On December 15, DigFin published the following profile of crypto quant manager Stefan Qin of Virgil Capital. On December 22, the Securities and Exchange Commission of the United States accused Qin of fraud in a lawsuit filed in Manhattan federal court, alleging he has defrauded investors in his arbitrage fund.
The SEC charges Qin with fabricating records, failing to redeem $3.5 million in investments, and for having sought to withdraw $1.7 million in investor funds to pay off Chinese loan sharks.
DigFin’s profile should remain as a public record so we leave it below.
“I think we’re the biggest, or one of the biggest crypto quant funds,” Stefan Qin said. But gathering assets is not the mission. “I don’t really care.”
That’s because Virgil Capital, the New York-based trading firm he founded in 2016 when he was 19 years old, doesn’t take management fees. It’s paid purely on performance, which means capping fund size to preserve returns.
“We will never charge management fees. If I have to return money, I will,” Qin told DigFin, noting that other arbitrageurs have collapsed because they got complacent.
“Those firms are good at fund raising,” he said. “They’re opportunistic. We’re focused and long term. Few firms have that kind of foresight. And once they start charging management fees, it’s hard for them to stop. It’s easy money.”
DigFin has yet to meet a hedge fund in the finance world that doesn’t also accept and even live off its management fees. Virgil isn’t tempted?
“We never try to make easy money,” Qin insisted.
Never-ending arb
Stefan Qin thought he was going to become a physicist. He is a math prodigy who got top marks at university in Australia, but fell in love with the crypto industry and made it his vocation.
His firm, Virgil Capital, has quietly endured in a space better known for firms going boom and bust. It’s longevity is due in part to his notion of what a quant firm ought to be about.
As a first mover in the industry, he’s built a sustainable competitive advantage that allows Virgil to do well just off performance fees.
In some respects, Virgil is making money – maybe not easily, but confidently – from structural anomalies in crypto markets and a bit of good luck.
First, the anomalies.
Qin describes crypto as defined by two things: it is global, yet it is fragmented.
The industry’s infrastructure is also unsophisticated, but that will change. What won’t change is the distribution of trading across many exchanges around the world, each with their own standards, connectivity, and market participants.
This makes it ideal for high-frequency arbitraging, if a trader can connect to enough venues.
As a university student, Qin dabbled in betting on crypto price movements. “I’m not a good trader,” he said.
But while doing an internship in China with OKCoin (rebranded now as Malta-based OKEX), he built a platform between two venues, one in China and the other in the U.S., to allow the firm to arbitrage.
The fragmented nature of crypto means the same currencies – Bitcoin, Ether, XRP, etc – trade on all of these exchanges but at different prices.
He realized that his internship project was actually a business unto itself. Qin dropped out of university in Australia to move to New York and build Virgil Capital. “The crypto fundamentals will persist,” he said.
Taking it to the bank
Now comes the bit of luck.
To transform Virgil into a mega arb fund, he managed to connect to 41 exchanges across seven countries. That’s a huge feat, as each exchange requires a lot of work to integrate their APIs, build enough risk management to compensate for the lack of a custody solution that can meet HFT demands, and hire traders able to navigate both the worlds of finance and crypto.
But because Qin began this in 2016 and 2017, before the industry went into its ICO-backed frenzy, he could find enough banks in a given jurisdiction willing to give him an account.
We never try to make easy money
Stefan Qin, Virgil Capital
He says he invests a lot of time in maintaining good relationships with those banks, some of which got cold feet when crypto and its related scams hit the headlines.
Qin calls this is his secret weapon: it’s now become difficult for crypto businesses to open bank accounts. He says he’s encountering a lot of friction as he tries to enter some new markets.
In short, Virgil, perhaps naively, managed to secure the bank accounts to underpin its global strategies. It will be very difficult for other firms to replicate that; even Virgil is struggling to expand. But this access underpins its ability to arbitrage among many venues, thus giving it a huge edge in attracting funds – to the extent that it doesn’t need to charge management fees, which in turn attracts more clients.
Durable dynamics
The firm’s arbitrage fund now has about $112 million under management and has a track record of annual distributions of up to 25%.
Because Virgil cannot grow AUM without impacting performance (the total crypto market cap is about $237 billion), he had to hand back some investors’ money. Those investors have not come back. So he launched a multi-strategy fund, both to provide Virgil with a more flexible strategy, and also as a destination for capital that can’t enter the arb fund. The multi-strat fund now runs about $27 million and can scale up to $75 million.
It’s not enough to be a good trader
Stefan Qin, Virgil Capital
Is he worried that a firm built on market inefficiencies can find its returns diluted by new entrants?
Qin says he initially thought hedge funds, prop shops and family offices would enter the market and make crypto more efficient. But it hasn’t happened.
“They became my clients instead,” he said.
The finicky world of crypto is too expensive to get into. The learning curve takes about a year – a year of paying traders to lose bets. It’s a hard sell for financial firms’ investors or shareholders.
This may explain why the industry has seen plenty of banks enter crypto as custodians or to set up their own exchanges (as DBS has just announced), but not launch funds or trading strategies.
That, plus the natural dynamics of crypto, seem likely to keep quant strategies in clover, if they risk-manage well.
Tradepreneur
Qin’s biggest challenge is finding the right people to join the firm. He now employs about 20 people.
He’s interviewed or trialed many people out of big funds like Citadel, Millennium and Two Sigma.
He respects their financial acumen, noting that he’s never worked in the finance industry; he acknowledges it’s not a world he knows: “I dropped out of uni.”
But the embryonic nature of crypto means traders from such places can’t operate successfully, because they’re used to sophisticated custody, fund administration, accounting, and all the other processes that support trading.
“It’s not enough to be a good trader,” Qin said, because people have to invent the tools as they go along. “You also need to be an engineer, a risk manager, and an accountant. You have to be an entrepreneur.”
He does believe, however, that firms like Virgil are creating bridges between the worlds of finance and crypto.
But the culture is different. Hedge funds teach their people to compete for bonuses; it’s dog eat dog. Crypto is still in a building phase, and such rivalries are counterproductive.
“There’s too many challenges in crypto,” he said. “We need to collaborate.”
And he wants to keep people focused just on trading, and not get distracted by other shiny opportunities. Firms in crypto can do far more than they might in finance: be an exchange, a market maker, a broker, an investment bank, all in one.
For Qin that risks distraction. “Virgil is the longest-running quant in crypto because we just do trading,” he said.
He’s 23 now and running one of the biggest funds in blockchain finance. Surely he must be tempted by detours?
“My parents wanted me to be a physicist,” he said. “They weren’t too happy when I told them I had quit uni to do this crypto thing. Who knows, maybe someday I’ll complete my degree. But what I really want to do is trade crypto.”
