FREMONT, CA: With elusive valuations and unruly markets guiding the crypto market, there’s increasing pressure and competition in fees. According to Vision Hill’s Q1 report, active funds have underperformed bitcoins on an average.
Many crypto funds were closed as an aftermath of the bear market of 2018. PwC and Elwood Asset Management released a report indicating that the number of active funds is significantly lower than expected. The report further suggested that operational sustainability is a challenge with a median fund size of $4 million and a median management fee of 2 percent. Thus covering salaries and other overheads with $80,000 recurring income are not feasible, especially with an increasing compliance requirement.
While funds are trying to boost recurring incomes with steps such as advisory roles and market making, they must not overlook crypto lending as a potential source of revenue. Funds can lend out their assets for a fee. The growing demand for lending services will also bolster this potential income stream with an opportunity for liquidity and diversity to strengthen the sector.
The PwC/Elwood report states that the median fee is 2 percent, which is at par with the prices for traditional hedge funds. The report also says the average fund fee for crypto as 1.72 percent, though many of the players may charge significantly less. The pressure is even more in the index and mutual funds with fees moving to zero or even lower. However, there is a rise in demand for crypto lending at an incredible pace due to the demand from institutions and the inflow of funds into startups.
On a positive note, the demand for the lending of crypto assets can increase velocity and price discovery as multitudes of the transaction enable the market to express its views. Further, the demand for short selling, fostered by asset lending, will enhance liquidity and develop a pool of natural buyers to an extent. However, a crypto fund manager can use a loan recall strategy to boost his fund valuation or to thrive upon squeezing the short sellers. A reputation for doing this will intimidate the future borrowers too.
It’s essential for the investors to ensure that the funds they back do not engage in such lending practice that thrives on squeezing the short sellers. Due to the lack of clear rules, the sector has to keep an eye on developments in both crypto asset lending and crypto fund administration.