The growing mainstream interest in digital assets like bitcoin has spread to the asset management industry. After years of casting a wary eye toward these assets as too risky, asset managers are responding to the demands of investors and are looking to incorporate these holdings into their portfolios.
It requires finding the right administrator, selecting a good custodian and then buying the assets themselves. Finally, there is the matter of hiring an audit firm that embraces digital assets and can help you navigate the challenges.
Overcoming internal resistance
In many cases, the first hurdle to clear is resistance within the asset management firm itself.
“Managers are always looking for assets that fit the investment thesis,” Schulman said. “But then they talk to a risk committee, or an investment committee or others internally who set off alarm bells.”
Too often, Schulman said, those raising objections do not fully understand the market. Their concerns are legitimate, Schulman said, but someone has to educate them. That person, in many cases, is the portfolio manager.
“Have you thought of the objections that will arise?” Schulman said. “Do you have answers to all of those?”
To this end, Schulman and his colleague Todd Briggs, a partner in RSM’s financial services group, have outlined five steps that an asset manager can take to work digital assets into the investment mix.
Get a fund administrator who supports digital assets
In a bygone, sepia-toned era, fund administrators would pull data from traditional sources like banks and prime brokers and issue a nice, pretty report at the end of the month. Digital assets do not work that way. So it begs a question: How are you going to pull in that data? There needs to be a tight integration with exchanges, custodians and high-quality valuation data. It’s all possible, but it requires the right administrator. Often, it is the middle market that best understands nontraditional assets.
Find a good custodian
This requires a certain amount of diligence. The Office of the Comptroller of the Currency is opening up banks to be custodians of digital assets. Until that happens, and as the market for digital assets matures, the need for custodians who cater to institutional clients—and not just individual investors—has grown. When you are looking for one, consider the security of the custodian – multisignature protocols are important. And make sure that the firm has an SOC report, appropriate insurance and appropriate reporting capabilities to interface with your fund administrator.
Buy your digital assets
Among the many quirks of the digital assets market is that it started out serving the little guy, the retail investor. This is the opposite of markets like those for collateralized debt obligations, which are complex securities that started out at the institutional level. Only over time did CDOs become available to individuals. So when institutional investors want to buy a digital asset like bitcoin, they need to plan carefully so they do not move the market with large orders.
There’s no magic bullet other than taking a disciplined, thoughtful approach, Briggs said. “It will require diligence to understand the products and the platforms, over-the-counter trading desks and decentralized exchanges,” he said.
This is a 24/7, 365-day market, filled with global, political risks, which presents a challenge: How do you monitor and manage market risks around the clock? And if you are considering accepting in-kind digital asset investor contributions, how do you comply with anti-money laundering requirements? Then there is the very real issue of data security. This all requires a certain level of diligence—in background checks, in constant monitoring of the markets and in data security.
Find an audit firm that embraces digital assets
There are innumerable risks and uncertainties associated with digital assets—but they can be managed. It requires finding a firm—like RSM—that has experience and extensive knowledge in the field, and brings a specialized set of skills to the job.
Many firms have come and gone in the highly fluid world of digital assets. Not RSM. We bring the deep knowledge to help you manage your business, and we will be here in the years to come.