In a yo-yo of a year for digital asset investment managers, Arca has largely held its ground.
The hedge and venture fund firm, in fact, is in the middle of finalizing a Series B round, according to two sources familiar with the matter. Arca CEO Rayne Steinberg confirmed the fresh capital-raise in an interview with Blockworks, saying it ought to be finalized in the coming months.
That’s not to say it’s been a painless year for the Los Angeles-headquartered operation. There have been a number of headaches, from choppy returns to operational and fundraising pivots.
Case in point: Arca first started outreach for the Series B about a year ago — near the height of the bull market — long before digital assets lost more than half of their collective market capitalization.
The firm also booked significant losses in its flagship strategy earlier in 2022, when the top-heavy market’s bottom fell right out on the Terra ecosystem — following the de-pegging of Terra’s stablecoin, UST — as well as the rapid collapse of over-levered crypto lenders, including Celsius and Voyager.
Sources said Arca was hit with fairly minor redemptions. Its liquid products offer monthly subscriptions and redemptions. But savvy repositioning and open lines of communication to limited-partners appear to have prevented a more dire outcome. And, crucially, Arca’s funds had minimal exposure to FTX, Steinberg said, though he declined to specify an exact figure.
“Our investment mandate is broad, and our buckets are also broad, so those changed in an environment where [assets have become] super-correlated to macro,” Steinberg said.
The Arca head, tasked with heading business development for the Series B, decided to wait it out. The new plan: rejigger classification of the capital— settling on compliance, infrastructure and staffing, in both the parent company and its affiliate startup innovation and advisory division, Arca Labs.
“The environment really changed with Luna and upended it and really changed the makeup of who was going to be in it,” Steinberg said.
Following its seed round, Arca closed a $10-million Series A in January 2021 led by RRE Ventures. The firm likewise then-declined to detail its valuation.
Regulators, the SEC and the CFTC in particular, have scrambled to get a handle on the swiftly changing developments, a push expected to intensify on the outcome of the US’ midterms.
Steinberg welcomes the scrutiny. Amping up the financial watchdogs’ powers, while perhaps overdue, ought to weed out an assortment of digital asset bad actors, including fraudsters. New regulation, as well as the potential for congressional legislation, would give a leg-up to asset managers — including Arca — with robust compliance structures and featuring executives who cut their teeth on Wall Street.
The institutional investment manager — whose limited-partners are predominantly the likes of endowments and pension plans — has historically sourced potential investors from what Steinberg dubbed “the gateway [to] traditional finance.” It’s also important for the startup’s partners to maintain their own distribution channels.
Despite a number of indicators that deep-pocketed TradFi investors are sitting out crypto’s latest volatile session — and some prominent figures, according to industry participants, are pulling out entirely — Steinberg said the vast majority of the Series B’s likely backers have not had much exposure to recent market conditions.
Fending off the bear market
The chief executive declined to disclose the specific investors with Series B commitment, or entities now in the midst of due diligence. But there is some crossover between Arca’s existing limited-partner roster, according to Steinberg, formerly WisdomTree Asset Management’s co-founder.
The Arca co-founder also declined to comment on how much capital the firm is targeting for the venture round, citing the fundraise still being in the works — and would not disclose an approximate new valuation under the same rationale.
Arca’s exact year-to-date showing for its main fund isn’t known, but one source said they were “far outside the norm,” which typically has a “healthy respect for risk.” The team’s portfolio managers clawed back a “good chunk” of those losses in the coming months — and then dipped again as markets were rattled by FTX’s bankruptcy.
The asset manager’s flagship fund employs a global macro approach, utilizing a bottom-up, fundamental technique — pioneered by TradFi stock-pickers and adapted for crypto — to inform its trading. That vehicle, and additional investment products, are now quite overweight cash as market participants parse the likelihood of yet more counterparties having to close up shop before year end.
Steinberg and execs have undertaken a “deep dive” into Arca’s response mechanisms to contain sudden market plunges. The self evaluation has focused on risk, initial counterparty due diligence and regular followup check-ins.
“You can’t get everything right, and if you’re stagnant, you’re [in trouble],” Steinberg said. “What worked yesterday won’t work tomorrow. Even when things go wrong, you’ll have to evaluate them, too.”