No guarantee or representation is made that the Fund will achieve its investment objective. Investment in the Fund involves significant risks and conflicts of interest, including, but not limited to, those set forth below. The risks listed below do not purport to be exhaustive. Additional risks and uncertainties that are currently unknown or deemed immaterial may become material factors that affect the Fund. Prospective investors should carefully consider the risks involved in an investment in the Fund, including but not limited to those discussed below. Prospective investors should consult their own legal, tax, and financial advisers regarding all such risks and regarding an investment in the Fund generally.
General Risk Factors
Lack of Operating History. The Fund has no operating history and therefore may not be able to operate its business, implement its investment strategy, or generate sufficient revenue to make or sustain distributions to investors. Failure to procure adequate funding and capital could adversely affect the Fund’s ability to grow and/or expand its business, which may negatively impact its performance.
Start-Up Periods. The Fund may encounter start-up periods during which it will incur certain risks related to the initial investment of newly contributed assets. Moreover, these start-up periods represent a special risk in that the level of diversification of the Fund’s portfolio may be lower than in a fully invested portfolio.
Reliance on the General Partner and No Authority by Limited Partners. The success of the Fund depends on the ability of the General Partner to develop and implement investment strategies to achieve the Fund’s objectives. Although the General Partner may impose limits on the types of positions the Fund may take or on the concentration of its portfolio investments, the Partnership Agreement imposes no such limits. Limited Partners will have no right or power to take part in the management of the Fund. The Fund’s investment performance could be materially adversely affected if any members of the investment team were to die, become ill or disabled, or otherwise cease to be involved in the active management of the Fund.
Dependence on Key Personnel. The General Partner is dependent on the services of its principal and key personnel, including Mr. Kam (the “Key Personnel”). The success of the Fund may depend to a great extent on the investment skills of the General Partner’s Key Personnel. There can be no assurance that the Key Personnel will continue to be associated with the General Partner and its affiliates. The Fund may be adversely affected if, because of illness, resignation, or other factors, the services of the relevant individuals were unavailable for any significant period.
Undisclosed Investing Strategy. The General Partner’s investment strategy and the techniques it will employ to attempt to reach the Fund’s goals are proprietary and are not required to be disclosed to potential investors (or to Limited Partners). As a result, a potential investor’s decision to invest in the Fund must be made without the benefit of reviewing or analyzing the General Partner’s strategy and techniques.
Undisclosed Positions. To protect the confidentiality of its positions and strategies, the General Partner generally will not disclose the Fund’s positions to Limited Partners on an ongoing basis. The General Partner, at its sole discretion, may from time to time permit such disclosures to certain Limited Partners.
Changes in Investment Strategies. The General Partner has broad discretion to expand, revise, or contract the Fund’s business without the consent of the Limited Partners. The Fund’s investment strategies may be altered, without prior approval or notice to the Limited Partners, if the General Partner determines that such change is in the best interest of the Fund.
Operating Deficits. The expenses of operating the Fund (including management fees payable to the General Partner) could exceed its income. This would require that the difference be paid out of the Fund’s capital, reducing the amount of capital available for investment and limiting the Fund’s potential for profitability.
Absence of Regulatory Oversight. While the Fund may be similar in structure to an investment company, it is not required—and does not intend—to register as such under the laws of any jurisdiction. For instance, the provisions of the Investment Company Act, which may provide certain regulatory safeguards to investors, are not applicable.
Business and Regulatory Risks of Hedge Funds. Legal, tax, and regulatory changes may occur during the term of the Fund and could adversely affect it. The regulatory environment for hedge funds is evolving, and changes may affect the value of the Fund’s investments, its ability to obtain leverage, or its capacity to pursue certain trading strategies. Securities and futures markets are subject to statutes, regulations, and margin requirements. Regulatory agencies such as the SEC and self-regulatory organizations may take extraordinary actions during market emergencies. The regulation of derivatives and related funds is evolving and subject to further legal changes. Any future regulatory changes could have a substantial and adverse effect on the Fund.
Enhanced Scrutiny and Potential Regulation of Private Investment Funds. There has been increased governmental scrutiny and regulation of private investment funds and the financial services industry more broadly. Future legislation may adversely affect the private fund industry or the Fund in particular. Regulatory bodies in the U.S., Europe, or elsewhere may adopt burdensome regulations or interpret existing laws in ways that specifically target private funds. These changes could reduce investment opportunities or increase exposure to liability, legal costs, and compliance burdens. Such developments could materially and adversely affect the Fund.
Future Regulatory Change Is Impossible to Predict. The securities and derivatives markets are subject to comprehensive statutes, regulations, and margin requirements. In addition, the SEC, the Commodity Futures Trading Commission (“CFTC”), and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily price limits, and the suspension of trading. The regulation of securities and derivatives, both inside and outside the United States, is a rapidly changing area of law and is subject to modification by government and judicial action.
The Fund invests primarily in Digital Assets, which currently are either not regulated or are in the early stages of regulation by U.S. federal and state governments or self-regulatory organizations. As Digital Assets have grown in popularity, certain U.S. agencies, such as the Financial Crimes Enforcement Network (“FinCEN”) and the CFTC, have begun to examine Digital Assets and the operations of Digital Assets in depth. Currently, the SEC has not formally asserted regulatory authority over Digital Assets. The SEC has issued a release stating that, depending on the specific facts and circumstances of the Digital Assets in question, the Digital Asset may fall under securities regulation. The CFTC has declared that Digital Assets are commodities, but currently, only certain kinds of Digital Assets may be subject to CFTC jurisdiction. To the extent that any type of Digital Asset is determined to be a security, commodity, future, or other regulated asset, or to the extent that a U.S. or foreign government or quasi-governmental agency exerts additional regulatory authority over the Digital Assets, the Fund may be adversely affected.
Digital Assets currently face an uncertain regulatory landscape not only in the United States but also in many foreign jurisdictions such as the European Union, China, and Russia. Various foreign jurisdictions may, in the near future, adopt laws, regulations, or directives that affect Digital Asset networks and their users, particularly Digital Asset exchanges and service providers that fall within such jurisdictions’ regulatory scope. Such laws, regulations, or directives may conflict with those of the United States and may negatively impact the acceptance of Digital Assets by users, merchants, and service providers outside of the United States, and may therefore impede the growth of the Digital Asset economy.
The effect of any future regulatory change on the Fund is impossible to predict, but such change could be substantial and adverse.
No FDIC or SIPC Protection. Digital Assets held by the Fund are not subject to Federal Deposit Insurance Corporation (“FDIC”) or Securities Investor Protection Corporation (“SIPC”) protections. The Fund is not a banking institution or otherwise a member of the FDIC or SIPC and, therefore, deposits held with or assets held by the Fund are not subject to the protections enjoyed by depositors with FDIC or SIPC member institutions. While private insurance may be available at times, the undivided interest in the Fund’s Digital Assets represented by Interests in the Fund is not insured.
Legality of Digital Assets. It may be illegal, now or in the future, to own, hold, sell, or use Digital Assets in one or more countries, including the United States. Although currently Digital Assets are not regulated or are lightly regulated in most countries, including the United States, one or more countries may take regulatory actions in the future that severely restrict the right to acquire, own, hold, sell, or use Digital Assets, or to exchange Digital Assets for fiat currency. Such action may restrict the Fund’s ability to hold or trade Digital Assets and could result in termination and liquidation of the Fund at a time that is disadvantageous to Limited Partners, or may adversely affect an investment in the Fund.
Current and Future CFTC or SEC Regulation. Current and future legislation, CFTC and SEC rulemaking, and other regulatory developments may impact the manner in which Digital Assets are treated for classification and clearing purposes. In particular, digital currencies and Digital Assets may not be excluded from the definition of “commodity future” or “security” by such future CFTC and SEC rulemaking, respectively. Further, stablecoins may be deemed to be a “swap” under CFTC jurisdiction or a “demand note” under SEC jurisdiction. As of the date of this Memorandum, the General Partner is not aware of any rules that have been proposed to specifically regulate Digital Assets as commodities or securities. The SEC has issued multiple releases stating that, depending on the specific facts and circumstances of the Digital Asset in question, some Digital Assets may fall under securities regulation. Additionally, although the CFTC has declared that Digital Assets are commodities, currently, only certain kinds of Digital Assets, including Digital Asset transactions that are entered into or offered on a leveraged or margined basis or financed by the offeror, may be subject to CFTC jurisdiction. The General Partner cannot be certain as to how future regulatory developments will impact the treatment of Digital Assets under the law.
To the extent that digital currencies are deemed to fall within the definition of a commodity or further within the scope of CFTC jurisdiction pursuant to subsequent rulemaking by the CFTC, the Fund and/or the General Partner may be required to register and comply with additional regulation under the Commodity Exchange Act of 1936, as amended. Moreover, the General Partner may be subject to further requirements with the CFTC through the National Futures Association. Such additional registrations or disclosures may result in extraordinary, non-recurring expenses of the Fund. If the General Partner determines not to comply with such additional regulatory and registration requirements, the Fund may terminate and liquidate at a time that may be disadvantageous to investors. Currently, the General Partner does not intend to register as a commodity pool operator with the CFTC.
To the extent that Digital Assets are deemed to fall within the definition of a security pursuant to subsequent rulemaking by the SEC, the Fund and/or the General Partner may be required to register and comply with additional regulation under the Investment Company Act or similar state and foreign investment advisory statutes. Moreover, the General Partner may be required to register as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”), or similar state investment advisory statutes. Such registrations may result in extraordinary, non-recurring expenses of the Fund. If the General Partner determines not to comply with such regulatory and registration requirements, the Fund, where necessary, may terminate and liquidate at a time that may be disadvantageous to investors.
Assignment of Advisory Contracts. Federal and state laws applicable to investment advisers (including, without limitation, the Investment Advisers Act and rules promulgated thereunder) may impose limitations on the General Partner’s ability to assign certain of its rights and obligations under the Partnership Agreement. Normally, such limitations would permit the General Partner to engage in transactions that do not involve a change of control of the General Partner without the consent of the Limited Partners. However, to the extent that an assignment does involve a change of control, the General Partner will be required to seek the consent of the Limited Partners before the transaction can be consummated. To the extent that the consent of Limited Partners is required for a particular assignment, such consent may be withheld in relation to a transaction that would, in the view of the General Partner, benefit the Fund and/or the Limited Partners. Generally, these laws do not require a minimum length of time for notices or deadlines to provide or withhold consent. The General Partner may establish reasonable notice periods and deadlines at its sole discretion. The General Partner may seek Limited Partner consent via electronic means and/or negative consent.
In this regard, in order to provide for the most efficient management of the Fund, the General Partner may in the future re-domicile the General Partner to a non-U.S. jurisdiction or transfer its general partner interest in the Fund (including the associated rights and obligations under the Partnership Agreement) to a non-U.S. affiliate controlled by the Managing Member without obtaining additional consent from Limited Partners. Such re-domicile or transfer will not involve a change of control of the General Partner under the Investment Advisers Act, and by subscribing for Interests in the Fund, each Limited Partner consents to such proposed transfer.
Cybersecurity Risk. As part of its business, the General Partner processes, stores, and transmits large amounts of electronic information, including information relating to the transactions of the Fund and personally identifiable information of the Limited Partners. Similarly, service providers of the General Partner or the Fund, especially the Administrator, may process, store, and transmit such information. The General Partner has procedures and systems in place to protect such information and prevent data loss and security breaches. However, such measures cannot provide absolute security. The techniques used to obtain unauthorized access to data, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time. Hardware or software acquired from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Network-connected services provided by third parties to the General Partner may be susceptible to compromise, leading to a breach of the General Partner’s network. The General Partner’s systems or facilities may be susceptible to employee error or malfeasance, government surveillance, or other security threats. A breach of the General Partner’s information systems may cause information relating to the transactions of the Fund and personally identifiable information of the Limited Partners to be lost or improperly accessed, used, or disclosed.
