Convergence of “Crypto-Native” and Traditional Asset Managers

The landscape for manufacturing Digital Assets investment products and widespread distribution is poised for significant transformation in the coming years. This shift is driven, in large part, by the convergence of “Crypto-Native” Managers striving to institutionalize their businesses similar to traditional Asset Management business models, and the growing interest of traditional Asset Managers to stand up a Digital Assets investment capability. If certain market catalysts unfold, we expect to see substantial changes given positioning around Digital Assets by both types of Managers.

Traditional Asset Managers will continue to exhibit varying degrees of appetite for Digital Assets, with the majority seeking to mitigate operational and reputational risks. This involves establishing strategic partnerships with Third Party “Crypto-Native” Managers, who already possess the necessary infrastructure, talent, and a track record in Digital Assets investing. Crypto-Native Managers have experience with the Digital Assets operating model nuances and have dedicated talent as they were founded with the sole purpose of investing in Digital Assets and providing investment products in a market previously underserved by traditional Asset Managers. Alternatively, traditional Asset Managers would need to build this investment capability in-house – likely limited at first to offering “basic” investment products that already have precedent and requiring key partnerships with technology and service providers already familiar with Digital Assets.

Over time, traditional Asset Managers who made early investments, both in principle and into their operating models, will emerge as “Leaders”. Others will be left with the choices of either overspending to digitize their existing operating models or paying a premium to acquire a Crypto-Native Manager. Concurrently, Crypto-Native Managers will be forced to differentiate their offerings by increasing the complexity of their investment strategies to set them apart from other Managers and traditional investment products.

• Examples of this include Invesco and Ark Investments both partnering with Galaxy Digital and 21Shares respectively, to operationally support the issuance of their Bitcoin Spot ETFs. Additional examples include Schroder’s minority stake in the Forteus and Monex’s majority stake in 3iQ to leverage existing businesses when building out their Digital Assets capabilities. This has also been evidenced in the vendor landscape with the acquisitions of Bitstamp by Robinhood and Seccurency by DTCC. While still early in the adoption of Digital Assets, more of these partnerships and strategic investments are anticipated over this next cycle – likely a focus on partnerships during the bull market as Managers react to client demand, and acquisitions / consolidations during the bear market as Managers look to acquire discounted AUM.

While specialized Hedge Funds and Venture Capital Managers may maintain their independence, significant consolidation is expected with the acquisition of proven Crypto-Native Managers. These Managers are likely to be onboarded as subsidiaries, functioning as specialized investment teams within the Traditional Asset Manager’s structure. Successful Traditional Managers with a Digital Assets investment capability will operate their investment teams as siloed strategy teams / trading desks with dedicated operations and in-sourced enterprise services. Crypto-Native Managers who struggle to generate alpha or differentiate their investment strategies may face insolvency or be acquired at a considerable discount for their assets under management (AUM) or capabilities.

The final evolution is the full end-to-end integration of Multi-Asset Managers across both Digital and Traditional assets. Formerly stand-alone Crypto-Native organizations or subsidiaries will be further integrated into existing businesses, resembling asset-specific trading desks. These integrated entities will support broader investment strategies, including the incorporation of Digital Assets within multi-asset portfolios and the utilization of tokenized assets to represent traditional underlying investments.

Turning our attention to the evolution of individual Managers and Digital Assets investment capabilities, progress is anticipated across three crucial dimensions. As each Digital Assets Manager is unique, the nuances between Managers will continue to increase as firms seek to differentiate themselves and their offerings. Managers will distinguish themselves by increasing the complexity of their underlying investments (manufacturing exposure) and the complexity of their Investment Product Mix (distributing exposure), leading to varying levels of operating model maturity needed to support these investment strategies and their clients.

• Operating Model Maturity – This entails a shift from spreadsheets for Portfolio Management to leveraging functional systems akin to institutional operating models. This involves implementing advanced technology stacks and moving towards Front-to-Back integration of Digital Assets with traditional operating models.
• Complexity of Underlying Investments – Managers will transition from long-only spot exposure to incorporating long/short investment capabilities, OTC derivative activities, and active network participation across the Digital Assets ecosystem. The journey may extend beyond simple staking to encompass lending and DeFi capabilities.
• Complexity of Investment Product Mix – Strategies can progress from representing a single asset (e.g., Bitcoin or Ethereum) to multi-asset indexing, active strategies, and ultimately multi-asset strategies. Digital Assets can evolve to represent a smaller allocation within larger funds alongside traditional assets.

2024 will serve as the foundation for Institutional adoption of Digital Assets. As net new inflows and client demand drive Institutional interest, Managers will have to define the manner in which they plan to manufacture and distribute Digital Assets products, whether it is organically through internal builds and strategic hires or inorganically through acquisition.