Plugging the prime brokerage void in crypto

• Insights

Eager to supplement returns amid today’s challenging macro environment a number of hedge funds have diversified into crypto-currencies.  In response , some prime brokers are now looking to capitalise on the crypto currency boom, as Linear Investments explains.

A challenging 18 months for crypto

The last 12 months has seen challenges in for crypto. Although crypto has proven quite resilient in 2023, the market has come under intense pressure following the collapse of several crypto exchanges, most notably  FTX , along with a handful of high-profile StableCoins.

Regulators are also increasing their scrutiny of the crypto market, with the US Securities and Exchange Commission (SEC) filing lawsuits against two major crypto exchanges, Binance and Coinbase. The FCA are also clear on their plans to continue to build on their regulatory approach to the crypto market.

In the case of Coinbase, the SEC is alleging the company operated as an unregistered exchange, broker and clearing agency for crypto currencies, which it argues were actually securities in disguise. Meanwhile, Binance is accused by the SEC of artificially inflating its trading volumes, diverting customer funds, failing to restrict US investors from its platform and misleading investors about their market surveillance controls. [1]

Managers are staying faithful to crypto

Despite the bad press and negative messages from the regulators on occasion, crypto still seems to be of interest to new managers but also traditional managers looking to diversify their portfolio and manage risk.

According to PwC’s 2023 Global Crypto Hedge Fund Report, 29% of hedge funds invest in crypto. While this represents a year-on-year drop in the number of hedge funds trading crypto, those staying loyal to the asset class have actually ramped up their holdings.

The same PwC study found 38% of hedge funds active in the crypto market now have more than 5% of their overall AUM (Assets Under Management) invested in the asset class. Managers are certainly bullish on crypto-  a further 93% of respondents told  PwC  that they expected the market capitalisation of crypto to be higher at the end of 2023, versus what it was in 2022.

At Linear, we are aware of funds’ growing appetite for all things crypto and are positioned to support those funds in their transactional or operational management.

Primes slowly start to explore the merits of crypto

According to PwC’s 2022 Global Crypto Hedge Fund Report – facing hedge funds trading crypto-currencies is the notable absence of prime brokers specialising in crypto. 78% of respondents told PwC that prime brokerage services was either a significant or very significant barrier to investing in digital assets.  A similar number said the same thing about custody.

While traditional, bank-owned prime brokers have long been reticent about touching crypto-currencies for regulatory reasons, smaller Prime Brokers such as Linear Investements are offering services including custody, financing, market access, research, and technology.  Our agility and flexibility means we can accommodate the rapid changes in the crypto market,  as is continues towards critical mass and regulatory maturity.

Having seen events unfold at FTX, it is vital  hedge funds only work with providers which are subject to robust regulation and that  take risk management seriously. Please speak to the team at Linear on www.linearinvestment.com to see how we can support your needs.

References:
Reuters – August 15, 2023 – Binance files for protective order against SEC
Hedgeweek – June 26, 2023 – Crypto prime brokerage comes into its own