The service providers of the General Partner and the Fund are subject to the same electronic information security threats as the General Partner. If a service provider fails to adopt or adhere to adequate data security policies, or in the event of a breach of its networks, information relating to the transactions of the Fund and personally identifiable information of the Limited Partners may be lost or improperly accessed, used, or disclosed.
The loss or improper access, use, or disclosure of the General Partner’s or the Fund’s proprietary information may cause the General Partner or the Fund to suffer, among other things, financial loss, disruption of its business, liability to third parties, regulatory intervention, or reputational damage. Any of the foregoing events could have a material adverse effect on the Fund.
Force Majeure. The Fund’s Portfolio Investments may be affected by force majeure events (i.e., events beyond the control of the party claiming that the event has occurred, including, without limitation, acts of God, fire, flood, earthquakes, outbreaks of an infectious disease, pandemic or any other serious public health concern, war, terrorism, labor strikes, major plant breakdowns, pipeline or electricity line ruptures, failure of technology, defective design and construction, accidents, demographic changes, government macroeconomic policies, social instability, etc.). Some force majeure events may adversely affect the ability of a party (including the Fund or a counterparty to the Fund) to perform its obligations until it is able to remedy the force majeure event and/or prompt precautionary government-imposed closures of certain travel and business. In addition, forced events, such as the cessation of the operation of machinery for repair or upgrade, could similarly lead to the unavailability of essential machinery and technologies. These risks could, among other effects, adversely impact the Fund’s returns, cause personal injury or loss of life, disrupt global markets, damage property, or instigate disruptions of service. In addition, the cost to the Fund of repairing or replacing damaged assets resulting from such force majeure event could be considerable. Force majeure events that are incapable of or are too costly to cure may have a permanent adverse effect on the Fund’s expected returns. Certain force majeure events (such as war, terrorism, or an outbreak of an infectious disease) could have a broader negative impact on the world economy and international business activity generally, or in any of the countries in which the Fund may invest and the markets the Fund may trade specifically. Military action or governmental sanctions prompted by certain force majeure events may further impact general economic conditions and market liquidity internationally or in the specific markets the Fund invests. Additionally, a major governmental intervention into industry, including the nationalization of an industry or the assertion of control over industry assets, could result in losses to the Fund, including if its Portfolio Investments are canceled, unwound or acquired (which could be without adequate compensation). Any of the foregoing may therefore adversely affect the performance of the Fund and its Portfolio Investments.
Investment and Trading Risks
General Investment and Trading Risks. An investment in the Fund involves a high degree of risk, including the risk that the entire amount invested may be lost. The Fund invests in Portfolio Investments using strategies and investment techniques with significant risk characteristics. No guarantee or representation is made that the Fund’s program will be successful. The Fund’s investment program may utilize investment techniques, the use of which can, in certain circumstances, maximize the adverse impact to which the Fund may be subject.
Digital Assets. Digital Assets are loosely regulated and there is no central marketplace for currency exchange. Supply is determined by a computer code, not by a central bank, and prices can be extremely volatile. Digital Asset exchanges have been closed due to fraud, failure, or security breaches. Any of the Fund’s funds that reside on an exchange that shuts down may be lost.
Several factors may affect the price of Digital Assets, including, but not limited to: supply and demand, investors’ expectations with respect to the rate of inflation, interest rates, currency exchange rates, or future regulatory measures (if any) that restrict the trading of Digital Assets or the use of Digital Assets as a form of payment. There is no assurance that Digital Assets will maintain their long-term value in terms of purchasing power in the future, or that acceptance of Digital Asset payments by mainstream retail merchants and commercial businesses will grow.
Digital Assets are created, issued, transmitted, and stored according to protocols run by computers in the Digital Asset network. It is possible these protocols have undiscovered flaws which could result in the loss of some or all assets held by the Fund. There may also be network-scale attacks against these protocols which result in the loss of some or all of the assets held by the Fund. Some assets held by the Fund may be created, issued, or transmitted using experimental cryptography which could have underlying flaws. Advancements in quantum computing could break the cryptographic rules of protocols which support the assets held by the Fund. The Fund makes no guarantees about the reliability of the cryptography used to create, issue, or transmit assets held by the Fund.
Digital Asset Exchanges. The Digital Asset exchanges on which Digital Assets trade are relatively new and largely unregulated and may therefore be more exposed to theft, fraud, and failure than established, regulated exchanges for other products. In general, Digital Asset exchanges are currently start-up businesses with no institutional backing, limited operating history, and no publicly available financial information. Exchanges generally require cash to be deposited in advance in order to purchase Digital Assets, and no assurance can be given that those deposit funds can be recovered. Additionally, upon sale of Digital Assets, cash proceeds may not be received from the exchange for several business days. The participation in exchanges requires users to take on credit risk by transferring Digital Assets from a personal account to a third party’s account. The Fund will take credit risk of an exchange every time it transacts.
Digital Asset exchanges may impose daily, weekly, monthly, or customer-specific transaction or distribution limits or suspend withdrawals entirely, rendering the exchange of Digital Assets for fiat currency difficult or impossible. Additionally, Digital Asset prices and valuations on Digital Asset exchanges have been volatile and subject to influence by many factors including the levels of liquidity on exchanges and operational interruptions and disruptions. The prices and valuation of Digital Assets remain subject to any volatility experienced by Digital Asset exchanges, and any such volatility can adversely affect an investment in the Fund.
Digital Asset exchanges are appealing targets for cybercrime, hackers, and malware. It is possible that while engaging in transactions with various Digital Asset exchanges located throughout the world, any such exchange may cease operations due to theft, fraud, security breach, liquidity issues, or government investigation. In addition, banks may refuse to process wire transfers to or from exchanges.
Any financial, security, or operational difficulties experienced by such exchanges may result in an inability of the Fund to recover money or Digital Assets being held by the exchange, or to pay investors upon withdrawal. Further, the Fund may be unable to recover Digital Assets awaiting transmission into or out of the Fund, all of which could adversely affect an investment in the Fund. Additionally, to the extent that the Digital Asset exchanges representing a substantial portion of the volume in Digital Asset trading are involved in fraud or experience security failures or other operational issues, such Digital Asset exchanges' failures may result in loss or less favorable prices of Digital Assets, or may adversely affect the Fund, its operations and investments, or the Limited Partners.
OTC Transactions. The Fund will engage in transactions involving Digital Assets and securities traded on OTC markets. In general, there is less governmental regulation and supervision in the OTC markets than of transactions entered into on an organized exchange. In addition, many of the protections afforded to participants on some organized exchanges, such as the performance guarantee of an exchange clearinghouse, will not be available in connection with OTC transactions. This exposes the Fund to the risks that a counterparty will not settle a transaction because of a credit or liquidity problem or because of disputes over the terms of the contract. Such risks are accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the Fund has concentrated its transactions with a single or small group of OTC counterparties. Moreover, the Fund has no internal credit function that evaluates the creditworthiness of its OTC counterparties. Therefore, to the extent that the Fund engages in trading on OTC markets, the Fund could be exposed to greater risk of loss through default than if it confined its trading to regulated exchanges.
Liquidity Risk. Liquidity risk exists when particular investments are difficult to purchase or sell, possibly preventing the Fund from selling out of these illiquid investments at an advantageous price.
Limited Exchanges on Which to Trade. The Fund may trade on a limited number of exchanges (and potentially only a single exchange) either because of actual or perceived counterparty or other risks related to a particular exchange. Trading on a single or limited number of exchanges may result in less favorable prices and decreased liquidity for the Fund and therefore could have an adverse effect on the Fund and the Limited Partners.
Exchanges Operating Outside of the U.S. Certain of the Fund’s Digital Asset exchanges may operate outside of the United States. The Fund may have difficulty in successfully pursuing claims in the courts of such countries or enforcing in the courts of such countries a judgment obtained by the Fund in another country. Further, should an exchange cease operation due to criminal actions or for financial or regulatory reasons, the Fund may suffer losses and will likely be subject to the laws of the exchange’s home country when pursuing remedies. In general, certain less developed countries lack fully developed legal systems and bodies of commercial law and practices normally found in countries with more developed market economies. Exchanges operating outside the U.S. typically limit or prohibit, or may in the future without notice limit or prohibit, investment by entities with U.S. beneficial owners in order to avoid U.S. regulations. Should an exchange on which the Fund trades prohibit U.S. beneficial owners or limit the Fund’s trading, the Fund may be forced to liquidate its positions at an inopportune time and be further limited or prevented from making investments in accordance with its investment strategy. It is possible in such an event that the exchange could “freeze” the Fund’s account, thereby preventing the Fund from accessing its account completely, and the Fund would be unable to trade or withdraw funds from the exchange. Furthermore, any trading profits that the Fund would have made as a result of early liquidation will not be available to the Fund, and the Fund, in certain cases, may be obligated to indemnify the exchange for losses incurred due to the liquidation and to participate in an investigation conducted by the exchange and/or relevant authorities. These legal and regulatory risks may adversely affect the Fund and its operations and investments.
Risks of Buying or Selling Digital Assets. The Fund may transact with private buyers or sellers or virtual currency exchanges. The Fund will take on credit risk every time it purchases or sells Digital Assets, and its contractual rights with respect to such transactions may be limited. Although the Fund’s transfers of Digital Assets or cash will be made to or from a counterparty which the General Partner believes is trustworthy, it is possible that, through computer or human error, or through theft or criminal action, the Fund’s Digital Assets or cash could be transferred in incorrect amounts or to unauthorized third parties. To the extent that the Fund is unable to seek a corrective transaction with such third party or is incapable of identifying the third party which has received the Fund’s Digital Assets or cash (through error or theft), the Fund will be unable to recover incorrectly transferred Digital Assets or cash, and such losses will negatively impact the Fund.
Third Party Wallet Providers. The Fund may use third-party wallet providers to hold a portion of the Fund’s Digital Assets. The Fund may have a high concentration of its Digital Assets in one location or with one third-party wallet provider, which may be prone to losses arising out of hacking, loss of passwords, compromised access credentials, malware, or cyber-attacks. The Fund is not required to maintain a minimum number of wallet providers to hold the Fund’s Digital Assets. The Fund may not conduct detailed information technology diligence on such third-party wallet providers and, as a result, may not be aware of all security vulnerabilities and risks. Certain third-party wallet providers may not indemnify the Fund against any losses of Digital Assets. Digital Assets held by third parties could be transferred into “cold storage” or “deep storage,” in which case there could be a delay in retrieving such Digital Assets. The Fund may also incur costs related to third-party storage. Any security breach, incurred cost, or loss of Digital Assets associated with the use of a third-party wallet provider may adversely affect an investment in the Fund.
Custody of Fund’s Assets. The General Partner may maintain custody of some or all of the Fund’s Digital Assets by generating the private keys that control movement of the various Digital Assets. In addition to maintaining custody of the Fund’s Digital Assets in a “cold wallet,” either through paper or hardware cold storage, the General Partner may store the Fund’s Digital Assets in a “hot wallet,” including “hot wallets” on various Digital Asset exchanges, or via proprietary storage methods developed by the General Partner. Digital Asset exchanges may also require the General Partner to provide control of the private keys when the exchange is utilized by the Fund. The foregoing, however, shall not limit the General Partner in any way from utilizing Digital Asset custody standards and practices that may exist in the future. The General Partner retains the right to use any third-party Digital Asset custodian in the future as firms and Digital Asset custody standards begin to develop. The General Partner is responsible for taking such steps as it determines, in its sole judgment, to be required to maintain access to these keys and prevent their exposure from hacking, malware, and general security threats. The General Partner is not liable to the Fund or to Limited Partners for the failure or penetration of the security system absent gross negligence, fraud, or criminal behavior on the part of the General Partner. Maintaining Digital Assets on deposit or with any third party in a custodial relationship has attendant risks. These risks include security breaches, risk of contractual breach, and risk of loss. Limited Partners should be aware that the Fund may allow third parties to hold its property, and this may result in the occurrence of any of the risks abovementioned.
