Sunday, 05 July 2020

Crypto markets gearing up for institutional money

Crypto AM: Conversation with James Bowater

Prime brokers are the key to institutional adoption of cryptocurrencies and digital assets – but are they ready for prime time?

Current estimates place the number of crypto hedge funds in the hundreds, and recent research from PwC revealed that assets managed by these funds doubled in the last year alone. With more and more money flowing into them, and more traditional financial firms looking to jump into the pool, these investors are demanding more sophisticated solutions for managing their portfolios. Though many firms have announced prime brokerage services, some of them are trend following while others are leading the way.

The number of digital asset managers is rising, for sure, but they pale in comparison to the number of traditional hedge funds, with a recent estimate pegging the number of them over 7,000, according to BarclayHedge. This is up dramatically from around 2,000 in 2002. Digital asset manager ranks may not grow as quickly, but the tools they need to be successful will be there when they need them.

“We are still very much a young, growing industry,” said George Zarya, CEO of BEQUANT, which is based in London. “For us to reach the investor base currently dominated by traditional funds – family offices, ultra-high net worth individuals, and others, we need to have the familiar structures in place that make them feel comfortable.”

To that point, recent announcements by firms including BEQUANT, BitGo, Coinbase/Tagomi and Genesis/Vo1t are seen as an attempt to satiate that demand.

But what exactly is a prime broker? In traditional markets, prime brokerages give asset managers a one-stop-shop for managing their portfolios with services that range from risk management, custody and securities lending to leveraged trade executions, cash management, smart order routing and additional fund administration.

Until recently, digital asset managers had to seek each individual service or offering through different service providers. This brings with it a host of problems including slippage, higher transaction costs and, of course, the need to post margin separately across multiple custodians and trading venues – a pain point that traders have long complained about in this space.

“If I start my own fund in equities, and I plop down on Bloomberg, there are trusted institutions out there [for execution, prime, etc.], there is a level of trust inherent,” Jeff Dorman, chief investment officer at Arca told The Block last year. “Part of my job as a fiduciary to investors is to do due diligence on OTC dealers, trading software, exchange execution, risk and portfolio tools, because it’s not a given especially in crypto that these businesses can offer adequate services.”

Since then, service providers including Fidelity have begun to offer the tools that firms need to succeed, and that could go a long way towards explaining the growth seen in cryptocurrencies and digital assets under management.

That said, a lot of the firms announcing they’ve launched a prime broker are targeting a specific audience but may not give them all the tools they need in their belt. According to some observers, they don’t even fully understand the type of business they are trying to build.

“What puzzles me a little bit is that some people are getting into prime brokerage, not based on a vision, but really because they are looking for the next big thing – and they don’t know what it is. So they are going after the buzzword,” Max Boonen, CEO of cryptocurrency liquidity provider B2C2 told CoinDesk.

Progress is being made on this front but, in most cases, it isn’t quite there when compared against traditional markets players.

“I do feel, at the moment, it’s aspirational in terms of being a prime broker,” Boonen added.

The reason, many industry insiders lament, is that many of the people launching crypto prime brokers come from tech backgrounds rather than traditional finance backgrounds. So, when it comes to creating a holistic solution that enables easier access to capital, liquidity, risk management and other important functions, they are building from the ground-up, rather than from a blueprint they’ve already followed.

There is one exception – BEQUANT Pro. And it’s no coincidence that the team is composed of financial industry veterans hailing from the likes of CME Group, Renaissance Capital and more.

The bulk of BEQUANT’s competitors started out as retail investor-focused trading venues or firms and gradually shifted into the institutional space. But, from the beginning, BEQUANT’s sole focus was the institutional market.

“We are tailored to a lot of quant [hedge funds] and our clients typically look at trading through automated strategies, arbitrage, you name it,” Zarya recently told CoinDesk.

BEQUANT launched the Pro product with a handful of firms they had previously been beta testing, and they are currently in talks with several more that are going through due diligence and onboarding, according to Zarya.

“Our offering has been years in the making, and it was built to withstand the most rigorous due diligence,” Zarya added. “So many firms want to be first to market. Our concern was being best to market, and we believe we’ve done that with a centralized offering that largely consolidates this fragmented marketplace.”

The service currently offers access to 18 different sources of liquidity including leading exchanges and over-the-counter (OTC) desks. By the end of this year, the goal is to have another dozen linked up, including derivatives trading venues.

“We’re quickly becoming the one-stop-shop for emerging and established fund managers,” says Zarya.


Legal Disclaimer

Creamcoin Marketcap