money, cashing out and running off to a nice island to retire. We wanted to build something that was an extension of ourselves, something that would allow us every day to keep doing what we love to do forever. And that is to invest in interesting things, manage money and have stimulating conversations and relationships.

The quote that epitomises our journey to date the most comes courtesy of Rumi, the great Persian poet (as well as many other things).

“As you start to walk on the way, the way appears”

When we started our business, we could hardly have imagined the path that would have taken us to where we are today nearly 4 years later. While the path we chose involved much sacrifice and hard work and still does, we have enjoyed every single second.

What many who follow us and read our newsletters may not know however is what we have been up to on the crypto side. Having been attracted to crypto in late 2017 by the sheer price action, we dug deeper and deeper. It was a priority for us when we began this business to make time to upskill rapidly. We were convinced even back then that the opportunity in crypto was the biggest in our careers.

At the time we wanted to launch a fund which gave us an ability to trade both stocks and crypto, the two things that make us excited to wake up every morning and work. But as we did our setup work (back in 2019) it soon became clear that if we wanted to trade crypto in a traditional “marketable”, “distributable” AIFMD-compliant fund, it would only be possible in a very limited way through providers who offer very few cryptocurrencies (BTC, ETH and a few other legacy instruments) – and even then, via effectively CFD-like set-ups that, at least in the mind of the powers that be, resembled traditional counterparty risk. Furthermore, the cost of trading would be very high at anywhere from 35bps to over 100bps PER TRADE. This is compared to most crypto exchanges where trading spreads are around 10bps at most. Moreover, the volatility profile meant we would need to trade very actively to ensure we weren’t on the wrong side of extreme adverse moves. Nevertheless, we decided to give it a go, hoping that over time as crypto became more mainstream (remember this was 2019/early 2020), more instruments would be added, and spreads would come down. We also believed we would find a way to trade actively with success despite the volatility involved.

Till this day, this hasn’t happened. Crypto remains expensive to trade with these same counterparties, to the point where trading costs, administrative friction and the dire lack of products on offer are impediments to use being able to trade and manage money in crypto properly. Sure, we’ve made some money, but on a risk-adjusted (and effort-adjusted) basis, the structural constraints in the current fund vehicle make this a steep uphill battle.

While many in the institutional world continue to wait for solutions to present themselves, hoping that problems will magically go away, we know full well that these solutions already exist – what is lacking seems to be any corporate incentives to deliver those solutions, especially if doing so cannibalises a small but profitable (high spreads) crypto trading business in the near term. Indeed, we know exactly what it’s like “on the outside”, beyond the walled garden of incumbent institutions.

The solution, therefore, is obvious – a separate entity that has a distinct risk and volatility profile, and for which counterparties can be chosen more freely. It has been months in the making, and admittedly has taken longer than expected to set up, but we got there in the end.

On the other hand, the way things are works very well with equities, and the numbers themselves inform our decision making. To that end, we undertook an exercise in decomposing the makeup of our overall portfolio to separate contribution performance from equities vs crypto, and while an estimate, it became quickly evident to us that not only was the bulk of performance coming from equities, but that isolating equities into a standalone product would deliver much better risk-adjusted returns.

When we launched our business, we decided not to pay ourselves a salary (we still don’t) in order to give it more runway to build out our products. To make ends meet, we decided we would trade crypto personally. Being unable to do this through our fund given the extremely high risk we were taking and the inability to trade the instruments we needed at a cost that was low enough, we gave it a go with a small amount of personal capital. Employing a very disciplined trading approach as well as the odd longer-term investment that made sense to us, we honed this approach over 3 years, built an understanding of the crypto markets and met many wonderful people along the way. We earned for ourselves, from a tiny investment many years ago, a substantial return - enough money to look after our immediate futures and not worry about struggling to support our families for some time. In December last year and as we wrote at the time, we thought we were in a bubble which would soon collapse, and we sold everything (bar one or two longer term investments) and cashed out into cold, hard US Dollars (Not stable coins. Actual dollars).

Going back to what we wrote at the start of this letter, all we ever dreamed of in the business was achieving our much-desired freedom. And through an alternate path that we really didn’t expect, we found it. And we are not about to give it away.

We are about to invest our hard-earned savings back into the business directly, firstly into the actual business to support our initiatives – the two funds, our trading software business (Nachas Networks), our private deals platform (3BC) and a number of new initiatives soon to be launched.

Secondly, we are investing capital into The Three Body Fund, which will be an equities-only product from 1 September, and finally to seed up our crypto vehicle, SLINGSHOT. We will manage our money with our own barbell approach. Our Three Body Fund is there to earn us double digit returns compounded over time without taking large drawdowns and without big risk. This is for the portion of our savings which we want to keep safe and growing nicely.

SLINGSHOT will be our dedicated crypto vehicle and as such it is high-risk with full exposure to anything that crypto has to offer. We are having a full go with this vehicle, on our own dime to begin with. This vehicle will only trade in publicly listed crypto. This is a fund structure mainly for us, family and friends and partners at this stage and as such will neither be marketed nor publicly distributed. Additionally, we will also selectively invest in early-stage private businesses most likely through our own balance sheet with potential SPV’s built for partners who wish to join us in these endeavours.

We now have a format and a structure that allows us to run our business and our lives in a way that we always wanted. We hope we can do this forever and know full well that this is a long game. This is the most excited we have ever been in terms of what our future holds. We are investing in ourselves and our business. And we’ve only just begun.

David Cunio and Eugene Lim

Three Body Capital Management LLP

DISCLAIMER

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. PLEASE SEE THIS LINK FOR FULL DISCLAIMER: https://threebody.capital/disclaimer

Three Body Capital Management LLP is registered in England and Wales under Company Number OC428810 and with the FCA as an Appointed Representative with FRN 920308. Three Body Capital Management LLP is an Appointed Representative of Finex LLP which is authorised and regulated in the UK by the Financial Conduct Authority (“FCA”) with firm reference number 507537.

This Investor Letter is being sent to you on the basis that you are a certified High Net Worth Individual, Sophisticated, Professional investor. It is not intended as and should not be construed as financial, investment, tax, legal, regulatory or other advice. None of the contents of this Factsheet is an offer to sell or the solicitation of any offer to buy securities. This Factsheet is exempt from the general restriction on the communication of invitations or inducements to engage in investment activity set out in section 21 of the Financial Services and Markets Act 2000 (“FSMA”). It is not an offer or sale of securities in the United States or to, or for the account or benefit of, any US person (as defined in relevant US securities laws, including residents of the United States or partnerships or corporations organised there).

PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH ACCOUNTS OF QUALIFIED ELIGIBLE PERSONS, THIS ACCOUNT DOCUMENT IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A TRADING PROGRAM OR UPON THE ADEQUACY OR ACCURACY OF COMMODITY TRADING ADVISOR DISCLOSURE. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT REVIEWED OR APPROVED THIS TRADING PROGRAM OR THIS BROCHURE OR THIS ACCOUNT DOCUMENT.

TO BE ELIGIBLE TO INVEST IN THIS PROGRAM YOU MUST BE CONSIDERED A QUALIFIED ELIGIBLE PERSON UNDER THE TERMS AND CONDITIONS DEFINED BY COMMODITY FUTURES TRADING COMMISSION REGULATION 4.7.