Hedge fund cryptocurrency adoption set to grow

Although a number of industry surveys currently place hedge fund participation in the crypto market at almost nil and institutional appetite at meager levels, one exchange is ready for an influx.

George Melika, co-founder of digital asset prime broker SFOX (San Francisco Open Exchange), thinks Bitcoin is a movement not destined to fade away, and with the ability to provide accurate pricing on roughly 200 digital assets and offer liquidity from 35 providers, his firm is seeing a growing number of hedge funds join the crypto ranks.

The aggregated liquidity from market makers and other exchanges on the platform is so vast that officials claim a single $50 million trade of bitcoin would execute in milliseconds without moving the market — 10x more than any exchange.

Quant trading firm Jane Street and crypto market maker Wintermute recently joined the SFOX platform, officials confirmed.

The San Francisco-based firm was founded seven years ago, which is akin to decades in the crypto scene. SFOX provides not only brokerage, but also custody, treasury management, liquidity, smart order routing, algorithmic execution and reporting as a single service.

Custody and the ability to provide market liquidity as well as the SFOX’s longevity in the space has added reassurance to institutional investors, executives said in a recent Alternatives Watch interview.

The size of the cryptocurrency market has been estimated at $2.5 trillion, with rapid growth in recent years translating to on average $100 billion in trades daily.

In E&Y’s 2021 Global Alternative Fund Survey, the findings suggested rather nascent adoption in the alternative investment industry. E&Y found only 10% of hedge fund managers and just 4% of private equity managers surveyed had allocations to crypto.

Overall hedge fund assets in the space remains small at 1-2% of the industry’s $4 trillion in AUM. The report concluded that there is plenty of opportunity for managers to grow within the space and the likelihood for that growth is high.

This year alone, a number of notable hedge funds have not only talked up crypto, but have launched crypto-oriented products.

For example, the $16 billion UK-based hedge fund Brevan Howard Asset Management is the latest large-scale manager to dive into digital assets with the launch of BH Digital. The unit is led by Colleen Sullivan, CEO and co-founder of CMT Digital, which specializes in crypto-asset trading and blockchain technology investments.

Anthony Scaramucci’s SkyBridge Capital joined the Bitcoin faithful by launching the direct investment fund SkyBridge Bitcoin Fund LP with $25.3 million of internal seed capital in January.

The E&Y research concluded that as the market infrastructure evolves, exchanges become more established and investors become more comfortable with asset custody solutions, that the crypto craze will become more reality than hype.

SFOX recently unveiled the first cryptocurrency trading product built specifically for hedge funds and asset managers, with an offering of best price execution and trading cost analysis tools.

“This first of its kind crypto trading platform is the right product at the right time as institutions of all kinds are rapidly transitioning to investing in digital currencies,” said Chamath Palihapitiya, Founder and CEO of Social Capital, an investor in SFOX, in a statement. “The technical superiority and unmatched cryptocurrency liquidity at SFOX will bring the hedge fund industry the trading, reporting and compliance services institutions need to embrace cryptocurrency as a new asset class.”

Melika, who brings executive experience from TIAA/Nuveen and Stamps.com, in turn has built an institutional-grade team recently adding Goldman Sachs alum and former-Accenture Finance and Risk Compliance Manager John Mannino. He has been charged with helping SFOX continue to engage with regulators and develop the structures and frameworks that institutions need to participate in the growing marketplace.

Credit Suisse and Jefferies trading executives Eddy Sfeir and Daniella Gekhtman were also brought on board to bolster SFOX’s senior sales team of institutional investors.

The pair will work on global expansion as senior vice presidents of digital assets Sfeir was head of options trading for Latin America. Gekhtman previously was a senior interest rates trader and vice president at Jefferies.

Perhaps the greatest boom in cryptocurrency has yet to come, as institutional investors such as pension funds begin to adopt crypto strategies. Melika has been through a fair number of market cycles and seems confident that the risks can be managed as the technology and accessibility improves.

“Bitcoin is fairly resilient, and people have faith in it now,” he said.

In his view the amount of cryptocurrency product available beyond Bitcoin and usage has reached a critical point in the market’s evolution. And that is why SFOX is seemingly peering into the future to see the transformation from crypto native funds to traditional asset managers trading across various crypto exchanges via a single platform.