In what may seem like conflicting stances, some of the world’s largest traditional asset managers are exploring cryptocurrencies, while at the same time seeing little demand from clients, according to multiple industry experts. This exploration is not always a sign of intent however, more just what you would expect from some of the biggest financial institutions on the planet – essentially just having their finger on the pulse.
A lack of regulatory clarity and a chequered past has made the institutional use of cryptocurrencies somewhat of a contentious topic. Subsequently, any comment or suggestion from an investment bank or asset manager is being interpreted as a firm indication of their stance.
The reality is, that for those in the upper echelons of the financial markets, any kind of investment phenomenon will be investigated in some way or another, regardless of intent to invest or trade. Whether its blockchain technology, exchange-traded funds (ETFs) or swaps, all new and innovative products are investigated before adoption.
BlackRock was the subject of such scrutiny on 16 July, after stories from Financial News and Bloomberg appeared to be in contradiction, with the former suggesting the asset manager had set up a working group to explore cryptocurrencies. Bloomberg then posted an interview with the BlackRock chief Larry Fink, who said there hadn’t been any client interest.
Both of these positions can co-exist, according to experts, who also say a handful of major players are also looking to establish their own cryptocurrency funds.
“On the traditional side of asset management some are talking about creating a fund which is a passive buy and hold strategy where they are allowing investors exposure to a basket of cryptocurrencies, essentially giving them easy access to this different asset class” says Ed Gouldstone, head of product management for Linedata’s asset management business.
“What I like about this is that it’s an area where asset managers can be innovative, they are starting to offer new products to their investors. It may be they are doing it on more of an individual client basis or test strategies themselves before an outright launch.”
Aite Group analyst, Gabriel Wang, recently authored a report on cryptocurrencies and says some asset managers confirmed to him they intended to launch their own crypto funds
“A couple of asset managers are looking to launch their own crypto investment funds, as they see the appeal of cryptos as an emerging asset class,” he says. “On the other side, trading orders have been flushing into OTC desks that handle crypto trades, mostly coming from hedge funds and prop trading shops right now.”
Speaking to The TRADE, one asset manager said they did not feel the need to be “first to the party” and that they have more to be getting on with than trying to understand the world of cryptos.
“As an institutional asset manager we don’t yet see underlying clients expressing much interest in cryptos,” they explained, adding that the ‘Wild West’ nature of the market is not ideal in the age of transparency. “In time though, once things are a lot clearer and possibly regulated, we may see a lot more client interest and look to get involved.”
The predominant issues facing asset managers remain the lack of regulatory clarity from global policymakers. For example there is still debate in the US over the classification of cryptocurrencies, whether they are securities or not. The answer to this will dictate which US body regulates them. However, this is just the top of a long list of barriers to entry.
Gradually market infrastructure players are bringing solutions to the table, but for cryptocurrency to be a viable option for asset managers there needs to be an ecosystem for a fully-functional buy-side landscape.
This should include custody, prime brokerage, fund accounting services, and portfolio analytics tools for a typical asset management industry.
“Institutional asset managers are sitting on the side-lines waiting for more regularity clarity and an appropriate investment vehicle,” said Richard Johnson, vice president of market structure and technology at Greenwich Associates “Speaking for the US market, both of these are beginning to emerge.
“In the meantime, many hedge funds are investing directly in the crypto space, and there are dozens of dedicated crypto funds. Some crypto funds are offering a crypto-index fund (e.g. top 20 coins). Asset managers could gain exposure to crypto by investing as an LP in one of these funds.”
Whether it’s cryptocurrencies themselves, the underlying blockchain technology or tokenisation of securities, there is no major financial institution in the world that isn’t conducting some form of exploration.
In time we may have a cryptocurrency market with all the necessary plumbing and infrastructure along with institutional money, but until then we are likely to continuously hear stories of various angles the major players are taking.
It’s reminiscent of news content in the run up to MiFID II about which asset managers had decided to absorb the costs of research or which firms had registered to operate a systematic internaliser, but ultimately no single stance will likely represent the entire industry.