The hard-won, if only tacit recognition of crypto as an asset class, is rippling across the financial industry. Crypto’s new status brings with it the requirement for trading, clearing, settlement and custody of digital assets, and nowhere is this need more pressing than in the hedge fund space.
PARTNER FEATURE
By Kristina West – The hard-won, if only tacit recognition of crypto as an asset class, is rippling across the financial industry. Crypto’s new status brings with it the requirement for trading, clearing, settlement and custody of digital assets, and nowhere is this need more pressing than in the hedge fund space.
As the uses of crypto expand, from large institutional players to the possibility of retail clients replacing their mainstream bank with a decentralised digital platform that allows them, for example, to take out a mortgage and buy a house, more traditional financial such as assets, bonds, equities, property and commodities will eventually be tokenised. To trade successfully in digital asset classes, fund managers therefore require a dedicated prime brokerage service to meet the increasingly complex requirements of the current and future rapid expansion of crypto as an asset class.
George Zarya, Founder and CEO at BEQUANT, a one stop solution for professional digital-assets investors and institutions, says: “It’s surprising how crypto markets have been repeating the same evolutionary cycles of infrastructure building as the traditional markets. But prime brokers now need to offer a technology-driven dedicated solution.”
Accessing the markets
The first service that a digital assets prime broker should offer is market access, comprising connectivity, or account setups across multiple liquidity venues.
Zarya comments: “We are dealing with a very fragmented market with hundreds of different exchanges, both centralised and decentralised. BEQUANT streamlines that access, creating an extra level of certainty and due diligence that saves time and resources for regulated institutional investors.”
The role of the prime broker within this service is therefore to provide access to the liquidity that the market presents, with access to lending and borrowing from one account. They should also be able to add new markets as required, with speed and efficiency.
A market neutral approach
Secondly, fund managers need strategy implementation services from their prime broker. Although a fund manager still has the option to set up a direct account with an exchange, a cross-margin account at a dedicated digital assets prime broker will allow that manager to cross-margin their assets and be more capital efficient.
Cross-margining accounts allow fund managers to go long and short on different venues without being worried that they might get liquidated when the market moves.
Zarya says: “We have seen cases where, having even the relatively small leverage of a crypto investor at three times the collateral, the market moves 30-40 per cent and you get liquidated, as happened in May. And then your arbitrage strategy is no longer an arbitrage strategy.”
If a fund manager borrows from a prime broker, they don’t need to worry about market movements: they essentially become market neutral. As such, fund managers can expand more easily into different strategies – the market-making, the liquidity provision – across multiple venues with that extra capital efficiency and extra buying power. “Not having to pre-fund assets prior to the trade is critical for many traders,” Zarya adds.
Post-trade services
The third key service that a digital assets prime broker should provide is a full suite of post-trade services, including clearing, settlement, and safekeeping of assets, with centralised clearing and reporting. Such a platform should be custody agnostic, integrating multiple different custodians with full automation of the process, thus providing the fund manager with peace of mind and full flexibility in the safekeeping of their digital assets.
Zarya says: “An agile, holistic, cross-integrated platform should allow the client to automate the whole cycle without being reliant on an army of operations people. This is all about technology.”
Serving the digital asset space
With traditional tier one banks often overwhelmed by legacy systems, a dedicated digital asset prime broker can offer the same services – access to liquidity, cross-margining and lending, and centralised clearing and reporting – on a fully-integrated and agile platform.
And, although market complaints about the perceived cost and inefficiency of crypto remain to be addressed, Zarya believes that the industry is trying to achieve a level of absolute intuitiveness, simplicity and low cost for a wider application. He says: “Although we have been focusing on the institutional segment, there’s also a real case for use of our product in the individual retail space as well because we are aiming to democratise these complex institutional products to bring them to the everyday user.”
BEQUANT was one of the first regulated prime brokers in Europe, registered and regulated in Malta, and is now expanding its regulatory presence to offer global client coverage. And in just three years of existence, BEQUANT has achieved a lot: the firm has generated significant presence in the crypto space in terms of volumes, with a turnover of USD40 to USD60 billion average a month; equivalent to a traditional prime broker with traditional assets, despite still essentially being in the start-up stage.
“The bigger volatility and big volumes of recent months have given us confidence in the future and the revenue has been very supportive of our growth. We are a very agile and dynamic team that will listen to what clients need,” Zarya says.
As a dedicated digital assets prime broker, BEQUANT has also expanded its client offering with a research department that investigates trends affecting the market. “We are building quantitative research off that data that we can use to look at volumes, volatility, interest rates, basis spreads like spot and futures, what the correlations are, and what the social sentiment is like within the crypto space. Clients can drive some alphas off these data and build an algorithm based on these observations,” Zarya concludes.
