May 31, 2021
First, let’s start with the word fund: what is it? Why does it exist? Well, just as there are “rainy day funds” or “emergency funds,” investors use funds to set aside money for a specific purpose. In this case, the money is usually pooled together from a group of investors who have interest in achieving a similar investment objective or outcome. Due to increased popularity, there are many fund types available, the most popular being mutual funds and exchange traded funds (ETFs).
These funds are an attractive investment option because they provide investors with exposure to a range of securities, as opposed to one specific asset; in other words, they help investors diversify their portfolios. For example, a fund may provide exposure to the complete S&P 500, whereas a stock of an S&P 500 company only provides exposure to that one company. Plus, some funds provide the added benefit of being professionally managed, and some funds provide access to strategies and asset classes that otherwise would not be easily accessible to an investor.
First, a digital asset is any asset that exists in a digital format on the blockchain. So, a digital asset fund acts as an investment vehicle containing assets in digital format, where the assets share a specific investment objective or outcome. You may also hear people referring to digital assets as being tokenized, meaning they are issued a blockchain token that digitally represents a real tradable asset. Because of this blockchain aspect, current digital asset funds are considered alternative assets and most are structured as limited partnerships.
What makes these funds digital or tokenized is that they are recorded and transacted on the blockchain. They possess all the characteristics of its traditional counterpart, although they can be sold in fractions of a share and have the potential to be traded 24/7 over the blockchain.
Currently, while they can be used for more than just this, most digital asset funds provide exposure to cryptocurrencies, DeFi (Decentralized Finance) and CeFi (Centralized Finance) strategies. There are several firms offering digital asset securities, including Securitize Capital, a subsidiary of Securitize. Securitize Capital offers funds, such as Bitcoin Yield Fund and USDC Yield Fund, where the outcome is to create exposure to cryptocurrency and yield on top of that exposure.
Well, asset management firms generate fees through fund management and operations, and with the increased competition among asset managers to attract new investors and retain their current investors, there have been many fee reductions for investors. These lower fee structures have disrupted the business model for many firms which has more recently resulted in several consolidations within the industry, where larger firms are looking to quickly grow AUM (assets under management) as a method of offsetting the potential for reduced revenues.
The tokenization of funds on the blockchain is expected to create new cost efficiencies for traditional asset managers, which could help alleviate the pressures from fee-reductions. This ultimately will also ensure that investors continue to benefit from continuation of low fees and increased investment options. And we, for one, are excited to see the new possibilities unfold.