In a June 14 interview with CNBC, legendary investor Paul Tudor Jones drew attention to the continuing high inflation. After last week’s CPI report data showed that inflation in the U.S. reached a 13-year high, the Tudor Investments founder advocated a 5% allocation to bitcoin in his portfolio.
Hedge fund companies ranked by assets under management. Source: MutualFundDirectory.org
The 50 largest asset managers in the world, when added together, oversee a total of $78.9 trillion. Taking out just 1% for crypto assets investment assets would amount to $789 billion, which is more than the entire $723 billion market cap of Bitcoin.
However, hedge fund firms have a fundamental misunderstanding of how crypto assets work, which is what is holding back the 1% allocation, let alone the 5%.
Let’s break down a few of the major hurdles that the traditional financial industry must cross before it can truly become a Bitcoin advocate.
Barrier #1: Perceived Risk
Investing in bitcoin remains a difficult decision for large hedge fund managers, especially given the perceived risks. on June 11, the SEC warned investors about the risks of bitcoin futures trading, citing the volatility, lack of regulation and fraud in the bitcoin market.
For some reason, the SEC’s focus remains on bitcoin, despite the similar or even higher 90-day volatility of some stocks and commodities compared to bitcoin.
DoorDash (DASH), a $49 billion U.S. public company, has a volatility of 96% compared to Bitcoin’s 90%. $44 billion U.S. tech stock Palantir Technologies (PLTR) has a volatility of 87%.
Obstacle #2: Indirect Risk is Nearly Impossible for U.S. Companies
Most of the hedge fund industry, those fund managers who oversee billions of dollars in assets, can’t buy physical bitcoin. But using exchange-traded funds (ETFs), exchange-traded notes (ETNs) and tradable investment trusts can circumvent these restrictions. Cointelegraph previously explained the differences and risks of ETFs and trusts, but this only scratches the surface, as each fund has its own rules and restrictions.
Obstacle 3: Fund oversight and managers may prevent the purchase of BTC
While fund managers can make investment decisions, they must comply with each specific fund regulation and adhere to the risk control requirements set by the fund administrator. Adding new instruments, such as CME Bitcoin futures, for example, may require SEC approval. Renaissance Capital’s Medallion Fund faces this issue in April 2020.
Those like Tudor Investments that opt for CME bitcoin futures must keep their positions updated before monthly expiration. This issue represents both liquidity risk and tracking error in the underlying instruments. Futures are not designed for long-term arbitrage, and futures prices are very different from regular spot trading.
Note: Tracking error, sometimes referred to as active risk, is a situation where there is a difference between the behavior of the benchmark price associated with an asset in a portfolio and the behavior of the position associated with that asset.
Barrier 4: Conflicts of interest remain with the traditional banking sector
Banks are interested players in this space as JPMorgan, Merrill Lynch, BNP Paribas, UBS, Goldman Sachs and Citi are among the largest hedge fund institutions in the world.
Banks are relevant investors and distributors of these independent hedge funds and have a strong relationship with asset management firms. Because the financial conglomerates dominate the issuance of equity and debt, this entanglement of interests goes even further, meaning they ultimately determine the allocation of hedge funds in these transactions.
While Bitcoin does not yet pose a direct threat to these industry giants, the lack of understanding and risk aversion, as well as regulatory uncertainty, has led most of the $100 trillion in hedge fund managers managing it globally to avoid venturing into the new asset class space.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/the-hurdles-the-traditional-financial-industry-must-cross-to-embrace-bitcoin/
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