The biggest performance contributors have been option trading, which arbitrages discrepancies between options, futures and other derivatives, and event driven strategies that trade around key events such as forks. Options and derivatives can also be used to trade the events. Lemvi mixes discretionary and systematic approaches and has created 9 trade types that have been the same since inception. The strategy is opportunistic, high conviction and concentrated in focusing on the most interesting one, two or three trades.

The arbitrage between futures and spot can be as high as 8-10% annualized, without any leverage. When we interviewed Gillot in October, Bitcoin futures were trading at USD 67,000 and the spot was at USD 61,700. Lemvi rarely uses leverage but might go up to 200% gross exposure for a hedged trade such as futures versus spot. The strategy can obtain small amounts of leverage from the notional value of options but does not use balance sheet leverage.

Low directionality and cheap optionality

The strategy runs limited directional exposure. In theory it could range between net long 100% and net short 100%, but in practice it has operated in much tighter ranges and the true beta is usually lower than the reported figures. “Though median net exposure to crypto shows up as net long 10%, this is misleading because the “Greeks” on the option side need to be accounted for. We may have optionality on long and short sides, and our exposure can move around a lot. If the market drops, we may be suddenly market neutral,” explains Gillot. The strategy is quite often 5-10% net long due to gamma but has limited loss via option structures. “And we always use optionality to go net short,” confirms Gillot.

Most of the time the strategy is very close to market neutral, though for some sorts of arbitrage trades the headline figures might show a net long or net short that is not meaningful. “If we are short futures that trade at a 10% premium to spot, we appear to be net short even though the two legs of the trade should reconverge to market neutrality at maturity. In the interim, the reported net exposure fluctuates with the futures premium, but still does not reveal any meaningful directional wager. Only if the futures premium collapses to zero will the trade be reported as market neutral,” explains Gillot. The growth of crypto ETFs has not affected the cash versus futures arbitrage; Lemvi can also trade ETFs.

“Usually, we are very slightly net long for the simple reason that longs could only lose 1x, but shorts could lose 10x,” says Gillot. The strategy was briefly 5% net short intra-month in May 2021, and has usually posted positive performance when crypto was down. It was also net short through puts during part of the “crypto winter” of 2018. And ephemerally in October 2024, the strategy went net short intraday, based on a fake news story about Satoshi Nakamoto, before switching back to net long by the end of the day.

These instances are however unusual. Lemvi rarely expresses any directional market view and is more interested in finding cheap optionality. “We try to find cheap options, at the money or out of the money. We may become directionally net short through optionality. We can create structures to very cheaply obtain optionality, so that we do not lose if prices go up or down, but also earn some time decay,” says Gillot.

In addition to controlling directionality, the strategy has 20-30 risk limits at many levels, for the Greeks, expiries, currencies, counterparties, percentage of daily volumes, and liquidity constraints.

Large and liquid coins and ICOs

Lemvi trades roughly the top 20 liquid digital currencies. They need liquidity and should be tradable long or short. Some of them, such as Bitcoin, Ethereum, Solana and Ripple also have options markets. Around 90-95% of exposure tends to be in the top 5 coins, which also make up 85% of the market. Coins need to be liquid and accepted on at least 3 or 4 of the 6-7 exchanges that Lemvi use. Perpetual swaps can roll automatically every day on some exchanges and every 4 hours on others such as Bitmex.

Lemvi has traded some coins such as EOS on day one due to their rolling ICO over a year, and Solana options soon after it launched.

Arbitrage between exchanges

Lemvi are often the first to trade new options markets, such as Solana, Ripple and BNB and market neutral arbitrage between exchanges is now most interesting for options where the biggest exchange is Deribit. “They have a secure exchange and have been the largest option venue for some time,” says Gillot. Differences between exchange pricing of delta one instruments in 2017-2019 have largely been arbitraged away.

Cheap optionality

Gillot named one of his strategies after famous activist short seller Muddy Waters, but Lemvi is neither an activist nor shorting single name equities. Lemvi’s ‘Muddy Waters’ strategy is short via cheap optionality, including hedges that can profit to some degree from up and down moves. “We might lose a scratch on the upside but would profit more on the downside,” says Gillot.

The directional arbitrage strategy is another option arbitrage strategy. “It can find optionality on different strikes and expiries, based on delta hedges, and Greeks such as gamma. It can be like a long straddle that may profit from big moves but not small moves. The structure could be net long or short. Sometimes we can use the skew to finance it at near zero cost,” says Gillot.

Divergence in forks and ICOs

Forks and half forks have been very profitable. “The old Bitcoin cash fork was a big winner, and there is still an arbitrage in a rolling ICO [of EOS] every day,” says Gillot. Forks, airdrops and ICOs are interesting because it is harder to account for their value, and different opinions about them and/or exchanges’ different ways of treating the events can lead to arbitrage opportunities. Exchanges may differ in terms of whether they accept or reject a fork. “It is important to carefully read the rules of each exchange, you cannot systematise them,” says Gillot. “Hard forks are a bit like merger arbitrage and ICOs are also a kind of event driven trade. These trades can generate profits of 8-10% but they are not found every month or every year,” points out Gillot.

