Separately Managed Accounts
For Crypto Investors
Our team at BitBull is working to pioneer a Separately Managed Account for crypto investors for ourself-managed fund, BitBull Opportunistic. Through our Fund of Funds, we haven’t found any other crypto hedge fund that offers an SMA or sub-account offering, but we’ve found this to be of interest to various investors. This would mimic the investments we make with our direct hedge fund, BitBull Opportunistic, while offering its own sets of advantages for larger investors.
What are Separately Managed Accounts?
Separately Managed Accounts (SMAs) are set up for selected investors and are exclusively managed on their behalf, where they are able to see the specific underlying securities or crypto assets as well as any trades or transactions executed by the management firm.
The difference between investing via a Separately Managed Account and a Crypto Fund, is that in the latter, the crypto assets are jointly owned by the fund’s LPs, without any specific ownership pattern or identification of assets. In an SMA, on the other hand, all the crypto assets held in the account are directly owned by the investor(s), who can track individual asset performance over time.
Benefits of investing in Crypto via a Separately Managed Account
Security & Custody
Transparency: A Separately Managed Account has a clear ownership pattern and specific underlying securities/crypto assets not shared by any other investors. With an SMA, you see exactly what you own, what the trades are, and how your assets are performing.
More control: With an SMA, since performance is easy to monitor, you have more control over the direction your investments take. If you want to switch strategies, it can be as simple as having a discussion with your management firm.
Customization: Investing via an SMA allows you to receive customized portfolio management. Since your account is exclusively managed, it can be tailored to meet your specific investment goals, targets, and risk appetite.
Custody and Security: Security in crypto is paramount. If clients want to be able to control withdrawals by themselves, ensuring that no 3rd party, including the fund, can withdraw without involving them, SMAs may be an option. There are ways to set up access only to trading with an account, but to disallow withdrawals. In general, however, we have found that many crypto funds prefer to keep assets away from the exchange and in a more secure crypto wallet or custody partner. So, this may also create overhead in keeping those crypto assets off-exchange, as each trade would require the assets to be on-exchange, and then off exchange when trading is done, and the client may need to be contacted and involved with these transfer for each trading period. There are some improvements to this process that we have thought through at BitBull; contact us if SMAs are of interest to you and you’d like to discuss these.
Downsides to investing via a Separately Managed Account
Access to deals
Cost: Separately Managed Accounts have higher minimums as compared to traditional funds, as well as higher fees which cover the cost of exclusive active management.
Set-up time: Crypto hedge funds and clients looking to set up Separately Managed Accounts must potentially work through setting up new bank accounts, custody practices, exchange accounts and relationships, Order Execution Management Systems (OEMS) or Portfolio Management Systems (PMS), and more. Depending on trading strategies – from an automated strategy such as arbitrage or highfrequency trading (HFT) to manual or discretionary strategies such as value investing, the trading team may need either several weeks to set up this trading ability with the new exchange accounts, or may need time during trading to enter duplicate orders if it is a discretionary strategy. Bank and exchange accounts in crypto can famously take up to a couple of months, so the set-up time with SMAs should not be understated.
Access to deals: While this may not apply to crypto hedge funds BitBull Opportunistic, if you are investing in a venture fund, it may be entering highly sought-after private deals that are not available to individual investors. With an SMA, you may miss out on certain blockchain equity financings, and the opportunity cost of missing out on such offerings can be very high. For this reason, SMAs may not be recommended for Venture Capital funds, but have less downside for Hedge Funds of the type that BitBull offers.
Learn More About Separately Managed Accounts
Investing in crypto assets via a Separately Managed Account has its pros and cons. While on the one hand, you get increased transparency and control, on the other, there is some setup time and cost. However, ultimately your choice depends on the management firm you start an SMA with and your own investing goals and expectations. At BitBull, we’ve thought through some significant process improvements that may enable SMAs for a crypto hedge fund like ours; please feel free to contact us if you’d like to discuss our thoughts on SMAs