The hedge fund industry in the US has witnessed a surge in crypto currency and digital assets funds being launched by experts in the technology sphere but who often have little experience of the financial and fund management world. This emphasizes the need for extensive support from service providers and the additional guidance these businesses may need to steer a successful launch.
The hedge fund industry in the US has witnessed a surge in crypto currency and digital assets funds being launched by experts in the technology sphere but who often have little experience of the financial and fund management world. This emphasizes the need for extensive support from service providers and the additional guidance these businesses may need to steer a successful launch.
“The majority of the start-ups we have seen being launched are in the crypto/digital asset space. A differentiating factor here is that many of them are being run by individuals who do not have a finance background but have a technology pedigree,” comments Steven Rosen, Senior Manager, Akram & Associates.
Discussing the nuances in service this translates into, Muhammad Akram, founder of Akram & Associates, outlines: “We have been servicing crypto/digital asset funds since 2014, but now that we have more clients in that space it means we need to be ahead of the curve to service them effectively.
“The whole crypto/digital asset industry and eco-system is evolving and the best practices used two years ago are no longer consider best practices. This means we have to constantly learn and train our team in this regard. Our biggest challenge is making sure we understand the risk in this area.”
Rosen explains that coming from a technology background, most professionals launching these crypto/digital asset funds lack a basic understanding of the service providers and support they need in order to successfully run a hedge fund: “They need the right legal counsel and the right auditor; they need to have all of these processes in place which is something many do not realise they need. Our initial conversations with many of these funds show they often might not understand the time, effort and cost needed to launch a fund.”
Raising capital is a challenge for any new fund, however when the professionals involved have little institutional background or knowledge, they are likely to lean more heavily on their service providers. “They’re learning about all the hoops they need to jump through to raise capital while at the same time trying to understand the best practices in the space,” Akram notes, “This is where we can step in and walk alongside them to show them what steps they need to take in order to make this successful venture.”
He advises that, just like in any other sector, having a business plan and best practices to follow are crucial for any fund to have hopes of success.
Partnering with service providers who are knowledgeable about the developments in crypto/digital assets is also important. “If they’re hiring a service provider who doesn’t know the space and doesn’t understand where this world is going, they will not get the best service which means ultimately, neither will their investors. They need to work with firms and people who know the regulatory and tax challenges for example, because that will clear many hurdles for them,” highlights Rosen.
Profitability challenges as costs rise
Both Akram and Rosen caution managers starting out that monetary policy decisions can impact their ability to generate returns. “When the Federal Reserve was printing money, the market was very fertile for everyone to make money. People were under the impression that making money is easy; but as this year began and we went through some volatile periods, some may have realised that it’s not a game for everyone to play. Launching and managing a fund requires a lot of discipline and attention to get it right,” Akram says.
In Rosen’s view, the biggest challenge for start-up managers will be how to make a profit in light of ever-increasing regulation: “To be compliant with the SEC regulations, managers need to pay service providers which, in turn, will impact their bottom line. In terms of compliance regulations, if even half of what has been proposed is enacted, even small funds will need to hire in a compliance expert, whether that be someone in house or as an outsourced service. This will eat away at the performance and the profit of the fund.”
These changes considered against a background of rising inflation could also lead to managers having to increase their fees as they pay out larger salaries to staff on top of the aforementioned growing regulatory burden.
“What they need to do is run a tight ship,” Akram stresses, “they should look to lock in a fixed fee with their service providers to allow them to project their expenses out into the future. The worry is that although the regulatory changes are being introduced to protect investors, they might be the ones who end up bearing the growing costs. Improving transparency and accountability is a positive development but everyone needs to be a bit cautious and not go overboard.”
Asia growth
Amid these changes, Akram Associates has identified room for expansion and has opened two offices in Asia to capitalize on the growing alternative investment management industry in the region. “The hedge fund and alternative investment industry is flourishing in Singapore and Hong Kong and we expect to benefit from this momentum of development,” explains Amir Mahmood, CEO of Akram’s Asia Offices. As the offices has only recently been launched, Mahmood underlines the importance of having the right professionals be part of the team: “The quality of a firm is directly dependent on the quality of its human resources, and we are confident in the excellent team we have built.”
Muhammad A Akram, Founder, Akram – Assurance, Advisory & Tax Firm
Muhammad Akram is a Certified Public Accountant in the state of California (License #114908), New York (License #122344), and North Carolina (Certificate #37968) and leads the Firm’s overall practice. He is a member of the AICPA and North Carolina Society of CPAs. He has worked with Big 4 and National Accounting Firms, where he worked on the audit, tax and consulting engagements for onshore and offshore alternative investment funds. He has also been responsible for advising investment companies on structuring and compliance processes, and for providing consultation on tax matters.
Steven Rosen, Senior Manager, Akram – Assurance, Advisory & Tax Firm
Steven earned a Bachelor of Science with a major in Accounting from the City University of New York. He has worked with regional and local CPA Firms on audit, review, compilation, tax and consulting engagements for non-public entities within the financial services industry, having extensive experience with Investment Partnerships. Steven is also integrally involved with training employees, and reviewing audit procedures and documentation performed by the staff before it is sent to quality control for review.
