Strategy overview

The fund’s trading strategy is basically Cash-and-Carry arbitrage. It is a market neutral strategy
that is combining a purchase of the long position in a cryptocurrency, and a sale (short) of the position in
a futures contract on the same underlying asset (cryptocurrency). Unlike traditional Cash-and-Carry
arbitrage implemented in traditional markets, the fund’s strategy is also able to profit by doing the
opposite, shorting a cryptocurrency and purchasing the long position in a futures contract. The basics of
such trading underlie in the following principle. Since futures contract is a derivative, it is able to trade
with a premium or discount comparing to an underlying asset. Therefore, the fund exploits pricing
inefficiencies of the asset in the spot/margin markets and the futures markets. A premium or a discount
arises from the market expectations: when masses expect an asset to rise in value, a futures contract
may trade with a premium, or the opposite way, if markets expect a sell of the contract that has a
further expiration date, the potential price shows high inconsistency levels.

Sometimes the price of a futures contract may be up to 10% lower or higher comparing to
spot/margin markets at the same time. However, when the futures contract comes to an expiration
time, it shall close at index price, which is an average price of 4-6 major exchanges. This means that
consequently price discrepancy is leveled. In fact, due to high volatility of cryptocurrencies, the fund is
not obligated to wait until the futures contract expire. Price inconsistency can change from one side to
another a number of times during a futures contract lifetime, which accordingly allows the fund to
generate substantial profit.

As was mentioned before, the strategy is a market neutral, because the equivalent bought and
sold is the same. This means that in any case, as price increase, or decrease, the strategy will only profit
on price inconsistency. The graph below illustrates the process of opening and closing the deal.
 As depicted on the graph, the two lines represent prices of two assets - futures contracts and
spot/margin on the same asset. The blue line is a price of a futures contract; the orange line is a price of
a spot/margin market for the same asset underlying a futures contract. The correlation between them is
substantial. However, the orange line moves with a lag. Lines can diverge or converge, sometimes they
can even cross or swap so that the orange line will continue below the blue line. Such movements occur
all the time. The basics are:

1. The strategy waits for two lines to diverge enough so it becomes profitable to open a deal. In
the case shown on the graph, the orange line, which stands for spot/margin market trades
higher than futures. As a result we short sell cryptocurrency using margin and purchase
contracts in order to open a long position at point 1.
2. After that, the strategy searches for an opportunity for lines to converge, or cross in order to fix
profit. It will require to sell contracts bought earlier on future market, and close margin
positions by buying back sold coins.
3. The profit is calculated separately on each market. The assets short sold on Spot/margin market
were bought back cheaper, though gaining a profit. Futures bought at point 2 were sold at point
4 with a profit as well. As a result, this scenario provided an opportunity to profit from both
markets, in most cases there is a loss on one side and profit on the other, but the principle is
that profit is always higher than loss.
4. Transaction costs (exchange commissions, funding, cryptocurrency exchange, slippage) may be
high enough to impact significantly the potential profit. This brought necessity to open deals
only when the spread between to assets is high enough to exceed transaction costs.
Furthermore, the fund’s strategy uses a sophisticated mechanism, which successfully avoids
 slippage and reduces exchange commissions by half, as the strategy deploys only limit orders on
spot margins, therefore providing liquidity to the market and benefiting in carrying low
transaction costs.

The fund operates on two exchanges, Bitfinex and OKEX. These exchanges are among the oldest
on this rather young market. Both in fact leasers in terms of liquidity provided for traders. Finally, both
allow to trade using leverage, which is used by the fund as it seeks opportunities to maximize profit. Our
typical leverage 1:3, sometimes it can rise to 1:4. This allows the fund to gain a promising profit even
from rather small price discrepancy. The problem arising from the leverage is that sometimes the loss on
one market can be significant, which can lead to a margin call. Because the strategy involves trading on
two different exchanges, OKEX and Bitfinex, we implemented the mechanism of an automatic transfer of
the cryptocurrency between the exchanges and wallets. The strategy seeks every opportunity to
maximize profit with a limited risk, so it can automatically raise capital for one trading pair by reducing
capital for another. This is achieved with the precise calculation of all related costs and risks. The
strategy can even close a deal with a negative return in order to invest funds in more profitable
opportunity. At the moment there are 8 cryptocurrencies, which stand as underlying assets for futures
contracts. Due to issues with liquidity, the fund uses only 6 cryptocurrencies: Bitcoin (BTC), Etherium
(ETH), Etherium Classic (ETC), EOS, Litecoin (LTC) and XRP.

The fund is market neutral to cryptocurrency price change, even though, nearly half of all funds
is stored in cryptocurrency since buying or selling futures for BTC can only be done in BTC. In order to
avoid risks of assets depreciations the strategy hedges these assets. For example, BTC is trading for 5000
USD and there is 1 BTC stored in the wallet. If the price drops to 2500 USD, the hedge will gain one extra
BTC. So, there will be 2 BTC which means that assets evaluation will remain 5000 USD. In case price of
BTC doubles up to 10 000 USD, the wallet will store only 0.5 BTC, which still evaluates 5000 in USD.