Catching spikes in staking and lending yields

Staking yields, related to DeFi, can provide some incremental return but the yield is much lower than from lending, though it does entail some counterparty risk.

Very occasionally, lending yields can spike up to 10 or 15 or 20%. The ‘poles and wheelbarrows’ strategy is analogous to the ‘picks and shovels’ of the goldrush, with yields as high as 30% including some counterparty risk from exchanges, though Gillot judges they are now much more well secured than in the past. These yields are much higher than staking.

Long/short yield is yet another sort of yield, from automatically rolling 8-hour futures. “We may use Kraken to get extra yields on longs when we might be short elsewhere via options or futures,” says Gillot.

Strategies avoided

In contrast to some other crypto hedge funds, Lemvi is not pursuing statistical arbitrage or market making strategies, though Gillot argues that leaving limit orders to pick up cheap options can sometimes look like market making. Lemvi also does not trade trend following or mean reversion strategies either. “We take no market views, and we could not hedge a trend or mean reversion.”

Lemvi trades relative value between spot, futures and options on the same coin, but Gillot does not take a view on relative value between coins: “It is hard to assess the value of any digital currency, except perhaps Bitcoin, Ethereum and Solana. We rarely take any view on valuations because they are hard to judge. We prefer to structure optionality”.

Exchanges and counterparty risks

Lemvi trades with the largest six exchanges by volume, based on liquidity, counterparty risk and security. Gillot sees a virtuous circle where the largest exchanges earn more fees, build bigger teams and become more secure.

Binance exposure was removed due to money laundering concerns over 2 years before CK was arrested. Lemvi had some exposure to FTX, and now expects to recover between 100% and 140% of it.

Counterparty exposure per exchange is capped out at 30%, and there is usually only one near this level with others around 10-15% or even lower. The counterparty risk needs to be balanced against volumes, liquidity and slippage issues.

Lending is only done directly. There is no “looping” or quasi-rehypothecation that could lead to exposure to other counterparties.

Typical margin levels are 20% maintenance and 30% initial. Being market neutral on the same exchange anyway reduces counterparty risk in some cases. “If both legs are on the same exchange we have less counterparty risk,” points out Gillot. Unencumbered cash is just kept in cash for margin.

Custody

Multi-asset and multi-currency custodian, Copper, is helpful for arbitrage or relative value between exchanges, and in fact is best on all criteria. “They have done a great job over the past 5-6 years. We were one of their first clients and now they have billions of assets under management. It is also easy to onboard new exchanges onto copper,” says Gillot.

Regulation, vehicles and certificates

Lemvi is regulated by FINMA-approved third party supervisor SO-FIT, and the investment vehicle is a certificate. “Trading within a certificate is more flexible than within a fund, and a Swiss fund structure would not be well suited to our strategy,” says Gillot.

Each time a new client comes on board, securitization specialists GenTwo AG create a new issuer. There is one issuer per client, and Lemvi avoids bank counterparty risk. One issue was Cayman-based Montbenon, and other issuers have been Guernsey-based. There are about 200 issuers and 200 clients for GenTwo AG.

GenTwo’s fee of 0.25% a year is relatively high, but the minimum ticket is only USD 20,000 and there is no minimum overall level of assets. It thus helps smaller managers to grow and is happy to work with copper and crypto exchanges.

Most of the investors are Swiss-based and channelled through Swiss banks. Lemvi currently only accepts USD rather than crypto for investments. US and UK investors are not accepted.

Incidentally, at firm level, Lemvi’s other strategy notes such as multi-strategy equity, macro and commodities, and bonds do not sub-allocate to the crypto strategies.

Capacity, institutionalisation and liquidity

The fee structure of zero management fee and 30% performance fee is designed to incentivise Lemvi to generate performance rather than gather assets.

Lemvi’s current assets in the crypto strategy are around USD 100 million, up from USD 15 million when the strategy started. Though the DDQ indicates capacity of USD 250 million, this is a moving target as crypto markets grow, and Lemvi could run a lot more. The market has grown much more than Lemvi’s assets. Lemvi does not have a huge footprint in crypto option markets: each expiry has 3-4 billion of volume and the institutionalisation of crypto has improved liquidity in both delta one and options.

Long term crypto vision

Gillot is mainly trading broadly market neutral arbitrages, but he is nonetheless a believer in the long-term vision of crypto creating a new financial system: “In countries such as Argentina, Turkey or Zimbabwe with very high inflation rates, Bitcoin provides a store of value. It is useful for remittances and peer to peer payments. Crypto is more common than bank accounts in some countries”.

Yet Gillot would not be surprised to see continued volatility. In 2021 Bitcoin went from 60,000 to 16,000. He is a believer but is also happier playing arbitrages than being a “holder” or long term buy or holder and steadily compounding over time.