New cryptocurrency funds offer entry to unproven assets
As bitcoin mania soars to unprecedented levels, two Singapore-based wealth managers are gearing up to offer cryptocurrency-focused funds to capitalise on booming investor demand.
The virtually concurrent launch of the two funds underscores both the rampant excitement and speculation surrounding cryptocurrencies as a new form of asset, plus the desire of new fintech-related funds to tap into the speculative mindset of many mass affluent or high net worth individuals in Asia. But many uncertainties remain about this relatively new, and still largely untested asset class.
The first fund to launch in Singapore is Helvetic Investments, a family office and investment manager, which is launching an open-ended cryptocurrency mutual fund on Monday (December 4). The “balanced, large-cap” Cayman Islands-domiciled fund aims to provide family offices, accredited and institutional investors access to an emerging asset class via a traditional investment vehicle.
The fund will primarily invest in a diversified basket of the top 15 cryptocurrencies, although up to 25% of the portfolio can also be invested in equities or bonds of companies and countries adopting blockchain technology—the technology that powers virtual currencies.
“There is tremendous interest among wealthy and institutional investors to gain exposure to the cryptocurrencies as the market becomes more mature,” asserted Ville Oehman, crypto fund manager at Helvetic Investments, to AsianInvestor.
“By investing in a conventional fund rather than cryptocurrencies directly, investors have less technical details they need to worry about.”
Another Singapore asset and wealth management platform provider, Swiss Asia Financial Services, is also putting the finishing touches to its plans of launching a cryptocurrency-focused hedge fund in the first quarter of 2018.
“We are in the process of setting up a fund to be run by a few managers who are currently trading on their personal account and have been quite successful,” Steve Knabl, chief operating officer and managing partner at Swiss Asia Financial Services, told AsianInvestor.
He declined to provide further details at this stage about the managers of the planned long-short, momentum-driven cryptocurrency hedge fund, aside from describing them as young individuals with a greater expertise in analysing technological trends than managing investment portfolios.
The minimum investment for both funds is $100,000 for accredited investors.
In the case of the Helvetic fund, the minimum investment for institutional investors has been set at $5 million.
While Helvetic Investment is seeking to raise up to $200 million, Swiss-Asia has a much lower target in mind—around $10 million.
Virtual reality or hype?
These developments come as bitcoin, the best-known cryptocurrency, vaulted to a record high of $11,000 on November 29.
The virtual currency has seen a spectacular run this year: from about $753 on December 1, 2016, bitcoin has gained a whopping 1,266%. However, irrespective of the hype—or perhaps because of it—investors need to fully understand what they are getting into before dabbling in virtual currency investing, even if it is done via a fund, experts stress.
In Asia, wealthy investors have been eagerly making speculative investments in bitcoin and its peers, an AsianInvestor report noted earlier.
“Any idea that has the possibility of making high returns quickly will be on the radar of Asian investors," said Adeline Tan, head of advisory at Mercer in Hong Kong.
There is certainly a fair bit of speculation going on and with bitcoin, in particular, prices seem to be climbing purely on demand, which might not be entirely rational, she added.
Financial industry observers remain highly divided over bitcoin’s soaring ascent: while enthusiasts believe there is room for bitcoin to soar even higher, the investment industry's Cassandras warn that the cryptocurrency mania is nothing short of a speculative bubble—which will burst soon.
Swiss-Asia’s Knabl said that while investors have shown willingness to invest in cryptocurrency products, they remain highly concerned about the risks.
Investing in the crypto currency universe through a hedge fund instead of directly might seem like a good idea to diversify those risks, but the benefits could be overestimated, said Keith Pogson, global assurance leader, banking and capital markets at Ernst and Young.
“The diversification gained through investing in a fund may not be that high, as there is currently a fairly high behavioural correlation within the cryptocurrency universe," he said. "When there is a correction, all these currencies are likely to head in the same direction.”
Infinity and beyond
There are other risks that investors need to be mindful of too, including lower levels of liquidity and impossible to predict problems.
Traditional currencies are a promise to pay the bearer and have the ability to be converted into goods and services. But cryptocurrencies are not a promise to pay.
“[So] you could potentially be stuck with a cryptocurrency forever if liquidity dries up,” Pogson said.
This year, there have been more than 84 new crypto fund launches globally, according to Autonomous Next, a fintech data and intelligence company. In total, there are now more than 100 cryptocurrency funds that manage between $2 billion and $3 billion, it said in an October 23 report.
Many of them are unlikely to survive the long haul.
“There are several hedge funds that aim to capture the interest in cryptocurrencies, but which one will eventually emerge as sustainable and truly offer a diversified portfolio of that universe remains to be seen,” Mercer's Tan said.
“We are not saying you can’t make money from this idea but like any other alternative investment idea, investors need to fully understand what they are investing in, otherwise you could suffer higher losses than anticipated.”
The pedigree of the investment managers is also important.
“A crypto currency fund needs to have experts who have at least three to five years in the blockchain ecosystem as well as extensive experience in investment management or banking as well. Otherwise, I don’t think it can be a credible proposition,” Cedric Jeanson, chief executive and founder of Bitspread, told AsianInvestor.
Bitspread is among the largest blockchain market makers, and trades more than $1 billion of digital currencies a month.
Other challenges
Trading exchange risk is another factor investors need to take into keep in mind, given recent high-profile exchange shutdowns, including Japan’s Mt Gox in 2014 and BTC-e this year over money laundering charges brought by the US government.
“The exchange should have a track record of at least three to four years and need to have a good reputation," said Kit Carson head of banking and payments at Globaldata, a financial industry data and intelligence company.
There are big looming regulatory risks too.
Regulators across the region – Hong Kong, China, Singapore, Australia, and Malaysia – have all issued advisories about the risks of initial coin offerings.
The Monetary Authority of Singapore currently does not regulate virtual currencies per se, but the central bank has said it is working on a new payment services regulatory framework to address the new developments.
Private banks also need to be comfortable on-boarding cryptocurrency funds on their product platforms.
Helvectic Investments’ Oehman doesn’t anticipate any significant issues on that front: “Given the fund structure, private banks are likely to see this as another alternative investment fund,” he said.
Nevertheless, private banks will need to assess if these products pass their internal risk-management procedures and onboarding requirements, which could take time, said Mercer’s Tan. “But we can assume that private bankers are being asked by clients for their views or offerings in this space.”
Only time will tell whether the cyrptocurrency boom will turn to bust—or go from strength to strength. For now, investor interest remains strong.