As we enter the New Age of Hedge Funds, The Catalyst Group’s digital expert, Andrew Knight, Senior Associate Director – Client Services, discusses the increasing demand from investment managers and their investors to facilitate subscriptions in-kind via stablecoins and the advantages associated with this.
Over the past few years, we have witnessed immense growth in the digital asset class which reached several trillion dollars in overall market value last year. A key attribute of this asset class is that start-ups are able to reach a global audience with very little in the way of barriers to entry. New protocols launching are therefore able to harvest significant value from a large number of participants over a very short period of time. Although this certainly comes with its fair share of risks, the inherent volatility coupled with the ability to scale incredibly quickly, makes this asset class highly attractive to venture capital and hedge funds alike.
The result: a surge in funds launching with their sole strategy aimed at managing digital assets.
Fund managers are not only competing to take advantage of various inefficiencies that still exist in this novel market but are looking to take advantage of the strong long-term growth prospects of the industry as well. Given that these funds often attract crypto enthusiasts as their investors, we have seen greater demand from investment managers and their investors to facilitate subscriptions in-kind via stablecoins, a digital asset backed by, and pegged to, the U.S Dollar (e.g. USDC).
What are the advantages of allowing investors to subscribe in-kind via stablecoins?
Instead of investors subscribing traditional fiat currency directly into the fund’s bank account, investors are able to send stablecoins such as USDC directly to a blockchain wallet owned and controlled by the fund. This has numerous advantages for the fund manager. For one, the manager is able to quickly and cost effectively deploy the new capital directly into digital asset strategies, instead of having to go through the process of converting their fiat currency from a bank into digital assets, which can be both costly and time consuming.
For investors, conducting subscriptions in-kind also has its perks. Hedge funds often attract investors from various countries outside of the those in which the fund is domiciled. This means that by subscribing via stablecoins, not only is the investor not having to pay lofty swift transfer fees, but the transfer is near instant, instead of the multi-day settlement process that currently exists for many international transfers.
From an operational perspective this also has its advantages. In the onboarding phase, investors are able to provide their personal blockchain wallets from which they will be subscribing or having their redemption proceeds paid. These wallets will be inextricably tied to the investor once formal KYC/AML checks have been done. At Catalyst, we have integrated robust ongoing compliance checks and blockchain wallet screening to comply with international standards. Therefore, once an investor has linked their wallet to our system, they are able to make ongoing subscriptions from that wallet directly into the fund. Given the transparency of the blockchain, we are able to directly link incoming proceeds to any particular investor on our system, saving a large amount of time and paperwork.
Are there wider opportunities for blockchain technology to affect the fund management industry?
There has been much talk about the potential for blockchain technology to positively impact the fund management industry, and we are absolutely starting to see early signs of this. Fund share tokenisation for instance is an exciting prospect, whereby all the fund’s dealing, share transferability, and compliance can be fully integrated and governed by the fund’s smart contract. At Catalyst we strive to be at the forefront of new and emerging technologies and look forward to what the future has in store.