The Hedge Fund Model in Crypto:
Hedge funds operate well within traditional finance, offering complex strategies and secure structures to manage and maximize returns. However, when applied to crypto, their reliance on offshore structures and delayed reporting can hinder performance. Offshore structures might allow regulatory flexibility, but crypto investments often need to interact with unregulated exchanges, exposing funds to higher risks. Moreover, the 24/7 nature of crypto markets requires constant oversight, which hedge funds—designed for markets with set trading hours—struggle to maintain.
For instance, hedge fund reporting typically lags behind by as much as 45 days. In crypto’s volatile environment, such delays make it challenging for investors to act on relevant market conditions, putting them at a distinct disadvantage. This reporting gap, in crypto terms, is like waiting months for results that may be outdated by the time they arrive.
SMAs: Real-Time, Transparent, and Customizable
Separately Managed Accounts offer a more suitable solution for crypto investing. In an SMA, investors own assets directly, with each account managed as a unique entity. This eliminates the commingling of funds that often occurs in hedge funds and provides unmatched transparency—investors can view their portfolios in real time, tracking the exact performance of each asset.
Another advantage of SMAs is the ability to tailor investment strategies. Unlike hedge funds, which often apply a one-size-fits-all approach, SMAs allow for personalized strategies that align with individual risk tolerance and financial goals. This level of customization is essential in crypto, where market conditions change rapidly. The adaptability of SMAs offers a clear advantage in helping investors react to market shifts as they occur, enabling bespoke strategies such as tax-loss harvesting and asset diversification within the crypto space.
Enhanced Security with Off-Exchange Settlements:
One of the rising concerns in crypto is asset security, especially with the collapse of major exchanges like FTX. Off-exchange settlement services, now offered by platforms like Copper.co, BitGo, and Zodia, enable institutions to trade while keeping assets in cold storage, away from the risks of unregulated exchanges. This added layer of security aligns well with SMAs, reinforcing the importance of direct ownership and transparency.
The FTX debacle highlighted how critical these safeguards are. For example, while global customers of FTX are still fighting to recover assets, FTX Japan’s users saw quicker reimbursements due to Japan’s requirement for segregated customer accounts—precisely the principle on which SMAs are built. If more regions follow similar regulations, as Japan did, we could avoid future mishaps like FTX’s collapse, ensuring better asset protection.
A Future Tailored for Crypto:
The regulatory environment is evolving to favor SMAs as the preferred approach for institutional crypto investments. Recent changes from Singapore’s Monetary Authority, for example, mandate that exchanges hold customer funds in trust, prohibiting pooling and reducing the risk of loss. This regulatory shift mirrors SMA principles, emphasizing direct ownership and separation of investor assets.
SMAs offer a promising approach that can meet the unique demands of crypto. They provide timely data, customized strategies, and secure storage, ensuring that institutional investors can adapt swiftly to market changes while retaining complete visibility and control. As the regulatory landscape continues to shape up and off-exchange settlements grow, SMAs could well become the go-to solution for institutions investing in digital assets.
Conclusion:
While hedge funds have a longstanding reputation in traditional finance, they appear mismatched with the demands of crypto’s dynamic and high-stakes environment. Separately Managed Accounts bring a tailored, transparent, and real-time approach, aligning seamlessly with crypto’s pace and risks. For institutions looking to build a sustainable crypto strategy, SMAs may soon be the investment vehicle of choice.
