Crypto investors will not return to traditional asset management, says ConsenSys
The growth of investment in digital assets could end up damaging traditional investment managers, according to speakers at an online event last week.
At a FundsEurope webinar last week, speakers from ConsenSys, State Street, Lombard Odier, and Calastone debated the role of digital assets, including cryptocurrencies and tokenised assets, in the future of the asset management industry.
The value of the cryptocurrencies exceeded USD2 trillion for the first time in 2021, spurred by growing institutional demand for the two largest digital coins, bitcoin and ether.
The latter has rallied more than 300 per cent in the year-to-date, on the back of rising interest in Ethereum’s use in decentralised finance (DeFi) applications.
Major financial institutions including BlackRock, JPMorgan, Morgan Stanley, and Goldman Sachs have also begun to take an interest in investing in the digital ecosystem.
“People have voted with their money and that's important,” said Lex Sokolin, global fintech head at ConsenSys, a US-based blockchain software technology firm. “The USD2 trillion of assets that is now in crypto, is not invested in ETFs and mutual funds.”
“The reality… is that, yes, the percentage is small, but that's a percentage of assets that the asset management industry will never ever see again,” said Sokolin.
Data from eVestment shows that mutual funds and ETFs have suffered net outflows in four out of the last five quarters, including the second quarter of 2021, with passive global equities fund among the worst-hit segments.
According to Sokolin, the crypto ecosystem’s emerging impact on asset management could be similar to the rise of e-commerce in the 2000s.
“If you're looking at early-stage Amazon in the 2000s and you're saying things like, ‘It's only half a percent that's e-commerce, it doesn't really matter’ – on a 20-year time horizon, 15 to 20 per cent of commerce is now electronic.”
Sokolin noted that currently over USD100 billion in cash and cash equivalents is invested on the Ethereum network, and that the ecosystem hosts multiple asset classes including equities, fixed income, and interest-rate strategies, as well as methods of asset allocation, rebalancing, market-making.
Instead of the money being “gone” from traditional asset management, Jeroen van Oerle, portfolio manager at Switzerland-based asset manager Lombard Odier, believes that digital assets will fit into the broader system of flows between major asset classes.
“Eventually, I think that there will not be a difference anymore between equities and bonds and asset coins, or whatever else you have,” said van Oerle, who manages Lombard Odier’s Global FinTech fund.
Recent investment into crypto has been driven by retail and institutional investors searching for returns in an investment landscape of low interest rates and quantitative easing, according to van Oerle.
“Therefore, this new asset class is offering an opportunity for some of those institutional bodies to move up the risk ladder and basically use those new assets to try and get that higher return for the for the clients.”
The search for returns has driven investors to raise allocations to alternative investments in 2021, including hedge funds and private markets. Hedge fund assets under management hit an all-time high of USD4.146 trillion at the end of the first quarter of 2021, according to Preqin.
Van Oerle concluded: “Ultimately I do believe that if returns normalise, and if interest rates normalise, that you will see a continuous flow between them and as asset coins mature, but it's not as if those flows are gone and never ever coming back to equities or bonds anymore. It will be a mixture.”
This could accelerate the ongoing shift away from traditional 60/40 fixed income and equity portfolio allocations, with van Oerle suggesting that in future portfolios could follow a 30/30/30 strategy including an alternative category.
Tokenisation and asset coins represent the “real long-term opportunity” for asset managers, said van Oerle.
‘Asset coins’ are digital tokens representing physical assets, such as real estate and artwork, which can allow multiple investors to each own part of a real asset.
However, the portfolio manager noted that traditional asset management has seen “little to no innovation” in recent years, in contrast to the banking and insurance sectors.
Senior executives in the asset management industry have viewed the entire ecosystem surrounding digital assets as one “crypto craze”, van Oerle continued.
“I think they're missing out on the long-term picture of where these assets are going to go in terms of completely reshaping the asset management industry,” said van Oerle.
Other panellists noted the importance of harmonising regulation and improving infrastructure, as important for attracting traditional asset managers.
“There's a new breed of fund managers that are coming up that are crypto-native, and that's all they're investing in, with hundreds of different coins,” said Nadine Chakar, head of global markets at State Street.
“But they are struggling to find that balance between the decentralised freedom that they cherish and trying to thrive in it, and at the same time the reality that you're managing somebody else's money.”
Chakar concluded: “In the institutional world where Jeroen and I operate, we're fiduciaries, we’re holding monies on somebody else's behalf, so you need an infrastructure and you need clarity of regulation.”