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Opportunities ripe in ESG and crypto

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It is an exciting time to be an investment manager – creative, innovative startups are taking advantage of the opportunities which are aligned with themes at the forefront of investor appetite. The potential for growth in the realm of sustainability and crypto funds is enormous, once certain challenges are overcome.

It is an exciting time to be an investment manager – creative, innovative startups are taking advantage of the opportunities which are aligned with themes at the forefront of investor appetite. The potential for growth in the realm of sustainability and crypto funds is enormous, once certain challenges are overcome.

When it comes to responsible, sustainable investment opportunities, Andreia Muresan (pictured), Managing Director, Circle Partners, details: “We see a clear ambition not only from investment managers, but also from investors, to accelerate innovation in the water, waste, energy and food sectors. Everyday, we hear of innovative ideas about responsible, sustainable investment opportunities. These are people who really want to make a difference, either by finding new responsible ways to facilitate access to investment opportunities for those with small investment budgets, or by promoting inclusion, diversity and equity through the investment choices they make.”

In Europe, fund managers are having to comply with the newly introduced Sustainable Finance Disclosures Regulation (SFDR). This legislation requires all investment funds to disclose if and how sustainability risks are integrated into their investment process.

Though this piece of regulation adds a number of reporting and disclosure requirements to all investment managers, it also can be a boon to a particular breed of startup hedge fund. Muresan comments: “I believe the regulation can be of benefit to mangers who have clear sustainability objectives. The European WAM firms survey shows that only 8.4 percent of their funds have a sustainability objective. Therefore, there is a tremendous opportunity for managers with an ESG objective to differentiate themselves and take a leading position in the wider universe of funds.”

She says startup managers considering a launch should set their ESG goals and incorporate them into their business decisions. They also need to look to the future. Muresan observes: “Managers need to make sure they keep themselves well-informed. Not only are there some new regulations still to be implemented, but there are so many new exciting developments which might help them along the way” 

“Being compliant with SFDR and upcoming legislations, while remaining relevant to investors from a sustainability perspective will be challenging. But, if managers embed ESG principles they believe in into their core processes and organisations, and they choose service providers with the same mind set, they will be ready for the future.”

Sustainability is a hot topic, which is not going away any time soon. “The level 2 requirements of SFDR and the EU Taxonomy, will take effect from January 2022, so if you consider to start a fund in the near future, it would be wise to already take this into account and incorporate ESG principles in your day to day activities, policies and procedures, reporting and due diligence process.

Digital hurdles and prospects

Another up-and-coming area of interest is digital assets and crypto-currency. Due to easy access to digital assets, investment managers have been trading crypto-currencies for many years, building impressive track records and deep knowledge of the blockchain universe and the opportunities it presents.

Muresan discusses the trends in this arena: “Historically, investors were very reluctant to invest in crypto-related funds and convincing them to allocate was significantly challenging. However this is changing as tokenisation of assets and services, use of virtual currency and blockchain technology have been accelerated by the Covid-19 pandemic.”

“We’ve also seen an increase in government efforts to combat fraud and bring certain activities within the scope of AML legislation. This, together with announcements made by well-known organisations to include crypto assets in their strategies, has been driving increased acceptance by investors. In view of this, investment managers are making the most of this momentum and ripe opportunities to start new initiatives.”

Muresan outlines certain operational struggles startup managers may face when looking to set up a crypto hedge fund: “A primary challenge for all funds investing in non-traditional asset categories lies in the valuation of the assets. Managers will need to prepare a net assets value calculation, so they should investigate upfront, together with their service provider what is needed in terms of documentation and evidence for such calculation to be carried out. Service providers, such as administrators and auditors must be able to independently verify the assets of the fund, the transactions and prices used. If managers intend to accept subscriptions in kind, they need to think about the impact this might have on the risk appetite of the fund and the risk profile of the investors.”

Startup managers in the crypto space need to make sure their service provider understands the implications of these risks and has suitable policies and procedures in place to ensure compliance of the fund with applicable legislation.

Emerging digital assets funds might also run into obstacles when looking to open a bank account. This is necessary to receive subscription money, pay the fund’s service providers, make redemption payments, etc. However, Muresan notes: “Not all banks are keen on accepting crypto-business  unless the fund engages a reputable fund administrator to take care of the due diligence checks on investors. So managers might want to take this into account when selecting their fund administrator.”

However, despite the potential difficulties, managers with a good understanding of the crypto universe can take advantage of the new opportunities available. “But investment managers should also be aware of the impact different regulatory initiatives might have on the use of the technology and digital currencies. Having the ability to easily adapt to new possible requirements is imperative and will ensure crypto managers can be in the game for the long run,” Muresan recommends. 

Andreia Muresan, Managing Director, Circle Partners
Andreia Muresan is the Managing Director of the Dutch operation of Circle Partners. She has over 17 years of experienced in the financial sector and a demonstrated history of working in an international environment. Skilled in Risk Management, Compliance, Internal Audit and Operations, Andreia Muresan has a deep understanding of the investment fund industry. Andreia has proven experience and drive to build, motivate and lead a team of professionals in different cultural settings. Before she joined Circle Partners in 2011 Andreia held several senior back-office and treasury positions. Andreia has also several years of experience with advisory roles for Audit Committees and Board of Directors.

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