The rise of crypto hedge funds in the BVI
By Simon Gray, BVI Finance – The crypto hedge fund is a new phenomenon, created by entrepreneurial investment managers looking to take advantage of the huge gains that cryptocurrencies have experienced over the last three years.
At present, the sector is still in its fledgling phase. A 2019 report by PwC estimated that there are fewer than 200 active crypto hedge funds collectively being managed today, with only USD1 billion in total assets under management (AUM).
It seems more a sector for plucky managers who see the potential in the asset class for now – the average crypto hedge fund team is seven to eight people, managing just USD21.9 million in AUM according to PwC.
That said, the cumulative average investment management experience for crypto funds is 24 years, indicating that an increasing number of experienced investment professionals are moving into the space.
The BVI is home to one in six of these crypto hedge funds – in fact it is a top three jurisdiction for such funds, according to PwC. So why are start-up investment teams choosing to domicile their new funds in the BVI and what do we foresee for the future of the asset class?
Incubators are the perfect fit
The most popular fund structure that crypto hedge fund managers are choosing in the BVI is the incubator fund. This structure was devised in 2015 before anyone had even heard of a Bitcoin, but fortuitously it provided the perfect set-up for light-touch, short-term crypto vehicles.
The BVI incubator fund incorporates a ‘20-20-20 criteria’ – it allows a maximum of 20 invited investors, each of whom must make a minimum initial investment of USD20,000 but the fund must not exceed a cap of USD20 million in terms of the aggregate value of its investments.
Hedge fund managers are often attracted to this structure as offshore funds are typically subject to significant administration and high levels of supervision, whereas the BVI incubator fund minimises initial requirements so as to enable start-up crypto managers to come to market faster and more seamlessly.
Taking advantage of the crypto bounce
While many hedge fund managers enjoyed the 2017 highs of crypto assets, the last 18 months have been more challenging with Bitcoin down 72 per cent alone.
That said, things are looking up once again thanks, in part, to the mainstream acceptance of crypto assets and the spectre of Facebook having launched its own crypto currency, Libra. Since January 2019 the asset class has bounced, with Bitcoin up more than 160 per cent over the last nine months.
To take advantage of this bounce, hedge fund managers will be seeking jurisdictions that do not over-regulate but rather support and encourage the asset class – and the BVI is doing just that.
The BVI Government and the Financial Services Commission (FSC) has adopted a ‘wait and see’ approach to regulation which continues to be the best approach as the sector matures and develops itself. Indeed the FSC announced its new progressive fintech and Sandbox regime earlier in 2019, and is designed to build on this growing trend..
Hedge fund managers are starting to make a name for themselves using crypto assets, working with great minds to develop smart assets and the BVI is dedicated to ensuring that they are not stymied by unnecessary bureaucracy in this process.
We look forward to continuing making the BVI the global hub for this exciting type of investment into the future.