There Are Huge Opportunities For Generating Alpha

Recently Martijn van Veen, Managing Director of M11 Funds, talked to Disruption Banking about Institutional Investment In Digital Assets. 

The gradual shift towards Digital Assets

Until recently, Martijn van Veen had spent his entire career in traditional finance. He started off with over a decade in investment banking as a proprietary trader, before running several hedge funds across Europe. But in 2017, he bought Bitcoin for the first time, setting him on a path into digital assets that has brought him to be the Managing Director at M11 Funds, a Lichenstein-based investment fund that focuses exclusively on digital assets.

Martijn told Disruption Banking that his journey from TradFi to digital assets was “a very gradual process.

“I started looking at and thinking about cryptoassets and digital assets in about 2017, which is when I first bought Bitcoin. I wasn’t fully convinced to start with – I sold the Bitcoin shortly after,” he said. “But as I started to think about the asset class more and more, I started to understand how big the opportunity is and wanted to be part of the huge amount of disruption that this shift in financial markets would initiate.”

The opportunity for Martijn to run the hedge fund business of M11 Funds came after the successful launch of two venture funds, which led to the founding of an asset management division that aimed to service the growing market of institutional clients seeking an exposure to digital assets. In May this year, M11 launched its first fund, the M11 liquid token fund. Martijn said that he came to the role with three priorities in mind.

Three priorities for success in Digital Asset Investment

“Number one – you need to have an investment fund that has an edge so that you can promote your services successfully. Number two – the fund needs to be operationally sound, which is especially important now in this industry considering the risks involved with counterparties and centralised exchanges,” he noted. “Number three – you need to be regulated. Especially in continental Europe, you simply cannot be part of an asset allocation if you are not regulated. To win the business of wealth managers, private banks, and other institutions you have to tick all three of these boxes.”

Martijn suggested that the most difficult of his tasks as the firm took this step into the world of digital assets was establishing “rigorous, well-managed processes for the hedge fund.”

“The essence of having proper functions is being in full control of your process: you need to have extensive oversight over liquidity lines, you need to have proper investment processes in place, including a well-managed risk management process,” Martijn told Disruption Banking. He added that these processes must be “established and repeatable – investors need to know that you will be able to deliver what you promised.”

This stability was perhaps even more crucial for M11 Funds because they were seeking to offer regulated funds, in an industry still in the nascent stages coming under regulatory authority. Martijn said that, to do this, M11 focused on securing the safety of the underlying assets held by the fund. “We created our own proprietary setup that enables us to ensure the safety and security of assets, resolving what we think is the biggest risk from an investment and asset management perspective. Of course, the regulatory uncertainty of the sector made this task more difficult, although we are definitely seeing progress and improvement on this front across different markets.”

Alpha-generating opportunities in the Digital Asset Market

Now that M11 is fully established and operational, Martijn is optimistic that the fund offers lucrative opportunities for investors. He explains that in the digital asset market, “roughly two-thirds is illiquid and a third is liquid. The majority of the liquid side is currently being covered by passive management and synthetical products. Only a very small part is being actively managed and, within that, the market is highly fragmented between different geographies.”

This fragmentation and market inefficiency within this segment of the liquid crypto market offers strong opportunities for investors to generate alpha. “These discrepancies mean that there is a lot of room to do all sorts of fundamental trading strategies in order to create huge alpha,” Martijn explained. “It feels to me that the environment is similar to what we saw in traditional finance hedge funds in the late eighties and early nineties – there was such a tremendous opportunity to create outsized, risk-adjusted returns. We are seeing similar conditions in the liquid crypto hegde fund market.”

Martijn is confident that more institutional investors are starting to appreciate the alpha-generating opportunities available in crypto markets. BlackRock’s Bitcoin ETF – which is expected to gain regulatory approval imminently – should further drive interest in this emerging market and encourage firms to include cryptocurrencies as part of their strategic asset allocations.

“In the discussion I am having with institutional investors – wealth managers, asset managers, family offices, and more – there is a greater sense of urgency in terms of increasing exposure to digital assets,” Martijn said. “The perception of institutional investors towards digital assets is undoubtedly changing.”

This article first appeared on Disruption Banking.