Risk of Loss of Private Key. Digital Assets are controllable only by the possessor of unique private keys relating to the addresses in which the Digital Assets are held. The theft, loss, or destruction of a private key required to access a Digital Asset is irreversible, and such private keys would not be capable of being restored by the Fund. Any loss of private keys relating to digital wallets used to store the Fund’s Digital Assets could result in the loss of the Digital Assets, and a Limited Partner could incur substantial or even total loss of capital.
Risk of Loss Due to Incapacitation of Key Personnel. The Key Personnel may be the sole individuals in possession of the unique private keys required to access the Digital Assets held by the Fund. The incapacitation of the Key Personnel would likely result in the loss of the private keys and, consequently, the loss of the Digital Assets held by the Fund. In such an event, a Limited Partner could incur substantial, or even total, loss of capital.
The Fund’s Trading May be Volatile and Speculative. Digital Assets and the nascent technology underlying Digital Assets represent a speculative investment and involve a high degree of risk. As relatively new products and technologies, Digital Assets have not been widely adopted. A significant portion of the demand for Digital Assets is generated by speculators and investors seeking to profit from the short- or long-term holding of Digital Assets. The relative lack of acceptance of Digital Assets in the retail and commercial marketplace limits the ability of end-users to use Digital Assets for their intended purpose rather than primarily for speculation. A lack of expansion by Digital Assets into retail and commercial markets, or a contraction of such use, may result in increased volatility.
Trading on the Digital Assets Networks. The Fund will convert U.S. dollar contributions made by Limited Partners to Bitcoins and other alternative Digital Assets over the Bitcoin Network or specific networks, as applicable. The Fund may use certain Digital Assets to purchase other Digital Assets. Many Digital Asset networks are online, end-user-to-end-user networks that host a public transaction ledger, known as the blockchain, and the source code that comprises the basis for the cryptographic and algorithmic protocols governing such networks. In many Digital Asset transactions, the recipient of the Digital Assets must provide its public key, which serves as an address for the digital wallet, to the party initiating the transfer. In the data packets distributed from Digital Assets software programs to confirm transaction activity, each Digital Asset user must “sign” transactions with a data code derived from entering the private key into a “hashing algorithm,” which signature serves as validation that the transaction has been authorized by the owner of such Digital Assets. This process is vulnerable to hacking and malware and could lead to theft of the Fund’s digital wallets and the loss of the Fund’s Digital Assets. Many Digital Asset exchanges have been closed due to fraud, failure, or security breaches. In many of these instances, the customers of such Digital Asset exchanges were not compensated or made whole for the partial or complete losses of their account balances in such Digital Asset exchanges.
Amendments to a Digital Asset Network’s Protocols and Software Could Adversely Affect the Fund’s Investment and Trading Activities. Digital Asset networks (collectively, “Networks”) are typically based on protocols that govern peer-to-peer interactions between computers connected to a Network. Generally, the code that sets forth a Digital Asset’s protocol is informally managed by a development team known as the core developers. A Digital Asset’s core developers, miners, and/or users (each such core group in respect of a particular Digital Asset, the “Community”) can propose amendments to a Network’s source code through one or more software upgrades that alter such Digital Asset’s protocols, the software that governs its Network, and the properties of the Digital Asset itself, including, but not limited to, the irreversibility of transactions and limitations on the mining/creation of new Digital Asset units. To the extent that a majority of a Community installs such software upgrade(s), such Network could be subject to new protocols and software that may adversely affect the Fund’s investment and trading activities. If less than a majority of a Community installs such software upgrade(s), such Network could “fork.”
Many Digital Assets are open-source projects and, although there may be an influential group of leaders in a specific Community, there may be no official developers or group of developers that formally control the applicable Network. For many Digital Assets, any individual can download the applicable Network software and make any desired modifications, which are proposed to the relevant Community through software downloads and upgrades. However, the Community must usually consent to those software modifications by downloading the altered software or upgrade that implements the changes; otherwise, the changes do not become a part of that Network. A developer or group of developers could potentially propose a modification to a Network that is not accepted by the applicable Community but that is nonetheless accepted by a substantial portion of such Community. In such a case, a “fork” in the blockchain could develop, and two separate Networks could result—one running the pre-modification software program and the other running the modified version (i.e., a second such Network in respect of the same Digital Asset). Such a fork in the blockchain typically would be addressed by community-led efforts to merge the forked blockchains. This kind of split in a Network could materially and adversely affect the value of Fund Digital Assets and, in the worst-case scenario, harm the sustainability of the applicable Digital Asset’s economy.
Risk to Digital Asset Networks from Malicious Actors. If a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the processing power dedicated to mining on certain Digital Assets networks, it may be able to alter the blockchain on which the Digital Assets transaction relies by constructing alternate blocks if it is able to solve for such blocks faster than the remainder of the miners on the Network can add valid blocks. In such alternate blocks, the malicious actor or botnet could control, exclude, or modify the ordering of transactions, though it could not generate new Digital Assets or transactions using such control. Using alternate blocks, the malicious actor could double spend its own Digital Assets and prevent the confirmation of other users’ transactions for so long as it maintains control. To the extent that such malicious actor or botnet does not yield its majority control of the processing power on various Digital Assets networks or the Digital Assets community does not reject the fraudulent blocks as malicious, reversing any changes made to the blockchain may not be possible. Such changes could adversely affect an investment in the Fund or the ability of the Fund to transact.
Forks and Airdrops. The blockchain code for a Digital Asset may be split, resulting in two different Digital Assets: one that is unaltered and a second, new Digital Asset whose code is based on but differs from the original Digital Asset’s code (a “Hard Fork”). Further, new Digital Assets may be distributed via “airdrops” to holders of certain existing Digital Assets (an “Airdrop”). New Digital Assets provided via a Hard Fork or Airdrop are provided involuntarily and without consideration. A Hard Fork or Airdrop may affect the value of the original Digital Asset. The General Partner, in its sole discretion, may elect to claim the new Digital Asset created as a result of a Hard Fork or Airdrop. Further, various exchanges, custodians, wallets, or other storage solutions may not accommodate such Hard Forks or Airdrops, or may only accommodate such Hard Forks or Airdrops after a significant period of time. Additionally, the General Partner may not have any systems in place to monitor or participate in Hard Forks or Airdrops. Therefore, the Fund may not receive any new Digital Assets created as a result of a Hard Fork or Airdrop, thus losing any potential value from such Digital Assets.
Digital Asset Miners May Cease to Solve Blocks. If the award of new Digital Assets, including bitcoins or other coins, as applicable, for solving blocks declines and transaction fees are not sufficiently high, miners may not have an adequate incentive to continue mining and may cease their mining operations. Miners ceasing operations would reduce the collective processing power on such Digital Asset network, as applicable, which would adversely affect the confirmation process for transactions (i.e., decreasing the speed at which blocks are added to the blockchain until the next scheduled adjustment in difficulty for block solutions) and make such network more vulnerable to a malicious actor or botnet obtaining control in excess of fifty percent (50%) of the processing power on such network. Any reduction in confidence in the confirmation process or processing power of such network may adversely impact an investment in the Fund.
Intellectual Property Rights Claims May Adversely Affect the Operation of Digital Asset Networks. Third parties may assert intellectual property claims relating to the operation of Digital Assets and their source code relating to the holding and transfer of such assets. Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in the Digital Asset’s long-term viability or the ability of end-users to hold and transfer Digital Assets may adversely affect an investment in the Fund. Additionally, a meritorious intellectual property claim could prevent the Fund and other end-users from accessing such Digital Asset network or holding or transferring their Digital Assets, which could force the Fund to terminate and liquidate the Fund’s Digital Assets (if such liquidation of the Fund’s Digital Assets is possible). As a result, an intellectual property claim against the Fund could adversely affect an investment in the Fund.
Equity Securities. The value of the equity securities held by the Fund is subject to market risk, including changes in economic conditions, growth rates, profits, interest rates, and the market’s perception of these securities. While offering greater potential for long-term growth, equity securities are more volatile and riskier than some other forms of investment.
Small- and Mid-Cap Risks. A portion of the Fund’s assets may be invested in securities of small-cap and mid-cap issuers. While, in the General Partner’s opinion, the securities of small- and mid-cap issuers may offer the potential for greater capital appreciation than investments in securities of large-cap issuers, securities of small- and mid-cap issuers may also present greater risks. For example, some small- and mid-cap issuers often have limited product lines, markets, or financial resources. They may be subject to high volatility in revenues, expenses, and earnings. Their securities may be thinly traded, may be followed by fewer investment research analysts, and may be subject to wider price swings, and thus may create a greater chance of loss than when investing in securities of larger-cap issuers. The market prices of securities of small- and mid-cap issuers generally are more sensitive to changes in earnings expectations, to corporate developments, and to market rumors than are the market prices of large-cap issuers. Transaction costs in securities of small- and mid-cap issuers may be higher than in those of large-cap issuers.
Non-U.S. Securities. Although the Fund’s emphasis will be on Digital Assets, the Fund may invest in non-U.S. securities. Investments in securities of non-U.S. issuers pose a range of potential risks, which could include expropriation, confiscatory taxation, imposition of withholding or other taxes on dividends, interest, capital gains or other income, political or social instability, illiquidity, price volatility, and market manipulation. In addition, less information may be available regarding securities of non-U.S. issuers, and non-U.S. issuers may not be subject to accounting, auditing, and financial reporting standards and requirements comparable to or as uniform as those of U.S. issuers. Transaction costs of investing in non-U.S. securities markets are generally higher than in the U.S. There is generally less government supervision and regulation of exchanges, brokers, and issuers than there is in the United States. An issuer of securities may be domiciled in a country other than the country in whose currency the instrument is denominated. The Fund might have greater difficulty taking appropriate legal action in non-U.S. courts. Non-U.S. markets also have different clearance and settlement procedures, which in some markets have at times failed to keep pace with the volume of transactions, thereby creating substantial delays and settlement failures that could adversely affect the Fund’s performance.
Emerging Markets. In addition to the risks associated with investments outside of the United States, investments in emerging markets (i.e., developing countries) may involve additional risks. Emerging markets generally are not as efficient as those in developed countries. In some cases, a market for the security may not exist locally, and transactions will need to be made on a neighboring exchange. Volume and liquidity levels in emerging markets are lower than in developed countries. When seeking to sell emerging market securities, little or no market may exist for the securities. In addition, issuers based in emerging markets are not generally subject to uniform accounting and financial reporting standards, practices, and requirements comparable to those applicable to issuers based in developed countries, thereby potentially increasing the risk of fraud or other deceptive practices. Furthermore, the quality and reliability of official data published by the government or securities exchanges in emerging markets may not accurately reflect the actual circumstances being reported. The issuers of some non-U.S. securities, such as banks and other financial institutions, may be subject to less stringent regulations than would be the case for issuers in developed countries and therefore potentially carry greater risk. Custodial expenses for a portfolio of emerging markets securities generally are higher than for a portfolio of securities of issuers based in developed countries. Many of the laws that govern private and foreign investments, securities transactions, creditors’ rights, and other contractual relationships in non-U.S. countries, particularly in developing countries, are new and largely untested. As a result, the Fund may be subject to a number of unusual risks, including inadequate investor protection, contradictory legislation, incomplete, unclear and changing laws, ignorance or breaches of regulations on the part of other market participants, lack of established or effective avenues for legal redress, lack of standard practices and confidentiality customs characteristic of developed markets, and lack of enforcement of existing regulations. Regulatory controls and corporate governance of companies in developing countries may confer little protection for investors. Anti-fraud and anti-insider trading legislation is often rudimentary. The concept of fiduciary duty is also limited when compared to such concepts in developed country markets. In certain instances, management may take significant actions without the consent of investors. There can be no assurance that this difficulty in protecting and enforcing rights will not have a material adverse effect on the Fund and its operations. Furthermore, it may be difficult to obtain and enforce a judgment in certain non-U.S. countries in which assets of the Fund are invested.