The fund evaluated its assets in USDT (Tether). This is a cryptocurrency which claims to be fully
backed by US dollars. The reason to manage assets in USDT rather than dollars is a problem that USD is
not easily converted within exchanges due to regulation problems, whereas almost all exchanges
support Tether. Because USDT is backed by fiat currency, it has very low volatility, which allows it to be a
rather trustful and predictable basic asset for the portfolio evaluation, free of USD problems with
convertibility within cryptocurrency exchanges. Furthermore, it is one of the cheapest way to deposit or
withdraw cryptocurrency account.

Terms and Conditions

1. The fund excepts cryptocurrencies and fiat currencies. At the time the fund receives
investments, it will convert those assets in USDT and other currency. From the time the fund
receives investments, it will calculate profit or loss in USDT;
2. The fund is obligated to publish all deals made by fund at least once a week. However, the fund
publishes only executed deals with calculated average price because the deal can consist of
hundreds or sometimes thousands of deals. Investor has the right to check whether the deals
occurred in fact, in this case the fund is obligated to show deals on exchange interface on face-
to-face basis;
3. The fund is obligated to deploy investments solely to the strategy described in this document;
4. Investor has the right to withdraw a part or the whole investment but no sooner than initially
agreed between the fund and the investor. The minimum period is 6 months. In order to
withdraw the investments, investor has to notify the fund at least 2 weeks prior the end of the
quarter. The reason for this is that the investor’s assets may be involved in a deal, and only by
the end of a quarter there is a guarantee that the futures prices are normalized as futures
contracts expire. If the fund hasn’t been notified of investor’s willingness to withdraw all or part
of their assets, the agreement will be automatically extended to the following quarter. In case
the investor’s assets evaluation experiences losses of 20% or higher, the fund is obligated to
notify the investor, so they have rights to withdraw all or part of their investments prior to
agreements’ expiration date.

iFunds commissions depend on a performance of a fund calculated annually. The table is located in
the appendix section

5. Even though the strategy is basically risk free, there are a few reasons which can lead to serious
losses:
1. Flash crash – is a very rapid, deep and volatile fall or rise in security prices,
occuring within an extremely short time period. It is especially common in margin and
futures contracts markets because of significant leverage taken by some market
participants. This can lead to margin call on one of our markets, because the strategy
involves leverage, and it is impossible to momently transfer funds between exchanges, as
each transaction requires time for an exchange to accept it and blockchain to confirm it.
There was a flash crash on a futures market of OKEX exchange in spring of 2018. BTC
dropped by nearly 50%, however the exchange canceled all deals in order to save it and
some investors from serious losses. There is no guarantee that it will manage such situation
in the same way in future;
2. Illegal decisions taken by cryptocurrency exchanges. As an example, closing
futures contracts trading before contract’s expiration date. Such action has been taken by
OKEX exchange inn December 2018, one day before BCH (Bitcoin Cash) hardfork. Because
OKEX couldn’t decide, which BCH will be taken for index calculation after the planned
hardfork, it closed contracts using trading price at that time which was more than 10%
lower when comparing to spot/margin price. In order to avoid such risk in future, the fund
is not involved in trading cryptocurrency which is awaiting the hardfork;
3. There is a risk of the strategy malfunction caused by incorrect data received
from one of exchanges, or its absence in time of significant market fluctuation. As an
example, the data sent by exchange may not reflect the actual situation on the market, due
to significant lag or exchange maintenance;
4. Shutdown or bankruptcy of an exchange involved in trading;
5. Cryptocurrency exchange breach (hacking), which may lead to loss of part or all
investments;
6. SEC's decision to consider USDT or other tokens illegal, which may lead in turn
to a significant loss;
7. Clawback (societal loss and full account clawback system) is a system
implemented by OKEX exchange. In case of a margin call of some of market participants
which lead to a significant loss, OKEX calculates profitable positions of other participants
and charge them proportionally to the size of their gains;
 6. The risks related to an exchange described in: 5.1, 5.2, 5.3, 5.4, 5.5, 5.6, 5.7 are carried solely by
the investor;
7. In case of a breach/hack in the fund’s assets, which was not related to breach of an exchange,
the sole responsible side for it is the fund, which is obligated to compensate losses;
8. Losses related to system malfunction, not related to an exchange, is a responsibility of the fund.

Appendix
Annual gross Fund’s Annual return after
10k-100k USD return fee fees
  From % To %  % From % To %
  0 20 20 0 16
  21 30 25 15.75 22.5
  31 40 30 21.7 28
  41 50 35 26.65 32.5
  51 60 40 30.6 36
  61 70 45 33.55 38.5
  71   50 35.5  
101к USD or Annual gross Fund’s Annual return after
more return fee fees
  From % To % % From % To %
  0 20 15 0 17
  21 30 20 16.8 24
  31 40 25 23.25 30
  41 50 30 28.7 35
  51 60 35 33.15 39
  61 70 40 36.6 42
  71   45 39.05