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Fund administrators have begun offering crypto services to new funds which has
presented them with a whole new world of challenges, writes Jonathan Watkins.
T
he evolution of cryptocurrencies
has been quite remarkable. In 2010
two Bitcoin were used to purchase a
single pizza, whereas in November 2017 the
same number of those digital assets would
see you driving out of your garage in a new
sports car. At its best, the underlying tech-
nology at Bitcoin’s core holds the potential
to revolutionise the financial ecosystem.
Unfortunately, at its worst, cryptocurrency is
synonymous with money laundering, crimi-
nal activity and cyber hacking.
Regardless of its humble beginnings and
controversy though, Wall Street has set its
sights on Bitcoin, Etherum, Ripple and co,
along with products such as futures and
exchange-traded funds which track them.
Leading the charge, according to a multitude
of experts, are hedge funds.
Crypto funds have been setting up in their
droves, with research house Autonomous
NEXT tracking a record high of 226 in Feb-
ruary 2018 – more than double that of the
number in October 2017, and five times more
than at the start of 2017.
According to a report by Morgan Stanley,
there is now around $3.5 billion in estimated
assets under management from over 250
crypto-dedicated funds. Traditional hedge
funds have also been getting in on the crypto
game.
“Hedge funds are interested in more active
strategies and trading crypto for arbitrage
“We always took the approach that we could
dig into any particular asset a manager
wanted to invest in and understand the
economics.”
DAN SMITH, PRESIDENT, TRIDENT FUND SERVICES
opportunities,” says Ed Gouldstone, head of
product management for Linedata’s asset
management business.
“There’s no shortage of ideas of how to use
crypto as part of an investment strategy.”
Let the infrastructure building begin
Of the institutional investors, many believe
hedge funds sit at the front of the line, ahead
of family offices and traditional asset man-
agers, who are likely to enter the market in
that order.
“Many are not quite ready to bang the drum
on selling it as a service.”
ED GOULDSTONE, HEAD OF PRODUCT MANAGEMENT, LINEDATA
Standing in the way of any aspiring funds,
new or existing, is a myriad of obstacles,
headlined by a lack of regulation and suita-
ble market infrastructure they have come to
depend on in more traditional asset classes
and alternatives.
But as one crypto fund CEO puts it so well,
Wall Street is hungry for new things and
crypto is as appetising as they come.
From the second quarter onwards, the
market has begun scrambling to set up ac-
cess to exchanges, new derivatives products,
technology, custody, administration, prime
brokerage, AML/KYC checks, auditing ser-
vices, data services and much more to make
cryptocurrency feel like any other traditional
asset class. These services are essential and
all need to fall into place for institutional
investors to begin fully committing to this
new asset class.
“We must remember that hedge funds
are entrusted by pension funds, endow-
ments and additional large-scale investors
to ensure their money and investments are
safe,” says Wayne Lloyd, senior manager
and crypto advisor at Publicis.Sapient. “It is
impossible for them to make any guarantees
that this is the case in the current market.”
On the fund administration side, a number
of incumbent providers have stepped into
the space. These include Trident Trust, Apex
Fund Services and Stonegate Fund Services.
However, Apex confirmed to Global Cus-
todian that it offers cryptocurrency fund
The Hedge Fund Annual 2018
globalcustodian.com
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