Asia Pacific Regional Risks. There are specific risks associated with investing in the Asia Pacific region, including the risk of severe economic, political, or military disruption. The Asia Pacific region comprises countries in all stages of economic development. Some Asia Pacific economies may experience overextension of credit, currency devaluations and restrictions, rising unemployment, high inflation, underdeveloped financial services sectors, heavy reliance on international trade, and prolonged economic recessions. Deflationary factors could also reemerge in certain Asian markets, the potential effects of which are difficult to forecast. While certain Asian governments will have the ability to offset deflationary conditions through fiscal or budgetary measures, others will lack the capacity to do so. Many Asia Pacific countries are dependent on foreign supplies of energy. A significant increase in energy prices could have an adverse impact on these economies and the region as a whole, and may especially impact certain Blockchain Companies due to their high reliance on energy. In addition, some countries in the region are competing to claim or develop regional supplies of energy or other natural resources. This competition could lead to economic, political, or military instability or disruption. Any military action or other instability could adversely impact the ability of the Fund to achieve its investment objective.
The Digital Asset ecosystem in the Asia Pacific region has seen a growing number of malicious actors committing fraud, price manipulation, spoofing, and other actions. The Fund’s Digital Assets and Blockchain Companies may be adversely affected by such malicious actions. Further, in response to growing fraud, regulators across the Asia Pacific region have introduced frameworks for the licensing and regulation of Digital Assets and Blockchain Companies. In certain Asia Pacific countries, however, the legal status of Digital Assets remains unsettled. Certain Asia Pacific countries have previously, and others may in the future, implement bans on Digital Assets or Digital Asset exchanges, or on certain instruments in the Digital Asset ecosystem, which may result in the seizure of the Fund’s Digital Assets or prevent the Fund from exiting certain investments. Certain Asia Pacific governments have recently begun creating their own state-controlled Digital Assets, which may lead to increased competition with other Digital Assets in which the Fund invests. It is likely that Asia Pacific governments will favor their own state-controlled Digital Assets over other Digital Assets, which may have an effect on the Fund’s investments or the Digital Asset ecosystem more generally, as state-controlled Digital Assets could become the primary Digital Asset used in such countries. Additionally, certain Digital Asset investment instruments may not be available to the Fund due to the Portfolio Manager (and, should the General Partner elect, its Asia-based affiliate that is assigned its general partner interest) being located in Asia. Further regulation in the Asia Pacific region could adversely affect the operations of Blockchain Companies in the Asia Pacific region and Digital Assets generally, which may negatively affect the Fund’s investments.
Currency fluctuations, devaluations, and trading restrictions in any one country can have a significant effect on the entire Asia Pacific region and may have an especially pronounced effect on the Digital Asset ecosystem. Increased political and social instability in any Asia Pacific country could cause further economic and market uncertainty in the region, or result in significant downturns and volatility in the economies of Asia Pacific countries. The effect such a downturn could have on Digital Assets is unclear.
With respect to the Fund’s equity investments, some companies in the region may have less established stakeholder governance and disclosure standards than in the U.S. Some companies are controlled by family and financial institutional investors whose investment decisions may be hard to predict based on standard U.S.-based securities analysis. Consequently, investments may be vulnerable to unfavorable decisions by the management or shareholders.
Corporate protectionism (e.g., the adoption of poison pills and restrictions on shareholders seeking to influence management) appears to be increasing, which could adversely impact the value of affected companies. Many Asian countries are considered emerging or frontier markets (newer or less developed emerging markets are also sometimes referred to as frontier markets), and the governments of these countries may be more unstable and more likely to impose controls on market prices (including, for example, limitations on daily price movements), which may negatively impact the Fund’s ability to acquire or dispose of a position in a timely manner. Emerging market countries may also impose capital controls, nationalize a company or industry, place restrictions on foreign ownership and on withdrawing sale proceeds of securities from the country, and/or impose punitive taxes that could adversely affect the prices of securities. Additionally, there may be less publicly available information about companies in many Asian countries, and the stock exchanges and brokerage industries in many Asian countries typically do not have the level of government oversight as do those in the United States. Securities markets of many Asian countries are also less mature, substantially smaller, less liquid, and more volatile than securities markets in the U.S., and as a result, because these markets may not be as mature, there may be increased settlement risks for transactions in local securities.
Economies in this region may also be more susceptible to natural disasters (including earthquakes and tsunamis), or adverse changes in climate or weather. The risks of such phenomena and resulting social, political, economic, and environmental damage (including nuclear pollution) cannot be quantified. These events can exacerbate market volatility as well as impair economic activity, which can have both short- and immediate-term effects on the Fund’s investments or on Digital Assets generally.
Currency. The Fund may invest its assets in instruments denominated in foreign currency, the price of which is determined with reference to such currency. Client accounts will, however, be valued in U.S. dollars. To the extent unhedged, the value of the assets will fluctuate with U.S. dollar exchange rates as well as the price changes of investments in the various local markets and currencies. Thus, an increase in the value of the U.S. dollar relative to the applicable foreign currency will reduce, all other economic factors being constant, the effect of increases and magnify the effect of decreases in the prices of the account’s securities in their local markets. Conversely, a decrease in the value of the U.S. dollar will have the opposite effect on assets denominated in foreign currency. To the extent deemed advisable by the General Partner, the Fund may hedge against currency fluctuations, but there can be no assurance that such hedging transactions will be effective.
Derivatives. Derivatives are financial contracts whose value depends on, or is derived from, an underlying product, such as the value of a futures or commodities contract. The General Partner will make use of derivatives in their trading. Derivatives often carry a high degree of embedded leverage and, consequently, are highly price sensitive to changes in interest rates, government policies, economic forecasts, and other factors, which generally have a much less direct impact on the price levels of the underlying instruments. Specifically, the risks generally associated with derivatives include the risks that: (1) the value of the derivative will change in a manner detrimental to the Fund; (2) before purchasing the derivative, the Fund will not have the opportunity to observe its performance under all market conditions; (3) another party to the derivative may fail to comply with the terms of the derivative contract; (4) the derivative may be difficult to purchase or sell; and (5) the derivative may involve indebtedness or economic leverage, such that adverse changes in the value of the underlying asset could result in a loss substantially greater than the amount invested in the derivative itself or in heightened price sensitivity to market fluctuations.
Options. The Fund may buy or sell (write) both call options and put options on various underlying investments including options on specific Digital Assets, options on specific securities, options on securities indices, and options on security futures contracts. When the Fund writes options, it may do so on a “covered” or an “uncovered” basis. A call option is “covered” when the writer owns investments of the same class and amount as those to which the call option applies. A put option is covered when the writer has an open short position in investments of the relevant class and amount. The Fund’s option transactions may be part of a hedging strategy (i.e., offsetting the risk involved in another investment position) or a form of leverage, in which the Fund has the right to benefit from price movements in a large number of investments with a small commitment of capital. These activities involve risks that can be substantial, depending on the circumstances.
In general, without taking into account other positions or transactions the Fund may enter into, the principal risks involved in options trading can be described as follows: When the Fund buys an option, a decrease (or inadequate increase) in the price of the underlying security or Digital Asset in the case of a call, or an increase (or inadequate decrease) in the price of the underlying security or Digital Asset in the case of a put, could result in a total loss of their investment in the option (including commissions). The Fund could mitigate those losses by selling short, or buying puts on, the investments for which it holds call options, or by taking a long position (e.g., by buying the investments or buying calls on them) in investments underlying put options.
When the Fund sells (writes) an option, the risk can be substantially greater than when it buys an option. The seller of an uncovered call option bears the risk of an increase in the market price of the underlying security above the exercise price. The risk is theoretically unlimited unless the option is “covered.” If it is covered, the Fund would forego the opportunity for profit on the underlying security should the market price of the security rise above the exercise price. If the price of the underlying security or Digital Asset were to drop below the exercise price, the premium received on the option (after transaction costs) would provide profit that would reduce or offset any loss the Fund might suffer as a result of owning the security. Swaps and certain options and other custom instruments are subject to the risk of non-performance by the swap counterparty, including risks relating to the creditworthiness of the swap counterparty, market risk, liquidity risk, and operations risk.
Third Party Involvement. The Fund may co-invest with third parties through Special Purpose Vehicles, and at any given time substantially all of the Fund’s assets may be invested in such Special Purpose Vehicles. Such investments may involve risks not present in investments where a third party is not involved, including the possibility that a third-party co-venturer or partner may at any time have economic or business interests or goals which are inconsistent with those of the Fund, or may be in a position to take action contrary to the interests and investment objectives of the Fund. There may be no restrictions on the allocations or movement of capital by such parties in a Special Purpose Vehicle, and such movements of capital may materially adversely affect the investments held by the Special Purpose Vehicle. In addition, the Fund may in certain circumstances be liable for actions of its third-party co-venturer or partner.
Proof of Stake Risk. The Fund may invest some of its assets through protocols that verify transactions through a concept known as Proof of Stake (“PoS”). PoS generally allows holders of a Digital Asset to verify future transactions in a protocol based on various factors, depending on the rules of the protocol. Some protocols allow holders with a larger amount of the Digital Asset (i.e., stakes) deposited in the protocol to be awarded with additional Digital Assets through the verification of future transactions. Those with stakes in some protocols may also have the ability to govern and vote on how the protocol is controlled in the future. As PoS typically requires storing a large amount of the relevant Digital Asset for a potentially long period of time in order to verify future transactions on the protocol, such investments may be illiquid for an extended period of time before there is any return on investment. Such illiquidity could have an adverse effect on the Fund. To the extent the Fund invests any of its assets through PoS-based protocols, there is a risk that a protocol assesses a penalty against the Fund in connection with the Fund’s activities in verifying transactions in such protocol, which could result in a loss of some or all of the Fund’s Digital Assets that have been deposited in the protocol. Further, PoS is subject to the same risks associated with Digital Assets in general including, but not limited to, equipment failure, regulatory control, and a failure of the network on which the stake is deposited.
Computer Malware, Viruses, Bugs, Etc. Computer malware, viruses, and computer hacking and phishing attacks have become more prevalent in the industries in which the Digital Asset exchanges (DEXs and CEXs) operate, and may occur on such exchanges’ systems or technologies. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security, and availability of exchange products and technical infrastructure may harm such exchanges’ reputations, their ability to retain existing users and attract new users, and their results of operations.
Digital Asset exchange products and internal systems generally rely on software that is highly technical and complex, and such exchanges’ internal systems depend on the ability of such software to store, retrieve, process, and manage immense amounts of data. Such software may now or in the future contain undetected errors, bugs, or vulnerabilities. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within such software may result in a negative experience for users and marketers who use Digital Asset exchange products, delay product introductions or enhancements, or result in measurement or billing errors. Any errors, bugs, or defects discovered in an exchange’s software could result in damage to such exchange’s reputation, loss of users, loss of revenue, or liability for damages, any of which could adversely affect such exchange’s business and financial results, and could result in significant losses for the Fund.
Stolen or Incorrectly Transferred Digital Assets May Be Irretrievable. Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer of Digital Assets or a theft of Digital Assets generally will not be reversible, and the Fund may not be capable of seeking compensation for any such transfer or theft. It is possible that, through computer or human error, or through theft or criminal action, the Fund’s Digital Assets could be transferred in incorrect amounts or to unauthorized third parties. To the extent that the Fund is unable to seek a corrective transaction with such third party or is incapable of identifying the third party which has received the Fund’s Digital Assets through error or theft, the Fund will be unable to revert or otherwise recover incorrectly transferred Digital Assets. To the extent that the Fund is unable to seek redress for such error or theft, such loss could adversely affect an investment in the Fund.
