Singapore at the Tip of the Spear for Cryptocurrency Hedge Funds
On the sidelines of the recently concluded (and highly successful) Singapore Fintech Festival 2018, the country’s central bank and regulator, the Monetary Authority of Singapore (MAS)announced that it would be making a US$5 billion move to anchor fund managers in Singapore. The news comes on the back of a recent announcement to allow Variable Capital Companies or VCCs (Singaporeans do so love our acronyms) which will allow more flexibility and opacity in the management of fund structures. But it is the timing and the venue of the MAS’s announcement that is the most interesting — at the Singapore Fintech Festival — which provides even a statistically significant postulation that MAS may even be open to funds which are pushing the envelope when it comes to financial innovation, including cryptocurrency or cryptocurrency-themed funds.
Under the MAS program, MAS will allocate US$5 billion of its own capital as part of its investment in the private markets asset class and if you’re scratching your head wondering why a central bank is investing its own assets into new ventures, let’s not forget that not too long ago, the Fed went to Congress, hat in hand, with a two-page term sheet demanding US$700 million to bail out the scions of Wall Street. Welcome to the world of finance. Buckle up, you’re going to be in for a ride.
The fund was announced last Tuesday by Enterprise Singapore chairman and MAS board member Peter Ong at the Global Investor Summit, which was held during the Singapore Fintech Festival 2018. Significantly, in his keynote speech, he higlighted that companies are staying private longer, noting,
“ There is now a greater recognition among ASEAN (Association of South East Asian Nations) companies that private capital is not simply just another source of funds, but also a key form of ‘smart capital’ that comes with technology, business know-how and networks useful to companies to grow and scale.”
But the moves also come at a time when funds themselves are struggling. The last decade has been hard on many funds chasing alpha, with rumors at water coolers talking about closures, redemptions and returning of capital. There have been many reasons for the trend. In the decades from the late eighties to the financial crisis of 2008, hedge fund investing became hugely popular, with algorithmic and quant-driven investing themes dominating. But many of the opportunities that existed during that period of unbridled growth have either diminished or been traded away. With the fall of Long Term Capital Management and then the collapse of Lehman Brothers, hedge funds were increasingly viewed as expensive ways to underperform the broader market. Couple that with the explosion of low-cost investing platforms and zero-fee trading, as well as the rise of low-cost index and ETF investing and it’s easy to see why many investors shunned the high fee and high risk structure of hedge funds for alternative vehicles. But while the traditional hedge fund strategies may have traded their way out of alpha in the traditional markets, opportunities still abound in the cryptocurrency markets.
Notoriously inefficient, cryptocurrency markets are the perfect platform for fund managers with sufficient risk appetite to find the alpha they seek. But make no mistake about it, higher alpha comes with higher risk. If we’ve learned nothing from 2008, it’s that there is no such thing as high returns without increased risk — just because S&P and Moodys says that it’s triple A doesn’t make it so apparently. So funds which are structured to take advantage of cryptocurrencies will have their work cut out for them. To begin with, cryptocurrency trading takes a position that cryptocurrencies themselves will not one day trade worthless or have so little liquidity as to become essentially untradeable. For starters, the market is relatively new, it’s only really existed depending on how you want to record history, since Mt. Gox, the world’s first OTC market for cryptocurrencies. In terms of track record — there’s little to speak of and what little there is may be a bit checkered. Then there is the question of utility. Like Columbus trying to find a trade route to India, the cryptocurrency journey may either be the most circuitous route ever or the happiest accident. Again, the jury is out. Finally, the blockchain technology which underpins all cryptocurrencies is still very much in its infancy. To take a bet on cryptocurrencies is to assume that the two are symbiotic — again, it’s too early to say. But like intrepid explorers, those funds willing to take a position on the future of cryptocurrencies, untold fortune or ruin awaits.
In the 17th Century, Dutch merchants hedged out their bets on risky (but highly profitable if successful) voyages to trade in spices from the Indies — modern day Indonesia — by inventing the joint stock company. The joint stock company allowed investors to pool their resources so that no one single failed voyage would destroy their personal finances. The profits of these spice trades were so voluminous (pardon the pun) that a single successful voyage had the ability to pay for three more. Similarly, cryptocurrency investments could represent the singularly most profitable decision or financial ruin. That’s the thing about finding new trading routes and opportunities, where before there was no path, over time people came and then a path emerged.
And if I were a gambling man, I would wager that at least a statistically-significant portion of funds and asset managers are at least taking a more than cursory exploration of cryptocurrencies as an asset class (the hash war be damned). Perhaps it is in this vein that Singapore may have got the mix correct. With a pro-blockchain and pragmatic approach to cryptocurrencies, Singapore was one of the early contenders in the ICO (initial coin offering) races. The MAS sandbox and embrace of fintech also makes the environment welcoming to innovation. But more importantly, as funds start to focus on cutting costs (there go those Herman Miller chairs and the Picassos in the lobby), while alpha in the traditional markets starts to evaporate, it’s entirely understandable if cryptocurrencies start to form part of a complete and healthy portfolio.
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