Addressing Risk

D2 Finance addresses risks across the following:

Portfolio Stress Testing: Regular stress testing is conducted to simulate extreme market scenarios, using tools like Bloomberg and BITO US Equity Options as proxy to assess resilience and potential vulnerabilities. Stress testing involves simulating extreme market scenarios or events to evaluate the resilience of a portfolio and assess potential losses under adverse conditions. This process helps in identifying vulnerabilities, refining risk models, and enhancing risk mitigation strategies. An independent Bloomberg stress test scenario is performed whenever there is a significant change in positioning. This testing uses BITO US Equity Options as an approximation of exposure within the given epoch. The strongest assumption made is that all assets move together in this scenario. It should not be regarded as a precise representation of risk, but rather as a useful tool to gauge sensitivity in a stress scenario.

Liquidity risk: Liquidity Risk refers to the fund’s ability to buy or sell assets at desired prices without significantly impacting market prices. Under normal market conditions, and even in stressed scenarios, the fund can typically be liquidated without incurring unusual costs within one day. The netting of exposure (excluding options) is almost instantaneous. During the month of April 2024, there were no withdrawals from both iETH and ARB++ in April (apart from D2’s own protocol to rebalance). Currently, the fund maintains a 100% retention rate to date. For assets under management (AUM) up to $25 million, liquidity risk is considered negligible.

Market risk sensitivity: The fund thrives on market volatility, major market risk is discrepancies between realized and implied volatility. Product will underperform in a dull market. Market risk sensitivity measures the fund's exposure to external market factors such as cryptocurrency price movements, market volatility, and macroeconomic events. Generally, volatility benefits the strategy. Underperformance is expected when the realized volatility is significantly lower than the implied volatility. The VaR (Value at Risk) measure is not applicable for iETH. Instead, we anticipate thriving when correlation assumptions fail and there are significant changes in the market.

Concentration Risk: A concentration does exist however in blue-chip assets. ART/D2 Finance maintains a focused portfolio of blue-chip assets, primarily Ethereum and its derivatives.

Trading Risk: In terms of trading limits, custom and immutable limits can be implemented directly in code, providing a structured framework for transactions. The Investment Manager utilizes stop-loss limits to safeguard the fund, complemented by a Dynamic Risk System that efficiently leverages options. Generally, ART/D2 Finance maintains predetermined maximum dollar risks for each exposure, accommodating wider stop-loss parameters. This approach allows us to view volatility movements as opportunities to secure better entry prices for our strategically pre-developed ideas.


Regulatory Compliance: The fund is registered in the BVI. The fund continues to monitor regulatory developments closely

Technology & Cyber Risk: Vaults: This represents the interface for client fund management. Institutional clients retain full vault ownership. The funds are managed based upon SMA framework agreement. The Vaults smart contracts are fully audited as at 27 Sep 2023. Trader OMS - This serves as the institutional grade internal interface for fund custody and active trading within the strategy framework. The OMS embeds traditional hedge fund risk limit parameters within its smart contracts. While traders / pod can engage with compatible DeFi applications using the allocated capital, direct withdrawals are restricted. OMS smart contracts are fully audited as at 27 Sep 2023. The fund has a multi-layered approach to cybersecurity which includes 24/7 continuous monitoring, penetration testing, alert monitoring system with emergency shut-down controls, hardware wallets and multi-sigs, and staff training to mitigate cyber threats and protect investor assets. Regularly scheduled smart contract audits are scheduled upon any new trading module implementation. Smart contract security officer under recruitment for additional technology risk mitigation.