Initial Coin Offering Risk. The Fund may invest some of its assets in initial coin offerings, pre-sales, open sales, or similar offerings (collectively, “ICOs”). ICOs allow investors to purchase certain Digital Assets offered or created by blockchain-based companies on various platforms in exchange for dollars or already established Digital Assets which can then be converted to dollars on a Digital Asset exchange. Prior to an ICO, many blockchain-based companies offer presale tokens or Digital Assets. Presale tokens or currencies may be sold or used to buy additional tokens or currencies at a later point in time for a potentially higher value than originally purchased for. The Fund may invest in all stages, including presale rounds of ICOs. ICOs and various token presales are currently unregulated and are subject to fraud, security breaches, regulatory developments, enforcement actions, and technological developments. There is no guarantee that the token or currency purchased will have any value or worth. ICOs can at any point become subject to federal and state securities laws, federal commodity laws, and various international regulations, among other restrictions. The SEC has issued a release stating that, depending on the specific facts and circumstances of the Digital Asset in question, some ICOs may fall under securities regulation. Such future restrictions may have an adverse impact on the Fund’s assets or on the Fund’s ability to sell its assets. As investors can purchase new tokens with already existing Digital Assets, investments in ICOs and presales subject the Fund to all risks associated with Digital Assets in general.
Simple Agreement for Future Tokens. The Fund’s assets may be invested in ICOs through Simple Agreements for Future Tokens (“SAFTs”). SAFTs are agreements that offer the right to a Digital Asset (e.g., tokens) at a later point in time, usually upon the triggering of a condition outlined in the agreement. SAFTs that the Fund invests in may offer the right to Digital Assets that have some characteristics of equity securities, such as obtaining an interest in a company. Consequently, such tokens are subject to some of the same risks as equity securities. Such tokens may be subject to legal or other restrictions on transfer, may have no liquid market, may afford limited voting rights to the holder of the token, and may have a lack of control in the management of the issuer of the token. SAFTs are also subject to the same risks as ICOs including, but not limited to, fraud, security breaches, regulatory developments, enforcement actions, failure of the conditions of the agreement to materialize, no guarantee in value or worth of the underlying token, and technological developments. Such risks may have an adverse impact on the Fund’s assets or on the Fund’s ability to sell its assets. SAFTs further subject the Fund to all risks associated with Digital Assets in general.
ICO Valuation Risks. ICOs may offer the Fund the ability to purchase Digital Assets at discounted prices. Digital Assets purchased by the Fund will generally be valued at cost until active trading in such Digital Assets develops. Accordingly, while Limited Partners who invest in the Fund prior to the emergence of such active trading will receive the benefit of purchasing such Digital Assets at discounted prices, any withdrawal proceeds paid to Limited Partners who withdraw from the Fund prior to the emergence of such active trading will reflect the lower, discounted prices and not the expected trading price of such digital currencies or Digital Assets on any active exchange or other market.
Fraudulent ICOs. ICO campaigns in which the Fund participates are unregulated and may turn out to be fraudulent. There is no guarantee that funds lost due to such fraudulent actions will be recovered by the Fund.
ICO Ineligibility. The Fund may be ineligible to participate in certain ICOs (particularly, ICOs issued by non-U.S. sponsors that limit participation to non-U.S. persons or entities). While the Fund may seek to participate in ICOs through a non-U.S. subsidiary, there is no guarantee that a non-U.S. subsidiary of the Fund will be permitted to take part in an ICO that generally limits participation to non-U.S. persons or entities.
Lack of Operating History of Blockchain Companies. The Fund expects to invest in Blockchain Companies that have relatively limited operating histories. Generally, very little public information exists about these companies, and the Fund will rely on the ability of the General Partner to obtain adequate information to evaluate the potential returns. If the General Partner is unable to uncover all material information about these companies, the Fund may not make a fully informed investment decision and may lose money on its investment. These companies may be particularly vulnerable to U.S. and foreign economic downturns such as the recent recession and may have limited access to capital. These businesses also frequently have less diverse product lines and a smaller market presence than larger competitors and may experience substantial variations in operating results. They may face intense competition, including from companies with greater financial, technical, operational, and marketing resources, and typically depend upon the expertise and experience of a single individual executive or a small management team. The Fund’s success depends, in large part, upon the abilities of the key management personnel of the Blockchain Companies, who are responsible for the day-to-day operations of the Blockchain Companies. Competition for qualified personnel is intense at any stage of a company's development. The loss of one or more key managers can hinder or delay a company's implementation of its business plan and harm its financial condition. Blockchain Companies may not be able to attract and retain qualified managers and personnel. In addition, Blockchain Companies may compete with each other for investment or business opportunities, and the success of one could negatively impact the other. Furthermore, Blockchain Companies do business in regulated industries and could be affected by changes in government regulation. Accordingly, these factors could impair their cash flow or result in other events, such as bankruptcy, which could limit their ability to repay their obligations to the Fund and may materially and adversely affect the return on, or the recovery of, the Fund’s investment. As a result, the Fund may lose its entire investment in any or all of the Blockchain Companies.
Economic Risks of Blockchain Companies. The business and operating results of Blockchain Companies may be impacted by worldwide economic conditions. Any conflict or uncertainty, including due to natural disasters, public health concerns, political unrest, or safety concerns, could harm their financial condition and results of operations and cash flows. In addition, if the government of any country in which products are developed, manufactured, or sold sets technical or regulatory standards for products developed or manufactured in or imported into their country that are not widely shared, it may lead some of their customers to suspend imports of their products into that country, require manufacturers or developers in that country to manufacture or develop products with different technical or regulatory standards, and disrupt cross-border manufacturing, marketing, or business relationships which, in each case, could harm the business of Blockchain Companies. In addition, Blockchain Companies may be susceptible to economic slowdowns or recessions.
Failure of a Blockchain Company. Although the Blockchain Companies are carefully selected by the General Partner, it is possible that the Fund may lose all or a portion of its investment in some Blockchain Companies. No assurance can be given that the failure of one or more Blockchain Companies will not have a material adverse effect on the Fund’s overall performance.
Investing in Blockchain Technology Companies. Companies in the rapidly changing fields of blockchain technology and the Digital Assets markets face special risks. The General Partner has no control over and limited visibility into future technological developments. The rapid pace of technological development creates the risk that an issuer’s products and services become obsolete, fail to gain meaningful market share, or fall out of favor as more appealing and advanced technologies and products emerge. A Blockchain Company’s intellectual property rights may be subject to legal challenge. Many companies in the blockchain technology and Digital Assets space have limited operating histories. Such a company may be unable to engage and retain sufficient skilled engineering, marketing, and management personnel to allow it to maintain its technological edge and develop the corporate infrastructure required to sustain and grow its business. Some Digital Asset or blockchain industries may be subject to greater governmental regulation than other sectors, and changes in governmental policies and the need for regulatory approvals may materially and adversely affect the business of companies in those sectors. For these and other reasons specific to particular industries and companies, investments in companies in blockchain technology industries pose greater risks than those in certain other sectors.
Investment in Companies Dependent Upon New Technologies. The Fund may invest in the token offerings of technology companies as part of its investment strategy. As such, the value of the Fund’s interests may be susceptible to factors affecting the information technology, software, communications, consumer, and related technology industries, and an investment in the Fund may be subject to greater risk than an investment in a fund that invests in a broader range of industry sectors, that does not invest in technology companies, and/or that limits its portfolio exposure to a smaller percentage than that of the Fund. The specific risks faced by technology companies include: significant capital requirements; rapidly changing science and technologies; products or technologies that may quickly become obsolete; scarcity of management, technical, scientific, research, and marketing personnel with appropriate training; the possibility of lawsuits related to ownership and licensing of patents and intellectual property and related infringement; and rapidly changing investor sentiments and preferences with regard to technology sector investments (which are generally perceived as risky).
Risks Associated with Investing through Decentralized Exchanges (“DEXs”)
Dependence on a Few DEXs. There are currently very few decentralized, non-custodial protocols with platforms through which the Fund may invest. If platforms representing any significant portion of the decentralized credit market were to dissolve, liquidate, become bankrupt or otherwise cease operations, change their business, or cease originating loans, the Fund would be unable to fulfill its investment objective.
DEXs Dependent on New Technology. DEXs are in the rapidly changing fields of blockchain technology and the Digital Assets markets and face special risks. The General Partner has no control over and limited visibility into future technological developments. The rapid pace of technological development creates the risk that a DEX’s products and services become obsolete, fail to gain meaningful market share, or fall out of favor as more appealing and advanced technologies and products emerge. A DEX’s intellectual property rights may be subject to legal challenge. Many companies in the blockchain technology and Digital Assets space have limited operating histories. Such a company may be unable to engage and retain sufficient skilled engineering, marketing, and management personnel to allow it to maintain its technological edge and develop the corporate infrastructure required to sustain and grow its business. For these and other reasons specific to the lending industry, investments through DEXs that operate in blockchain technology industries pose greater risks than those in certain other sectors.
Limited Supply of Investments. The General Partner’s ability to execute its investment strategy depends on its ability to access a sufficient supply of stablecoins or other Digital Assets. The extent of such supply is outside of the Fund’s and the General Partner’s control. The Fund may not be able to acquire investments in the quantities and at the times it otherwise desires. In such cases, the Fund may hold large cash positions for extended periods of time, which may adversely affect its performance. In addition, if insufficient attractive investments are available, the Fund may not accept additional capital, which could cause greater concentration in the Fund’s portfolio and cause the Fund’s expense ratio to be higher than it would be with a larger asset base.
The Fund must also compete with other investors for investment opportunities on DEXs. Competition for investment opportunities may adversely affect the terms of the investments and may prevent the Fund from finding a sufficient number of attractive opportunities to meet its investment objectives.
Regulatory Risks Due to Novelty of DEXs. DEXs are fairly new, and their compliance with various aspects of regulatory regimes applicable to consumer credit transactions is untested. A federal or state regulator could take a position that a DEX’s activities (and perhaps the activities of the lenders/borrowers/members of those platforms, such as the Fund) do not comply with applicable law. Further, there is a risk that DEXs are mandated to comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations applicable to traditional lenders as well as jurisdiction-specific lending laws. Any such regulatory action could adversely affect the Fund and the Limited Partners.
Lack of Transparency. The General Partner selects Digital Assets for the Fund and executes its investment strategy based in part on information and data that DEXs make available to their users, including interest rates set by these platforms. The General Partner is not in a position to confirm the completeness, genuineness, or accuracy of such information and data, and in some cases, complete and accurate information is not readily available.
Scalability Risk. Although the General Partner believes that the decentralized finance ecosystem presents an opportunity for attractive returns as compared to other fixed income markets, there is a possibility that as additional capital enters any DEX, the interest rates and potential for returns will diminish, which will negatively affect the Fund’s returns.
Collateral and Borrower Default Risks. The Fund is subject to various risks associated with the collateral securing the loans invested in by the Fund. The prices of Digital Assets can be extremely volatile, and the value of collateral pledged by a borrower may decrease, resulting in the borrower’s loan being under-collateralized. If the value of the collateral decreases and in the event the Fund were forced to liquidate the collateral upon a borrower’s default, there is no assurance that liquidation of any collateralized Digital Assets would satisfy a borrower’s obligations under the applicable loan. Although borrowers on most DEXs are required to “over-collateralize,” i.e., post collateral valued greater than the value of the loan (typically 120%–150%), the frequent and rapid volatility of Digital Assets may result in a situation where the value of the collateral that a borrower posted falls so rapidly that despite algorithmic liquidation triggers, there is insufficient collateral value left over to repay the loan.
Due to the volatility of pricing Digital Assets, there may not be significant demand for a particular digital currency or digital asset, and the Fund may have difficulty liquidating certain Digital Assets held as collateral if a borrower defaults.
Interest Rate Risk.
