What is an investment fund? An investment fund is money contributed by investors so that professionals can manage its growth. By investing mutually, each investors can acquire the profit inherently. Example: John, Marie and Joe want to invest in crypto market, each of them has $300. They make a deal to create a fund so it will be much easier to diversify their portfolio. Now the fund has 900$, it can be allocated to buy 6 different coins. With $300, each of them can only buy $100 worth of one coin. Now, with $900, they can invest in 6 different coins with $150 worth of each coin or 9 coins with $100 worth of each coin, thus allowing them to minimise the risk and maximise the profit. As you can see, investment fund can help the investors to profit easily without putting too much work in it. With the help of a professional fund manager, the investors can profit even more from it.
Investment fund types
Open-end fund:
When the investors add more capital to the fund, they will issue new shares which means the shares are unlimited as long as the investors keep putting their money in the fund. These shares can be deemed by investors at any time after buying directly from the fund. However, each purchase will cost a small fee. In US, these fees are called front-end load. Open-end funds are mostly available in developed countries like US, UK, Australia, etc., but the operating rules can vary.Closed-end fund:
Unlike open-end fund, closed-end fund offers limited shares through IPO or private sale. After finishing IPO, the shares are traded on exchanges. The investors will have to buy and sell it directly from the exchange. In US, closed-end funds must be filed under both Securities Act of 1933 and Investment Company Act of 1940.
- Hedge fund:
Hedge fund is a type of investment fund that takes capital from accredited individuals or
institutional investors to invest in a wide range of assets. This fund is managed aggressively with different risk management techniques and well-constructed portfolios. This type of fund is usually supervised by a professional investment management firm. On a side note, hedge fund is not available to the public, it’s only available to accredited individuals or institutional investors.
- Exchange-traded fund:
Exchange-traded fund (aka ETF) is a type of investment fund that is traded on stock exchanges. It tracks indices, assets, stocks, bonds, etc. By purchasing ETF shares, you own a share of a portfolio that tracks the profit and performance of fundamental assets. ETF shares can be traded on exchanges which fluctuates its price in a certain amount of time.
- Mutual fund:
Mutual fund are similar to hedge funds. The only difference is the open nature of this type of fund. The investors can either be accredited investors or retail investors. This type of fund provides liquidity, better diversification and greater economics scale. However, it comes with a price as mutual fund must pay several type of fees and expenses.
The demand is rising
Over the past 4 years, there has been a significant change in demand for crypto funds.
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From 2016 to 2017, there is a huge spike in the need for crypto fund. The demand for crypto funds has almost tripled in just a year. This number indicates a shift in the market from traditional stock market to the crypto market. Currently, there are more than 400 crypto funds all over the world. This number can rise even more if SEC approves Bitcoin ETF. Out of 466 crypto funds, 255 of them are hedge funds, 196 are venture capital funds and the rest are private equity.
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Additionally, the majority of crypto funds are very small compared to the traditional funds. Most of them have less than $10 million in AUM (Assets Under Management). Only 28 crypto funds have over $100 million in AUM. However, with the rise of the demand for blockchain technology and crypto asset, the number can grow even more.
Let’s take a look at the growth of crypto assets under management.
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From Jan 1st 2017 to Jan 1st 2018, there has been a significant growth in demand for crypto AUM. From $675 million to $5860 million, that’s is almost 10 times growth! Despite the significant rise in one year, the number of AUM hasn’t stopped growing. From January to July this year, the number of crypto assets under management has increased ~50%. In the following chart, we can see that most of the crypto funds are based in the US. Hong Kong comes second, UK comes third. With this trend, we might see a further need for crypto funds in US which could influence SEC to approve ETF.
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SEC are having hard time deciding whether cryptocurrencies should be listed as commodities or security. In June, William Hinman, the SEC director of Corporation Finance division answered in a speech: ”Returning to the ICOs I am seeing, strictly speaking, the token — or coin or whatever the digital information packet is called — all by itself is not a security, just as the orange groves in Howey were not.” However, he also stated:”The same reasoning applies to digital assets. The digital asset itself is simply code. But the way it is sold — as part of an investment; to non-users; by promoters to develop the enterprise — can be, and, in that context, most often is, a security — because it evidences an investment contract”. Therefore, until further research, SEC may have a hard time defining what cryptocurrency is. Additionally, crypto funds will be easier to establish than the traditional hedge funds due to SEC inability to control the crypto market. The majority of US-based crypto fund can bypass the registration due to a small loophole in The Investment Company Act of 1940. Most of the crypto fund launches has been quite small and many of them are qualified as an exempt advisor. Therefore, they may not have to fill out the registration form.
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Future for cryptocurrencies
With the growing demand for blockchain technology, it no doubt that mass-adoption will soon become reality. Each year, more and more crypto projects are being created which raises the need for crypto investment fund. Plus, it also attracts new investors due to its decentralised nature. No third party can tamper, delete, take away the amount of coins, token they have in their wallet without their consensus. Plus, investors can buy and sell coins/tokens easily without registering with the government. By establishing more funds, the investors are helping blockchain to move forward to the mass-adoption phase. Sooner or later, people will find crypto is the true medium of exchange instead of fiat.
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