In an exclusive interview Henri Arslanian (PwC Global Crypto Leader)* gave us interesting insights about the recently published "Crypto Hedge Fund Report 2020": Henri, you are one of the masterminds behind the annual "PwC–Elwood Crypto Hedge Fund Report" which is a must read in the industry. Please tell us a little bit more about how the idea for this report evolved? Henri: I am a big believer that crypto funds will be the getaway into crypto for many institutional investors. In the same way that such investors dipped their feet into alternative funds like hedge funds, private equity or venture capital funds in the 1990s before bringing those skills in-house.
Having spent many years as a hedge fund lawyer and then in the prime brokerage consulting team at UBS covering the hedge fund industry, I was surprised that there was no trusted source that would allow the ecosystem to understand the particularities of the crypto hedge fund industry. One day, I was in the London offices of Elwood and raised this idea of doing an annual report covering the crypto hedge fund industry and the rest is history...
What are your personal key observations looking at the emerging crypto hedge fund industry? Henri: The crypto hedge fund industry is where the traditional hedge fund industry was in the mid-1990s. However, it is becoming more institutionalised way faster and we are seeing the changes every year. For example, the percentage of crypto hedge funds with an independent director went from 25% to 43% from 2018 to 2019 and those using an independent custodian went from 52 to 81% during the same period. This is very impressive change and a sign of how quickly the industry is maturing. What do you think will be the most relevant developments for crypto hedge funds going forward? Henri: Over the past 24 months, we have seen increased regulatory clarity in the broader crypto space. Actually, according to Cambridge University, only 5% of regulators do not have someone working on crypto internally. And this is excellent as provides comfort to institutional investors, including those investing in crypto hedge funds.
The one area I would like to see more developments is increased tax clarity. It may sound surprising but crypto tax clarity is one of the biggest challenges today. For example, as we pointed out in a recent report on crypto tax (https://www.pwchk.com/en/financial-services/publications/hk-ird-issues-guidance-crypto-currency-taxation.pdf), there is uncertainty when it comes to the tax impact for crypto borrowing and lending in many jurisdictions.
Also, most jurisdictions offer an offshore fund exemption to traditional hedge funds but the relevant legislative changes have not been made yet to also include funds trading crypto assets. So this tax uncertainty still remains and this may deter some institutional investors from deploying capital into crypto hedge funds. With a total of around $2 billion assets under management in crypto funds by the end of 2019 the size of the market is still quite small compared to other more established alternative asset classes. What will be the main triggers to see a substantial future growth of the crypto hedge fund market? Henri: I believe that there are a multitude of factors that may drive more institutional capital in crypto hedge funds but there are two in particular that I think are impactful. First, there needs to be broader interest from institutional investors on Bitcoin and broader crypto assets. Anecdotally, I have seen this happen when the price of Bitcoin is on the rise and there is widespread coverage in the mainstream media. Second, and probably more important, we need to see the broader crypto industry continue its institutionalisation. From crypto custodians getting third party party assurance reports (eg SOC/ISAE) to crypto funds adopting industry best practices on topics ranging from counterparty risk management to governance. Lets not forget that crypto hedge funds need to pass not only the investment due diligence from institutional investors, but operational due diligence as well! Henri, thank you very much for these interesting insights! * Henri Arslanian is the PwC Global Crypto Leader and Asia FinTech Leader, the Chairman of the FinTech Association of Hong Kong and an Adjunct Associate Professor at the University of Hong Kong where he teaches the first FinTech university course in Asia. With over 500,000 LinkedIn followers, Henri is a TEDx and global keynote speaker, a best-selling published author and is regularly featured in global media including Bloomberg, CNBC, CNN, The Wall Street Journal and the Financial Times. More about Henri Arslanian and his activities can be found on his personal website www.henriarslanian.com and you can follow him on Twitter and Linkedin.