The loans invested in by the Fund are subject to interest rate risk, which relates to changes in a loan’s value as a result of changes in interest rates generally. Certain of the interest rates selected by the DEXs utilized by the Fund are variable and can fluctuate even after a loan has been made. Accordingly, the Fund may earn a lower interest rate on loans it has invested in if the interest rate is lower than the rate applicable at the time the Fund made the investment. Additionally, the interest rates applicable to the loans invested in by the Fund are determined by the DEXs through which such loans are made. Neither the General Partner nor the Fund has control over the interest rates applicable to such loans.
Liquidation Risk. The Fund is also subject to liquidation risks when borrowing Digital Assets. DEXs utilized by the Fund or lenders of loans invested in by the Fund may force liquidation of the Digital Assets offered by the Fund as collateral for loans. Generally, liquidation will be forced if the loan is defaulted on or if the value of the posted collateral falls below a specific collateral ratio in comparison to the value of the amount borrowed. If liquidation is forced, the Fund may be required to pay a liquidation penalty to the applicable DEX in addition to a separate discount on the price of the amount of collateral sold, resulting in greater losses to the Fund’s investments.
Technology Risk. The software and technology of DEXs is experimental and new and may now or in the future contain undetected bugs or security vulnerabilities. In addition, like digital exchanges, DEXs are appealing targets for cybercrime, hackers, and malware. All of these risks could result in the loss of some or all assets held by the Fund.
Smart Contracts. The loans invested in by the Fund utilize smart contracts. Smart contracts are computer codes that can be created and run by the users of the network on which such smart contract is based. A smart contract can take information as an input, process that information through the rules defined in the computer code, and execute certain actions, such as digital currency or digital asset transactions, that have been programmed into the smart contract. The use of smart contracts creates risk exposure because smart contracts use experimental cryptography. The occurrence of software bugs or other flaws cannot be ruled out and could potentially result in the theft or destruction of funds.
Network Risk. Most smart contracts are stored on the Ethereum network, and the Fund will be subject to certain risks related to Ethereum. To the extent the Fund uses smart contracts stored on other networks that currently exist or may exist in the future, the Fund will be subject to certain risks associated with such networks. The development of smart contract platforms could be impacted by one or more regulatory inquiries or regulatory actions. With respect to the Ethereum Network, the Ethereum Foundation exerts a strong influence, and the centralization of such power could make the Ethereum platform less secure. Other networks may face similar security issues related to the centralization of their governance. The Ethereum platform and other smart contract platforms are also subject to risks applicable to digital asset networks as defined and further described below. Furthermore, smart contract platforms may become destabilized due to the increased cost of running distributed applications if the demand for the underlying token used to power the platform grows at a pace that exceeds the rate at which miners can create new tokens. A destabilization of the platform could dampen interest in the platform and the underlying token, making it more difficult for platform-based businesses to operate, which could negatively impact the Fund and other users of such businesses.
Systemic Economic Risk. Given the nascent state of the decentralized finance ecosystem, as well as the interconnectivity of various protocols, there are unknown degrees of systemic risk.
Dependence on Service Providers. DEXs rely on various parties to execute their business models. For example, DEX administrators may rely on hardware security modules (HSMs), cloud-based solutions for key management, and other critical operating infrastructure, which could be the subject of failure, loss, or theft. In such cases, administrative governance and control of the DEXs could be materially affected and, in some scenarios, lead to complete loss of funds. The platforms could be adversely affected if any such party ceases to provide those services, which would, in turn, adversely affect the Fund and the Limited Partners.
Operational Risk. The Fund’s investment strategy relies extensively on DEXs and DEXs’ computer programs and systems to borrow or make loans, settle transactions, and monitor its portfolio. The General Partner may not be in a position to verify the risks or reliability of such systems. If there is a failure in the price mechanism, or the occurrence of data manipulation or other failure to retrieve correct market data owing to price source issues, the value of collateral provided by a buyer for any loans invested in by the Fund may be determined incorrectly, which could adversely impact the Fund.
Stablecoin Specific Risks. Stablecoins are distinct from other digital currencies and digital assets in that their value is backed by the value of an underlying asset, such as fiat currency like USD, commodities, or other digital currencies. Stablecoins are subject to the same risks as other digital currencies and Digital Assets as described in these risk factors, but are also subject to unique risks. While stablecoins are intended to be less volatile than digital currencies, they are inherently subject to the volatility of the underlying assets they are pegged to. Fiat-based stablecoins are centralized, which exposes the holder of such stablecoins to counterparty risk, including but not limited to a centralized entity that issues the applicable stablecoin and manages the fiat conversion. Specifically, fiat-based stablecoins require the holder of such stablecoins to rely on the issuer to have sufficient reserves to back up all of the issued stablecoins. For example, USDT issued by Tether is subject to controversy due to the lack of transparency and claims that Tether does not hold sufficient USD reserves to back all of the issued USDT tokens, which resulted in a significant drop in value of USDT in October 2018. Further, fiat-based stablecoins are subject to greater oversight and regulation, and will be further dependent on the banking industry and other geopolitical factors, all of which could affect the value of such stablecoins. Digital currency-backed stablecoins are inherently more volatile than stablecoins backed by fiat or commodities. The collateral backing digital currency-based stablecoins is held in smart contracts and the underlying digital currency can be immediately liquidated if the value of such digital currency falls below a certain threshold. Further, if the underlying digital currency loses too much value, the system may become under-collateralized, and there is potential the system supporting the stablecoin will be shut down and the stablecoin itself available for, though not subject to, a one-time redemption in exchange for underlying collateral. In addition, there is a risk that the underlying digital currency held as collateral is not adopted or accepted on other platforms, which increases borrower default risk.
Non-Fungible Tokens. NFTs are unique Digital Assets that cannot be exchanged for the same amount of the same kind of asset because each holds different characteristics. Unlike digital currencies, NFTs are differentiated from others of their kind in code and each may hold several different functionalities and characteristics. Similar to digital currencies, there are risks associated with using internet-based assets, including, but not limited to, the risk of source code, hardware, software, and Internet connection failures or problems. The source code relating to the holding and transfer of such assets is vulnerable to software failure, hacking, and malware, and could lead to theft and loss of the Fund’s Digital Assets. NFTs are created, issued, and transmitted according to their respective protocols run by computers in the NFT network. These protocols may have underlying flaws that may result in the loss of some or all assets held by the Fund. These protocols may also be subject to network-scale attacks that result in the loss of some or all assets held by the Fund.
In general, these protocols are currently start-up businesses with no institutional backing, limited operating history, and no publicly available financial information. Participation in such protocols requires users to take on risk by transferring Digital Assets from a personal account to a third party’s account. In particular, NFTs are traded peer-to-peer in decentralized online marketplaces; therefore, it may be difficult or impossible to verify the identity of third-party buyers and sellers, or whether a third-party buyer or seller is a bona fide participant in the network. This creates credit risk that the unknown counterparty will not perform its obligations under the related agreement. It also increases the risk of fraudulent transactions, in that an unscrupulous market participant could use hidden wallets to sell and/or buy assets to or from itself at inflated prices, thereby seeming to create gains that in reality do not exist. For example, OpenSea is the largest marketplace for user-owned digital goods and NFTs; however, it is only an administrative platform that facilitates peer-to-peer transactions between buyers and sellers. OpenSea is not a broker, financial institution, or creditor. The Fund is therefore subject to risks that a counterparty will not perform its obligations under the related contracts without any recourse through the exchange platform.
These platforms may also impose daily, weekly, monthly, or customer-specific transaction or distribution limits or suspend access or withdrawals entirely, rendering the exchange of such Digital Assets for fiat currency difficult or impossible. Additionally, Digital Asset prices and valuations on such platforms have been volatile and subject to influence by many factors, including the levels of liquidity on protocols and operational interruptions and disruptions. The prices and valuation of Digital Assets remain subject to any volatility experienced by digital currency and Digital Asset protocols, and any such volatility can adversely affect an investment in the Fund.
NFT Valuation Risks. The unique nature of NFTs presents an inherent difficulty in the valuation of the digital assets. Each NFT is comprised of its own data, which defines its characteristics in the context of its network; therefore, without a liquid market of comparable assets, the valuation of the current market price of the NFT will likely be less precise. The value of NFTs may be based on certain criteria within the context of its network and often on the appreciation of its respective community of network participants. Valuation of certain NFTs thus may require identifying the criteria and distinguishing characteristics that define its value within its native network. For the aforementioned reasons, the General Partner will value NFTs at cost until they are sold.
The value of NFTs may also be dependent upon the use or public interest in the creation and development of distributed networks and related applications surrounding the NFTs. A lack of use or public interest in the creation of such networks and ecosystems of applications may negatively impact the potential value or utility of the NFTs and adversely affect the Fund’s investment.
Commodity Futures Contracts. The Fund may trade futures and/or commodity interests (e.g., futures contracts on commodities, securities indices, or currencies). As with some other derivatives, futures trading can provide a form of leverage, allowing the Fund to participate in market price fluctuations of securities indices or commodity interests underlying futures (or options on futures), while investing only a small percentage of the value of those underlying securities indices or commodity interests. Trading in futures can be highly speculative and may entail risks that are greater than investing in securities. Some of those risks include the following:
Futures Trading is Volatile and Speculative. Futures markets are highly volatile. Futures contracts are influenced by, among other things: changing supply and demand relationships, governmental actions, agricultural and commercial trade programs and policies, national and international political events, national and international economic events, weather and other naturally occurring phenomena, and prevailing psychological characteristics of the marketplace. There is no assurance that the General Partner will engage in profitable trades for the Fund or that the Fund will not incur substantial losses.
Futures Trading is Highly Leveraged.
The margin deposit required to enter into a futures position is typically 2–10% of the total value of the contract. As a result, if the Fund’s account is margined, a relatively small price movement in a commodity futures contract may result in a loss to the investor equal to or substantially greater than the amount of the deposit. Combined with the volatility of futures prices, the leveraged nature of futures trading can cause futures traders to sustain large and sudden losses of their capital. When the market value of a particular open position changes to a point where the margin on deposit in a participating investor’s account does not satisfy the applicable maintenance margin requirements imposed by the Fund’s futures commission merchant (“FCM”), the Fund, and not the General Partner, will receive a margin call from the FCM. If the Fund does not satisfy the margin call within a reasonable time (which may be as brief as a few hours), the FCM will close out the Fund’s position.
Futures Positions May Be Illiquid. Futures positions may be closed out only on the exchange on which they were entered into or through a linked exchange. Most commodity exchanges limit fluctuations in certain futures contract prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits.” Once the price for a particular contract has increased or decreased by an amount equal to the “daily limit,” positions can be neither taken nor liquidated unless traders are willing to effect trades at or within the limit. This could prevent the Fund from liquidating unfavorable positions and subject it to substantial losses. In addition, the Fund may not be able to effect futures contract trades at favorable prices if trading volume in those contracts is low.
Cash Flow. Futures contracts’ gains and losses are marked-to-market daily for purposes of determining margin requirements. Option positions generally are not, although short option positions will require additional margin if the market moves against the position. Due to these differences in margin treatment between futures and options, there may be periods in which positions on both sides must be closed down prematurely due to short-term cash flow needs. Were this to occur during an adverse move in the spread or straddle relationships, a substantial loss could occur. Futures exchanges and the CFTC typically have the right to suspend or limit trading in the contracts that each such exchange lists. Such a suspension or limitation could render it impossible for the Fund to liquidate its positions and thereby expose it to losses. In addition, there is no guarantee that exchange and other secondary markets will always remain liquid enough for the General Partner to close out existing futures positions. It is also possible that an exchange or the CFTC could order the immediate liquidation and settlement of a particular contract, or order that trading in a particular contract be conducted for liquidation only.
Counterparties, Futures Commission Merchants, and Other Third Parties.
