Morgan Stanley to open three Bitcoin funds to its wealth management clients

This article is from The Block & CNBC, original author: Michael McSweeney & Hugh Son

Odaily Planet Daily Translator | Nian Yin Si Tang

A new investor note written by Morgan Stanley’s wealth management arm on Wednesday outlines the case for cryptocurrencies as an emerging investable asset class.

The report's authors, Lisa Shalett and Denny Galindo, stressed that their decision was a cautious one, noting that any investment in cryptocurrencies such as Bitcoin is speculative. Still, it represents another step in Wall Street's shift in thinking about the technology, from outright rejection to slow acceptance.

As the authors note in the report’s introduction:

“For speculative investment opportunities to rise to the level of an investable asset class that can play a role in a diversified portfolio requires transformative progress on both the supply and demand sides. For cryptocurrencies, we believe that threshold has been reached. A strengthening regulatory framework, deepening liquidity, product availability, and growing interest from investors, especially institutional investors, have all come together.”

One of the report’s specific recommendations is for potential investors to seek more information. The authors conclude the article by stating: “Our recommendation is that investors become educated and consider how and whether to invest in this emerging asset class in their portfolios.”

As for what form that risk exposure might take, the Morgan Stanley report outlined in its executive summary:

“As with any asset class that remains speculative, there are a multitude of risks — some predictable, some certain, and some yet to be discovered. This risk profile leads us to prudently recommend taking small positions in a highly diversified format, similar to venture capital investing. Our initial model (which was replicated to some extent in a recently published CFA Institute study) suggests that low correlations with other assets provide diversification benefits and that positions of no more than 2.5% can achieve Sharpe ratio improvements. It is important to remember that we are only at the top of the first inning.”

Note: The Sharpe Ratio, also known as the Sharpe Index, is a standardized indicator for evaluating fund performance.

Then, in the report’s conclusion, the authors reiterate that they have not yet reached the point of recommending direct investment in the form of holdings in any specific cryptocurrency.

“From our perspective, cryptocurrency trading is still in its infancy. Questions remain to be answered regarding finding true price discovery and best execution. We are not convinced on this point and therefore advise clients to proceed with caution,” the authors wrote, concluding:

“For accredited investors ready to gain exposure, we recommend starting with publicly traded products — preferably those that are multi-asset in nature and may have growth opportunities through venture capital/private equity investments in the blockchain ecosystem.”

The report comes more than a month after Bloomberg reported that Morgan Stanley's Counterpoint Global was weighing whether to invest in Bitcoin.

On February 13, Bloomberg reported, citing people familiar with the matter, that Counterpoint Global, a $150 million investment unit of Morgan Stanley known for picking growth stocks, is considering adding Bitcoin to its list of possible bets. According to people familiar with the matter, the unit is exploring whether the cryptocurrency will be a suitable option for its investors. Investing in Bitcoin also requires approval from the company and regulators. A Morgan Stanley spokesperson declined to comment.

In addition, Morgan Stanley also participated in the financing of New York Digital Investment Group, which may involve Bitcoin-related businesses. On March 8, New York Digital Investment Group (NYDIG) announced the completion of $200 million in financing. Investors include Stone Ridge Holdings Group, Morgan Stanley, New York Life, MassMutual Life, Soros Fund Management and FS Investments. Bessemer Venture Partners and FinTech Collective, which previously led NYDIG's two rounds of financing, are also participants in this round of financing. NYDIG's CEO said that the above companies are not just investors, NYDIG will work with them on "Bitcoin-related" plans involving investment management, insurance, banking, clean energy and philanthropy. NYDIG also announced that life insurance companies, annuities and property and casualty insurance companies have a total of more than $1 billion in direct and indirect Bitcoin exposure, which is entirely facilitated by NYDIG and held on NYDIG's institutional custody platform.

Just now, CNBC exclusively reported that Morgan Stanley became the first major US bank to offer Bitcoin fund exposure to its wealth management clients. According to people familiar with the matter, the wealth management giant with $4 trillion in client assets told its financial advisors in an internal memo on Wednesday that the bank will open three fund investment channels to allow investors to hold Bitcoin.

The move by Morgan Stanley came after clients asked for exposure to bitcoin, a major step toward accepting it as an asset class, said the person, who disclosed details of internal communications at the bank. Bitcoin’s rally over the past year has put pressure on Wall Street firms to consider wading into the nascent asset class.

But at least for now, the bank is only allowing its wealthy clients to invest in the volatile asset, which it considers suitable for investors with at least $2 million in assets and "extremely strong risk tolerance." Investment firms need at least $5 million to get exposure to the fund. In either case, the account must be at least six months old. Even for U.S. accredited investors with brokerage accounts and sufficient assets, Morgan Stanley limits Bitcoin investments to 2.5% of their total net asset value, people familiar with the matter said.

Two of the funds on sale are from Galaxy Digital, while the third fund is jointly launched by asset management company FS Investments and Bitcoin company NYDIG. The minimum investment amount for Galaxy Bitcoin Fund LP and FS NYDIG Select Fund is $25,000, while the minimum investment amount for Galaxy Institutional Bitcoin Fund LP is $5 million. Customers may invest as early as next month, when the bank's financial advisors will complete training courses related to the new products.