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November 17, 2021

Anchoring Crypto Investment Strategies With Capable Partners

Developments in the crypto space are presenting significant innovation and change. However, for institutional-grade investing through hedge funds or interest in direct participation, the right operational components should be in place before and after a decision is made to invest.

By Vincent Molino,
Head of Risk and Risk Management Solutions,
Northern Trust Front Office Solutions

Crypto assets have made their way into the mainstream, and the institutional investing space has noticed. Crypto hedge funds are seeing increased interest from investors and growing AUM as a result. According to PwC, the average crypto hedge fund grew AUM from US$12.8 million in 2019 to US$42.8 million in 2020,1 with 2021 likely surpassing those numbers by a significant amount.

Now, the industry’s embrace has gone beyond crypto currency funds. Some institutional investors are not just investing in token or coin funds, but investing in new financial instruments, such as ETFs and futures, and seeding new strategies in anticipation of growth and returns. With emerging examples of blockchain enabled assets recently entering the space, like non-fungible tokens (NFTs), new funds are cropping up which also invest in digital collectibles.

Crypto asset acceptance may be growing, but in many ways the space is still uncharted territory. For investment managers and institutional investors who are ready to participate in a risk-managed way, they should consider a few operational factors:

  • Custody – Institutional crypto market participants will need an option for holding these non-traditional assets in custody. Investment managers should seek a reputable third-party custodian with the necessary infrastructure and expertise to handle this need. As crypto strategies continue to gain interest, investors will likely seek to hold digital assets with a capable custodian rather than maintain self-custody, both from a record keeping and security perspective.
  • Reporting – Those managers and investors who are new to the crypto investment space will likely need detailed and transparent views into performance, risk and liquidity. Working with a partner to assist in custom reporting can help build a solid foundation for portfolio management through capable technology.
  • Regulation – As crypto strategies continue to grow in prominence, new regulatory frameworks are sure to arise across the globe. Managers and institutional investors planning to adopt crypto strategies for their portfolios should pursue a relationship with a partner who tracks emerging regulation and provides tools to better position an organization for such investment.

Developments in the crypto space are presenting significant innovation and change. However, for institutional-grade investing through hedge funds or interest in direct participation, the right operational components should be in place before and after a decision is made to invest. 

 

1 PwC, “3rd Annual Global Crypto Hedge Fund Report 2021”, May 2021.

Northern Trust Front Office Solutions is a holistic digital and service solution designed for modern institutional portfolios. We simplify investment data management for asset allocators and managers with complex, multi-asset class portfolios to improve portfolio analysis and investment decision making. Our offering integrates multiple data sources into one system and offers extensive customization to organize that data to what is most important to your organization. We support the most sophisticated clients including endowments, foundations, pension plans, corporations, healthcare organizations, family offices, and OCIOs.
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