In entering into futures contracts and options on futures contracts, there is a credit risk that a counterparty will not be able to meet its obligations to the Fund. The counterparty for futures contracts and options on futures contracts traded on U.S. exchanges is the clearinghouse associated with such exchange. In general, clearinghouses are backed by the corporate members of the clearinghouse who are required to share any financial burden resulting from the non-performance by one of its members, and as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members, it is normally backed by a consortium of banks or other financial institutions. There can be no assurance that any counterparty, clearing members, or clearinghouse will be able to meet its obligations to the Fund. In addition, under the Commodity Exchange Act, FCMs are required to maintain customers’ assets in a segregated account. If the Fund engages in futures and options contract trading and the FCMs with whom the Fund maintains accounts fail to so segregate the Fund’s assets or are not required to do so, the Fund will be subject to a risk of loss in the event of the bankruptcy of any of its FCMs. Even where customers’ funds are properly segregated, the Fund might be able to recover only a pro rata share of its property pursuant to a distribution of a bankrupt FCM’s assets.
Counterparty Risk. Some of the markets in which the Fund may effect its transactions are “over-the-counter” or “interdealer” markets. The participants in such markets are typically not subject to credit evaluation and regulatory oversight as are members of “exchange-based” markets. This exposes the Fund to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the Fund to suffer a loss. Such “counterparty risk” is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the Fund has concentrated its transactions with a single or small group of counterparties. The Fund is not restricted from dealing with any particular counterparty or from concentrating any or all of its transactions with one counterparty. Moreover, the Fund has no internal credit function that evaluates the creditworthiness of its counterparties. The ability of the Fund to transact business with any one or number of counterparties, the lack of any meaningful and independent evaluation of such counterparties’ financial capabilities, and the absence of a regulated market to facilitate settlement may increase the potential for losses by the Fund.
Net Cash. The Fund may hold a significant portion of its portfolio in cash and cash equivalents. This may result in the Fund’s investment results underperforming market indices or a portfolio that is 100% invested without any net cash holdings.
Highly Volatile Markets. The prices of financial instruments in which the Fund may invest can be highly volatile. Price movements of forward and other derivative contracts in which the Fund’s assets may be invested are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments, and national and international political and economic events and policies. The Fund is subject to the risk of failure of any of the exchanges on which their positions trade or of its clearinghouses.
High Risk Investments. While investments in companies in certain industries offer the opportunity for significant capital gains, such investments involve a high degree of business, financial, technological, and regulatory risk, which can result in substantial losses. Moreover, the Fund’s portfolio may include Blockchain Company Investments particularly subject to increased risk because they are in companies at an early stage of development, which have been or may go into bankruptcy, acquired as leveraged buyouts subject to interest rate fluctuations, or engaged in highly competitive industries dominated by companies with substantially greater resources. As a result, the Fund may experience substantial volatility and potential for loss. The General Partner believes that its investment program and research techniques moderate this risk through a careful selection of securities and other financial instruments. However, no guarantee or representation is made that the program will be successful.
Unidentified Investments; Competitive Market for Investments.
The General Partner may be very selective when seeking Portfolio Investments. The business of identifying and structuring certain transactions is competitive (and may become more competitive in the future) and involves a high degree of uncertainty. There can be no assurance that the General Partner will be able to locate and complete attractive Portfolio Investments or that it will be able to adhere to the investment strategy outlined herein. Furthermore, there can be no assurance that the General Partner will be able to invest the entire amount of the Fund’s assets or that suitable investment opportunities will otherwise be identified. If the General Partner is unable to identify adequate investments at any given time, a significant portion of the Fund’s assets may be held in cash or equivalents, which produce low rates of return.
Use of Leverage. The Fund may leverage its capital because the General Partner believes that the use of leverage may enable the Fund to achieve a higher rate of return. Accordingly, the Fund may pledge its investments in order to borrow additional funds for investment purposes. The Fund may also leverage its investment return with options, short sales, swaps, forwards, and other derivative instruments. The amount of borrowings which the Fund may have outstanding at any time may be substantial in relation to its capital. There is no limit on the Fund’s ability to borrow or use leverage. While leverage presents opportunities for increasing the Fund’s total return, it has the effect of potentially increasing losses as well. Accordingly, any event which adversely affects the value of an investment by the Fund would be magnified to the extent the Fund is leveraged. The cumulative effect of the use of leverage by the Fund in a market that moves adversely to the Fund’s investments could result in a substantial loss to the Fund, which would be greater than if the Fund were not leveraged. The use of short-term margin borrowings results in certain additional risks to the Fund. For example, should the securities pledged to brokers to secure the Fund’s margin accounts decline in value, the Fund could be subject to a “margin call,” pursuant to which the Fund must either deposit additional funds or securities with the broker or suffer mandatory liquidation of the pledged securities to compensate for the decline in value. In the event of a sudden drop in the value of the Fund’s assets, the Fund might not be able to liquidate assets quickly enough to satisfy its margin requirements.
Use of Financing. The Fund may borrow by entering into reverse repurchase agreements. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a mutually agreed date and price. Reverse repurchase agreements may involve the risk that the market value of the securities retained in lieu of sale by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund’s obligation to repurchase the securities and the Fund’s use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. To the extent that, in the meantime, the value of the securities that the Fund has purchased has decreased, the Fund could experience a loss. The financing used by the Fund to leverage its portfolio is extended by securities brokers and dealers in the marketplace in which the Fund invests. While the Fund attempts to negotiate the terms of these financing arrangements with such brokers and dealers, its ability to do so is limited. The Fund is therefore subject to changes in the value that the broker-dealer ascribes to a given security or position, the amount of margin required to support such security or position, the borrowing rate to finance such security or position and/or such broker-dealer’s willingness to continue to provide any such credit to the Fund. Because the Fund currently has no alternative credit facility which could be used to finance its portfolio in the absence of financing from broker-dealers, it could be forced to liquidate its portfolio on short notice to meet its financing obligations. The forced liquidation of all or a portion of the Fund’s portfolio at distressed prices could result in significant losses to the Fund.
Risk of Cryptocurrency Lending. The Fund may borrow and lend Digital Assets in the ordinary course of its business. Third parties that borrow Digital Assets from the Fund may not be able to return these cryptocurrencies, tokens, or other Digital Assets on demand (possibly causing the Fund to default on its obligations to other parties) and may also default on the payment obligations owed to the Fund in connection with such loans, potentially resulting in substantial losses to the Fund. The Fund may lose the entire value of the Digital Assets it lends to defaulting borrowers. The Fund may lend only one or a limited universe of Digital Assets, including but not limited to stablecoins. In the event of the catastrophic failure of a particular Digital Asset protocol (such as the Maker protocol), such protocol may convert the entire Digital Asset to another Digital Asset (such as Ethereum), which may result in a particular risk that some or all of the principal may be lost, or assets placed into the protocol may be lost in their entirety.
Hedging Transactions. The General Partner on behalf of the Fund will not, in general, attempt to hedge all or any market or other risks inherent in the Fund’s portfolio positions, and may hedge certain risks, if at all, only partially. The Fund may choose not, or may determine that it is economically unattractive, to hedge all or certain risks—either in respect of particular positions or in respect of its overall portfolio. The Fund’s portfolio composition will commonly result in various directional market risks remaining unhedged. Even if the General Partner is successful in reducing or controlling risk through hedging, the cost of hedging may have the effect of reducing returns. Furthermore, it is possible that the General Partner’s hedging strategies will not be effective in controlling risk, due to unexpected non-correlation (or even positive correlation) between the hedging instrument and the position being hedged, increasing rather than reducing both risk and losses.
Derivatives and Hedging. The Fund may invest and trade in a variety of derivative instruments, both to hedge the Fund’s portfolio and for profit. Derivatives are financial instruments or arrangements in which the risk and return are related to changes in the value of other assets, reference rates, or indices. The Fund’s ability to profit or avoid risk through investment or trading in derivatives will depend on the General Partner’s ability to anticipate changes in the underlying assets, reference rates, or indices.
Transaction Costs. During some periods, the Fund’s activities may involve a high level of trading, and the turnover of its portfolio may generate substantial transaction costs. These costs will be borne by the Fund regardless of its profitability.
Short Selling. While the Fund does not currently intend to engage in short sales as a principal part of its strategy, it may do so at the General Partner’s discretion. Short selling involves selling securities or assets which are not owned and borrowing them for delivery to the purchaser, with an obligation to replace the borrowed securities or assets at a later date. Short selling allows the investor to profit from declines in market prices to the extent such decline exceeds the transaction costs and the costs of borrowing the securities or assets. The extent to which the Fund engages in short sales depends upon the General Partner’s investment strategy and opportunities. A short sale creates the risk of a theoretically unlimited loss, in that the price of the underlying security or asset could theoretically increase without limit, thus increasing the cost to the Fund of buying those securities or assets to cover the short position. There can be no assurance that the Fund will be able to maintain the ability to borrow securities or assets sold short. In such cases, the Fund can be “bought in” (i.e., forced to repurchase securities or assets in the open market to return to the lender). There also can be no assurance that the securities or assets necessary to cover a short position are available for purchase at or near prices quoted in the market. Purchasing securities to close out the short position can itself cause the price of the securities or assets to rise further, thereby exacerbating the loss.
Limited Diversification. The Partnership Agreement does not limit the amount of the Fund’s capital that may be committed to any single investment, industry, or sector. At any given time, it is therefore possible that the General Partner may select investments that are concentrated in a limited number or types of investments. This limited diversity could expose the Fund to losses disproportionate to market movements in general if there are disproportionately greater adverse price movements in those investments.
No Assurance of Distributions, Appreciation, or Liquidity. There can be no assurance that any distributions to the Limited Partners will be made by the Fund or that aggregate distributions, if any, will equal or exceed the Limited Partner’s Capital Contributions to the Fund. Net investment proceeds in respect of a Portfolio Investment will be the principal source of distributable cash to the Limited Partners. With respect to the Fund’s equity positions, there will be either no marketplace or a limited marketplace for the securities of a private Blockchain Company, and the realization of the success of the investment may require the securities to be sold to other private investors or in a public offering, or for the Blockchain Company to be acquired. There can be no assurance that any of these types of transactions will take place with respect to a particular investment. Consequently, there is no assurance that the operations of the Fund will be profitable or as to when or whether cash or securities will be available for distribution to holders of Interests. In addition, the General Partner has absolute discretion in the timing of distributions to the Limited Partners; however, the income tax liability of Limited Partners depends on the profits of the Fund, regardless of whether distributions are made. Securities acquired by the Fund through equity investments will be held by the Fund and will be sold or distributed at the sole discretion of the General Partner.
Security Breaches. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses, could result in the halting of the Fund’s operations, the suspension of redemptions, or a loss of Fund assets. While the General Partner generally intends to use and rely on third-party security systems maintained by the exchanges on which the Fund’s trades are effected, such security systems are not impenetrable and may not be free from defect, and any loss due to a security breach or software defect will not be borne by the Fund.
Systems and Operational Risk. The Fund’s investment strategy relies extensively on computer programs and systems to trade, clear, and settle securities transactions, to evaluate certain securities based on real-time trading information, to monitor its portfolio and net capital, and to generate risk management and other reports that are critical to oversight of account activities. In addition, certain of the General Partner’s operations interface with or depend on systems operated by third parties, including its prime brokers and market counterparties and their sub-custodians and other service providers, and the General Partner may not be in a position to verify the risks or reliability of such third-party systems. These programs or systems may be subject to certain defects, failures, or interruptions, including, but not limited to, those caused by worms, viruses, and power failures. Any such defect or failure could have a material adverse effect on the Fund’s portfolio.
