Do blockchain companies targeting hedge funds have better options?

Baozou Comment : Blockchain technology can reduce operating costs and simplify processes. Therefore, it is very attractive to hedge funds, which have high costs, cumbersome compliance processes, and other fields. However, blockchain technology will only be the technical support for this investment field, and will not change its structure and purpose. However, the relationship between blockchain technology and venture capital is mutually influential and promoting. This will stimulate new startups to participate in the development of new asset classes.

Translation: Annie_Xu

The concept of using blockchain technology to restructure the hedge fund industry is gaining traction.

At least that’s the message from a report published last week by CoinDesk on Melonport, an asset management company based on blockchain technology. The idea of ​​the startup is to use it to offset the high costs and onerous legal requirements of hedge funds and make portfolio setup and management easier.

Melonport isn’t the only one. Several companies are exploring various angles. Some focus on the underlying platform, others focus on yield, and provide manageable digital asset options. Most see the hedge fund industry as their target.

However, I think the real goal is something else.

On the surface, blockchain and hedge funds seem like a natural match. Setting up a hedge fund is expensive, not just because of the upfront legal and administrative costs, but also because of the amount of money needed to protect capital (and $300 million is “small”).

In addition, rising regulatory costs, fee pressures and poor performance all require industry consolidation. Times are tough, and the first three quarters of 2016 saw the most fund closures since 2008.

However, on a blockchain platform, costs will also be lower due to enhanced transparency, smoother data transfer, custody efficiency, and more automated compliance processes.

The assets currently available, with their “alternative” structures and relatively high risk profiles, appear to be options for hedge fund managers: digital representations of real-world assets, cryptocurrencies with no tangible value, digital “tokens” that promise dividends, tokens that provide services to holders, and derivatives based on any of the above.

Yet, despite the merits of these proposals, this new breed of hedge fund management is unlikely to gain a foothold in the industries it targets.

The consolidated hedge fund industry is still huge: about $3 trillion under management. With U.S. President Donald Trump promising to reduce financial regulations, fund managers have reason to be happy: Hedge funds tend to favor turbulent and inefficient markets.

A powerful combination

Rather than being afraid of potential competition, hedge funds are more likely to incorporate blockchain technology into their operations, improving the industry’s prospects.

This does not count as "occupying" the industry.

Where blockchain asset management startups will come into play is in another arena: venture capital.

Much has been written about ICOs, an increasingly popular method of raising capital for new companies, despite the risks and strategic disadvantages of being unregulated. Instead of going through stressful presentations and negotiations that ultimately result in having to give up decision-making freedom, blockchain companies can issue digital tokens that represent future ventures or participate in company earnings.

Currently, it is not easy for venture capital firms to invest in this new type of asset. Some have invested in digital token hedge funds, but this is different from reviewing and supporting blockchain startups.

VC Perspective

If blockchain companies in the fund management space can launch stable platforms that make it easier to build and manage digital asset portfolios, we will see venture capital firms setting up their own ICO funds.

This will allow them to participate in this new financing trend while still using their own expertise and vision.

In the process, they will add liquidity and name recognition to the new asset class while participating in the innovation and technological advancement they claim to actively pursue.

In short, the hedge fund industry may eventually be powered by blockchain.

But its overall structure and purpose are unlikely to change. The processes and goals of the venture capital sector will be more impacted. This in turn may ultimately inspire new types of startups and drive the growth of new asset classes that leverage and enable technological developments.