Fund administrators step up to the crypto challenge

Fund administrators have begun offering crypto services to new funds, presenting the service providers with a whole new world of challenges.

A handful of fund administrators have begun stepping into the digital asset servicing space as crypto funds continue to set up in their droves.

Research house Autonomous NEXT has tracked a record high of 226 in February 2018 – more than double that of the number in October 2017, and five times more than at the start of 2017.

According to a report by Morgan Stanley, there is now around $3.5 billion in estimated assets under management from over 250 crypto-dedicated funds. Traditional hedge funds have also been getting in on the crypto game.

Subsequently, from the second quarter onwards, the market has begun scrambling to set up access to exchanges, new derivatives products, technology, custody, administration, prime brokerage, AML/KYC checks, auditing services, data services and much more to make cryptocurrency feel like any other traditional asset class. These services are essential and all need to fall into place for institutional investors to begin fully committing to this new asset class.

On the fund administration side, a number of incumbent providers have stepped into the space. These include Trident Trust, Apex Fund Services and Stonegate Fund Services.

However, Apex confirmed to The TRADE Crypto that it offers cryptocurrency fund administration on a “very selective and risk-adjusted basis” and that the company turns away over 90% of the opportunities they look at. Stonegate said it believed itself to be one of the first firms to begin providing fund formation and fund administration services to crypto funds back in 2015. 

“Fund administration of crypto funds is a highly complex process.  From what we’ve seen, of the more than 600 global fund administration firms in the world, only a small handful (perhaps five to seven firms) service crypto funds,” says Carmen Barnett, managing director at Stonegate Global Fund Services.

Other players such as Triple Leo Consulting, NAV Fund Administration Group and Theorem Fund Services are also offering services. Technology provider Libra has said it is currently providing services to 12 fund administrators, with another five in contracting for its middle- and back-office services, suggesting many more traditional players are also looking at entering the space.

“I certainly get the impression it’s an on-request type of service,” adds Ed Gouldstone, head of product management at Linedata. “I get the impression it’s not easy to fit into a normal book of business. Many are not quite ready to bang the drum on selling it as a service. From a fund admin point of view, it depends on your niche and your area at the moment, there are a lot of fund management firms who like to work with a generalist. Whether it’s global, regional, fixed income or equities, some want to work with a small number of firms to cover the entirety of what they do.”

In July, North Street Global established the first crypto fund-only administration service, launching with $700 million in cryptocurrency assets under administration from around the world.

The offering will include full-service cryptocurrency hedge fund administration, market data services and AML/KYC compliance. North Street Global’s CEO, Alex Mascioli, explains that they are targeting clients in the US, and also Asia and Europe.

“We have seen just as much crypto fund formation and investing activity outside the US as we have seen in the US,” explains Mascioli. “We anticipate the greatest initial take-up for new launches will be from those jurisdictions whose regulations are currently either the most lenient or organised.”

A big challenge for fund administrators has been adding crypto expertise and intellectually understanding the new market. Speaking to a handful of the players offering services, it became clear they had invested significant time into educating themselves, speaking to experts, lawyers, regulators and auditors. Perhaps none so much more than the team at Trident Trust.

“We always took the approach that we could dig into any particular asset a manager wanted to invest in and understand the economics,” says Dan Smith, president at Trident Trust.

“Our office in Atlanta had always taken a fairly entrepreneurial approach to private funds and things private fund managers want to invest in.”

Smith highlights that Trident Trust began with the first client back at the start of 2017, before the infamous Bitcoin bull run. Just over a year and a half later it has around 50 funds signed up across its Cayman, Malta, Dubai and Singapore offices, along with Atlanta.

“Anything you want to be good at, whether its playing the trumpet, riding a bike or crypto hedge fund accounting –  it takes time to learn, but it has been nice that we’ve got to know the other providers in this space, the custodians, lawyers and auditors for example,” he explains.

Trident says that some of the funds at the beginning were smaller – by hedge fund standards – at around $20 million, while some of the administrator’s newer clients have managed more than $100 million, proving that larger investors are entering the space.

“All the business has been new managers as clients, but having said that we have engaged with some existing firms who think they can implement their strategy in this asset class,” adds Smith.

He believes many of them are being careful and cautious, but work is being done in the background.