Fund Risks
Illiquidity of Interests; In-Kind Distributions. An investment in the Fund is relatively illiquid and is not suitable for an investor who needs liquidity. There is no public market for Interests (nor is any public market expected to develop for such Interests), and the Partnership Agreement imposes significant limitations on Limited Partners’ abilities to transfer Interests. Interests may not be transferred or pledged except in compliance with significant restrictions on transfer as required by Federal and state securities and commodities laws and as provided in the Partnership Agreement. The Partnership Agreement does not permit a Limited Partner to transfer or pledge all or any part of its Interest to any person without the prior written consent of the General Partner, the granting of which is in the General Partner’s sole discretion. In addition, rights to withdraw funds from the Fund are subject to several limitations. The General Partner may consent (or, in its sole discretion, decline to consent) to deviations from one or more of the procedures or limitations regarding withdrawals. The General Partner has the discretion to cause the Fund to deliver amounts withdrawn in-kind rather than cash. The assets so delivered may be relatively illiquid, and the Limited Partner would bear the risk of a decline in their value after the effective time of its withdrawal. Further, such investments so distributed may not be readily marketable or saleable and may have to be held by such Limited Partner for an indefinite period of time. Any such in-kind distributions will not materially prejudice the interests of the remaining Limited Partners. These facts, taken together, will significantly affect the liquidity of a Limited Partner’s investment in the Fund.
Long-Term Investments. Disposition of Portfolio Investments may not occur for a number of years after the initial investment. While it is the intention of the General Partner to achieve the Fund’s investment objectives, factors such as overall economic conditions, the competitive environment, the market for new securities offerings, and other factors may affect the disposition of Portfolio Investments.
Effect of Substantial Withdrawals. Substantial withdrawals by Limited Partners within a short period of time could require or result in the liquidation of investment positions more rapidly than would otherwise be desirable, possibly reducing the value of the Fund’s assets and/or disrupting the General Partner’s investment strategy. Reduction in the size of the Fund could make it more difficult to generate a positive return or to recoup losses due to, among other things, reductions in the Fund’s ability to take advantage of particular investment opportunities or decreases in the ratio of its income to its expenses. The General Partner may permit some Limited Partners to have access to more information about the Fund’s investments, or to obtain information more rapidly, than Limited Partners generally. In addition, withdrawals or redemptions by investors in other investment vehicles or accounts managed by the General Partner, some of which may have more advantageous information and/or liquidity rights than those provided to Limited Partners, could adversely affect the value of portfolio positions held by the Fund. Further, a significant withdrawal of Capital Accounts from the Fund may cause a temporary imbalance in the Fund’s portfolio, which may adversely affect the remaining non-withdrawing Limited Partners. The Fund may distribute cash and/or assets to withdrawing Limited Partners who have no need for liquidity in the investment, other than to pay annual tax liabilities associated with the Fund.
Potential Mandatory Withdrawal. The General Partner may, in its sole discretion at any time, require a Limited Partner to withdraw all or a portion of its Capital Account. Such a mandatory withdrawal could result in adverse tax and/or economic consequences to such Limited Partner.
Risk of Asset Growth. If the assets managed by the General Partner and its affiliates grow significantly, it may adversely affect the Fund’s investment performance. It becomes more difficult to find attractive investment opportunities as the amount of assets that the General Partner must invest increases. In this event, the General Partner may find it necessary to invest in a greater number of positions than it currently intends, which could dilute its focus on individual positions, impair its ability to monitor existing and potential investments, and result in investments in positions that it otherwise would not select. In addition, with greater assets to invest, it will be increasingly difficult for the Fund to make investments large enough to be meaningful to their overall portfolios.
Contingency Reserves. The General Partner, at any time in its sole discretion, may on behalf of the Fund establish reserves for contingencies (including general reserves for unspecified contingencies). The establishment of such reserves will not insulate any portion of the Fund’s assets from being at risk, and such assets may still be traded by the Fund. A pro rata portion of any reserve may be withheld from distribution to a withdrawing Limited Partner.
Tax Liability Without Distributions. Partners must recognize for income tax purposes their pro rata shares of the taxable net income of the Fund, regardless of whether the Partners requested a partial withdrawal from the Fund to cover their income tax liabilities. Taxable income can be expected to differ from Net Income, primarily because generally only realized gains and losses are considered for income tax purposes, but Net Income and Net Loss will include unrealized gains and losses. The Fund may generate taxable income for a Partner even though the value of the Partner’s interest in the Fund has declined. It will generally be necessary for Partners to pay such tax liabilities out of separate funds or withdrawals from the Fund. There are significant limitations on a Partner’s right to withdraw funds from the Fund. Sufficient information may not be available in time for the Partner to determine accurately an amount to withdraw to pay taxes for a given fiscal year.
Information Rights. Subject to the sole discretion of the General Partner, certain Limited Partners may invest on terms that provide access to information that is not generally available to other Limited Partners, and as a result, may be able to act on such additional information (i.e., withdraw their Capital Accounts) that other Limited Partners do not receive.
Performance Allocation to the General Partner. The General Partner is entitled to receive a Performance Allocation, based upon the net capital appreciation, if any, allocated to the Limited Partner’s Capital Account. The Performance Allocation may create an incentive for the General Partner to make investments that are riskier or more speculative than would be the case if such arrangement were not in effect. In addition, because the Performance Allocation is calculated on a basis which includes unrealized appreciation of the Fund’s assets, it may be greater than if such compensation were based solely on realized gains.
Side Letter Agreements. In accordance with common industry practice, the General Partner may enter into one or more Side Letters or similar agreements with certain Limited Partners pursuant to which they may agree to vary certain of the terms applicable to any such Limited Partner or grant to any such Limited Partner specific rights, benefits, or privileges that are not made available to Limited Partners generally. The General Partner may also agree to provide a greater level of disclosure regarding the investments and activities of the Fund to certain Limited Partners than other Limited Partners. Such agreements will be disclosed only to those actual or potential Limited Partners that have separately negotiated with the General Partner for the right to review such agreements.
Asset Valuation. The General Partner has substantial discretion in determining the value of the Fund’s assets and liabilities, whether or not a public market exists for assets of the same class or type. While some marketable assets are valued based on prices reported in the public markets, other investments may be more thinly traded or subject to irregular trading activity. Determinations on the value of certain investments, and how to value assets and liabilities as to which limited prices or quotations are available, are based on the General Partner’s recommendations or instructions to the Administrator. The General Partner may face a conflict of interest in making any of these valuation decisions or recommendations. If the General Partner’s valuation of any such asset is inaccurate, the General Partner might receive a Performance Allocation and Management Fee that is greater than the fee to which they would otherwise be entitled. The General Partner may not be able to effectively manage the Fund’s investment portfolio, diversification, and other internal guidelines and risks if the Fund’s portfolio is inaccurately valued. Any such inaccuracy could adversely affect the Limited Partners. Additionally, any reduction in the value of any assets or increase in the value of any liabilities held by the Fund would reduce the amount of fees to which the General Partner may be entitled.
In-Kind Contributions of Digital Assets. The Fund may accept Capital Contributions of Digital Assets; however, Limited Partners understand and acknowledge that such Capital Contributions may be valued in U.S. dollars using closing values as of the day before the Limited Partner’s Capital Contribution is accepted by the Fund in accordance with the General Partner’s valuation policy. Changes in relative value of the Digital Assets against the U.S. dollar will affect the value of the in-kind Capital Contribution and may result in a Limited Partner’s Capital Account being credited with a lower value than the subscription amount set forth in such Limited Partner’s Subscription Documents. All of the risks of the Fund’s trading of Digital Assets described in this Memorandum will thus be borne directly by the Limited Partner during the period from when such Digital Assets are contributed to the Fund and when the Fund accepts the Capital Contribution. Digital Assets are volatile and speculative, and Limited Partners may experience a significant loss of value of the in-kind Capital Contribution before their Capital Contribution is accepted by the Fund.
Master-Feeder Structure. The Fund invests substantially all of its assets through a “master-feeder” structure. The “master-feeder” fund structure presents certain unique risks to investors. For example, a smaller feeder fund investing in a master fund may be materially affected by the actions of a larger feeder fund investing in such master fund. If a larger feeder fund redeems its shares of a master fund, a remaining feeder fund may experience higher pro rata operating expenses, thereby producing lower returns. A master fund may become less diverse due to a redemption by a larger feeder fund, resulting in increased portfolio risk. A master fund is a single entity, and creditors of such master fund may enforce claims against all assets of such master fund, including a pro rata share of assets owned by the feeder.
Legal Counsel. Documents relating to the Fund, including the Subscription Documents to be completed by each Limited Partner, as well as the Partnership Agreement, are detailed and often technical in nature. Cole-Frieman & Mallon LLP is legal counsel to the Fund and the General Partner and does not represent the interests of any Limited Partner. Moreover, under the Partnership Agreement, each Limited Partner will be required to waive any actual or potential conflicts of interest between such Limited Partner and legal counsel to the Fund. Accordingly, each prospective Limited Partner is urged to consult with its own legal counsel before investing in the Fund. Finally, in advising as to matters of law (including matters of law described in this Memorandum), legal counsel has relied, and will rely, upon representations of fact made by the General Partner and other persons in this Memorandum and other documents. Such advice may be materially inaccurate or incomplete if any such representations are themselves inaccurate or incomplete, and legal counsel generally will not undertake independent investigation with regard to such representations.
Other Risks
Tax Considerations. The Fund will be permitted to utilize leverage and borrow. Thus, tax-exempt Limited Partners may incur an income tax liability with respect to their share of any unrelated business taxable income (“UBTI”) the Fund may generate, if applicable. Each investor should consult with and rely on its own independent tax counsel as to the U.S. Federal income tax consequences of an investment in the Fund based on its particular circumstances, as well as to applicable state, local, or non-United States tax laws. For a more detailed discussion of the income tax considerations associated with an investment in the Fund, see the discussion below under “Tax Considerations”.
Risks for Certain Benefit Plan Investors Subject to ERISA. Prospective investors that are benefit plan investors subject to ERISA and Department of Labor Regulations issued thereunder should read the section hereof entitled “ERISA MATTERS” in its entirety for a discussion of certain risks related to an investment by benefit plan investors in the Fund.
Investment Company Regulation. The Fund relies on Section 3(c)(7) of the Investment Company Act to avoid requirements that the Fund register as an “investment company” under, and comply with the substantive provisions of, the Investment Company Act. If the Fund were required to be registered as an investment company, the Investment Company Act would require, among other things, that the Fund have a board of directors, some of whom were unrelated to the General Partner, compel certain custodial arrangements, and regulate the relationship and transactions between the Fund and the General Partner. Compliance with some of those provisions could possibly reduce certain risks of loss, although such compliance could significantly increase the Fund’s operating expenses and limit the Fund’s investment and trading activities. Interpretations of Section 3(c)(7) are complex and uncertain in several respects, and as a result, there can be no assurance that the Fund will remain entitled to rely on that Section. If the Fund were found not to have been entitled to such reliance, the Fund and the General Partner could be subject to legal actions by the SEC and others, and the Fund could be forced to terminate its business under adverse circumstances.
Registration Exemption.
The Fund offers Interests on a continuing basis without registration under the Securities Act in reliance on an exemption for “transactions by an issuer not involving any public offering,” and without registration or qualification of the Interests under state laws in reliance on related exemptions. While the General Partner believes reliance on such exemptions is justified, there can be no assurance that factors such as the manner in which offers and sales are made, concurrent offerings by other funds, the scope of disclosure provided, failures to file notices or renewals of claims for exemption, or changes in applicable laws, regulations, or interpretations will not cause the Fund to fail to qualify for such exemptions under Federal or one or more states’ laws. Failure to so qualify could result in the rescission of sales of Interests at prices higher than the current value of those Interests, potentially materially and adversely affecting the Fund’s performance and business. Further, even non-meritorious claims that offers and sales of Interests were not made in compliance with applicable securities laws could materially and adversely affect the General Partner’s ability to conduct the Fund’s business.
Other Laws and Regulations.
The Fund and the General Partner are subject to various other securities and similar laws and regulations that could limit some aspects of the Fund’s operations or subject the Fund or the General Partner to the risk of sanctions for noncompliance.
The foregoing list of risk factors does not purport to be a complete enumeration or explanation of the risks involved in an investment in the Fund. Prospective Limited Partners should read the entire Memorandum and consult with their own advisers before deciding to subscribe for Interests.
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