Jeff Dorman, a CFA and the Chief Investment Officer (CIO) of Arca, provides insights into the court-sanctioned sale of FTX‘s cryptocurrency assets. In contrast to growing concerns, Dorman sheds light on the careful and deliberate approach to liquidating these assets.
The Role of Galaxy and Regulatory Framework
Galaxy Asset Management, distinct from its trading desk, emerged as the successful bidder for FTX’s crypto assets. They have been entrusted with the role of fiduciaries, which implies that sales must be gradual and opportunistic. It’s noteworthy that court documents impose a limit of $50 million in sales per week. Additionally, prior written notice is required before executing any sales, and the decision to hedge remains within the discretion of the investment manager, likely Galaxy.
Market Sentiment and Realities
Galaxy’s victory has triggered significant inquiries from various parties, ranging from legitimate funds to mere speculative interests. However, it is expected that over-the-counter (OTC) sales will dominate the purchasing process, reducing the likelihood of substantial selling on public exchanges. Contrary to some speculations, Galaxy is unlikely to hastily unload $3 billion in futures contracts. Dorman emphasizes that the goal is to outperform a static portfolio, rather than transforming the estate into a long-short (L/S) fund.
Legal Constraints and Strategy
It is crucial to recognize that Galaxy cannot engage in “front-running” the sales for internal profit, as such actions would be illegal. Their asset management business is kept separate from their proprietary trading desks and Michael Novogratz’s personal accounts. Dorman underscores that this plan isn’t a hastily conceived strategy but the result of extensive collaboration with the courts.
Bankruptcy and Sales Approach
Bankruptcies, especially complex ones like FTX’s, require patience. The ultimate objective is to maximize the value of the estate rather than rushing to distribute assets. While this approach may limit short-term gains, it ensures that assets are not hastily sold in a weak market.
Market Makers and Selling Dynamics
In market dynamics, it’s common for traders to sell more than anticipated in anticipation of known block sales. For example, if PIMCO intends to sell $100 million worth of bonds and ten other funds each plan to sell $50 million, the actual absorption of the $500 million in sales remains uncertain.
Sales Pace
The pace of sales in the market can indicate strong demand and the market’s ability to absorb assets, which is considered a bullish sign. Conversely, slower sales suggest a lack of bids, which can be interpreted as either bullish or, at the very least, neutral in terms of market impact.
In summary, Dorman believes that the sales process will be methodical, well-planned, and potentially slower than expected to ensure a smooth transition. Traders and investors are advised to stay informed and exercise caution when making decisions.