ICYMI | Kinney: “Diamonds Are Finally A Brilliant Asset”

02/05/21 12:42PM EST

Dear Hedgeye Nation,

In this new cutting-edge Real Conversations, Hedgeye CEO Keith McCullough dives deep with Founder & CEO of Diamond Standard Cormac Kinney, to discuss the digital commodity component of diamonds that investors should be taking advantage of. 

Watch as these two pros dissect the current diamond market, rare earth minerals, digital commodities, and much more. 

Below we have transcribed key excerpts from their conversation. You can watch the entire hour-long interview below.

https://cdn.jwplayer.com/players/Gj64iwPm-x1Hp06Vr.js?sig=f7f0cd986a25be865c3636b46d01d814&exp=1612549387

McCullough: Welcome to another real conversation, we’re going to have an interesting one suffice to say with Cormac Kinney who is the founder and CEO of Diamond Standard. Welcome Cormac! Thanks for making the time.

Kinney: Good to see you again.

McCullough: The topic we’re obviously going to get into is diamonds, specifically as a digital commodity or currency. Some people might call it a currency, and it is an interesting debate.

Our subscribers are going to want to put this within the framework that we call a Full Investing Cycle, where you have a diversification across different alternative investments.

So we have talked to different people from fine wines, to art, etc. I was quite excited when I saw your initiative, because A) it doesn’t exist and B) it’s new as a result.

So first I just want to give an opening volley on why you are doing this and how you thought about starting it.

KinneyWell the funny thing is that was never interested in diamonds.

My background was in Fin-Tech where I spent ten years designing trading systems for both the buy side and sell side. That company was NeoVision which got acquired by SS&C, and our largest investors were people like Deutsche Bank, where we built systems.

But after that I end up moving into the world of statistical arbitrage and I ended up being a quantitative PM for about six years running about a $500 million fund.

I started at Amaranth Advisors (which didn’t work out if you recall), but I ended up raising about $500 million from Paul Tudor Jones and Izzy Englander, and eventually brought my fund to Millennium which is where I ran it at a very large size.

So my background is trading and quantitative technologies like automated market making, exchange systems, statistical arbitrage, and analytics; but my wife is the famous jewelry designer Mimi, and we’ve been married 20 years now.

In those 20 years, I accidentally learned too much about diamonds, and I came to realize that diamonds are a $1.2 trillion asset as a natural resource. That’s as much as all the silver, platinum, and palladium combined.

But investors could never use diamonds even though they are a hard asset natural resource.

An investor could never touch a diamond because there is no standardization. Every diamond is different, so there is no price discovery process that is repeated and consistent.

When two people trade a diamond there deal is secret, so there is no transparency, exchange, or centralized limit order book. All these things we were used to.

As a result there simply was no liquidity for diamonds. There is immense friction whenever you want to trade them and for an institutional investor like BlackRock (which doesn’t own a single diamond yet) there is no way to mark to market. They simply can’t hold it.

The breakthrough for me was that I came from these two really different extremes of having a really deep understanding of diamonds and a deep understanding of trading/computer science.

I realized the diamond standardization challenge was a computer science problem.

That was my approach and it has only taken me five years, but you’ll be surprised because we actually are launching the SPOT Commodity futures on the CME, options, and an ETF on NYSE all within about 14 months.

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