US mutual funds’ crypto holdings doubled to over $1bn in Q1 – Forex Trader Hub
Cryptocurrency investment is on the rise among US mutual funds, with holdings doubling in the first quarter of this year to top $1 billion, an analysis of regulatory filings has shown. BlackRock and Morgan Stanley Investment Management are among 16 mutual fund managers who have now dipped their toes into the alternative asset’s wild market.
Quarterly filings made to the US Securities and Exchange Commission show a mark-to-market value of $949 million in cryptocurrency-tracking products on funds’ books Q1, more than twice the total from the previous quarter. Funds held an additional $54.7 million of notional exposure to CME-listed bitcoin futures.
With the SEC yet to approve any crypto exchange-traded funds (ETFs), the bulk of the mutual fund investments were in investment funds. The closed-ended Grayscale Bitcoin Trust was the most popular, and together with the NYDIG Institutional Bitcoin Fund – a pooled investment fund set up by Stone Ridge’s bitcoin subsidiary – the two products made up 99.6% of all cryptocurrency fund investments by market value listed on first-quarter filings.
The risk management and custody challenges presented by trading in the spot markets may also make these synthetic products more attractive to investors.
“It makes sense that institutions are starting with wrapper products, where it’s relatively simple to get risk exposure,” says Justin Schmidt, head of strategy at cryptocurrency platform Talos.
After several years of watching the ebbs and flows of the cryptocurrency markets, firms may also have become familiar enough with the products to begin investing this year, Schmidt adds.
SEC snapshot
The information was contained in the SEC’s N-PORT filings, which provide a point-in-time snapshot of the type and size of each fund’s investments every quarter. Fund manager Horizon Kinetics was the first to record a crypto investment as far back as September 2019, with many other mutual funds following suit in 2020.
The fourth quarter 2020 filings show 16 sub funds managed by 10 separate firms had positions in cryptocurrency products. That went up to 13 managers and 26 funds in the first quarter of 2021, including three BlackRock funds that held a combined $41.6 million notional exposure to bitcoin futures. A second quarter 2021 filing for one of Morgan Stanley Investment Management’s funds shows a $1.3 million investment in the Grayscale Bitcoin Trust. In all, Risk.net was able to identify a total 16 mutual fund managers that have had exposure to cryptocurrencies since 2019.
Funds managed by SkyBridge Capital held the largest investment at the end of the first quarter, holding $415 million of the NYDIG Institutional Bitcoin Fund across two trades. Most funds though held small investments in cryptocurrency non-derivative products in the period, with the median market value totalling $6.3 million.
While the Kinetics Internet Portfolio held 43% of its net assets in cryptocurrency assets in the first quarter – the highest of the funds examined in that period – cryptocurrency funds and derivatives positions reflected just 1.7% of the median fund’s net assets.
For example, each of BlackRock fund’s positions totaled less than 0.01% of the respective fund’s net assets, while at Morgan Stanley Investment Management it equalled 0.5% of the fund’s total value in the second quarter of 2021.
Schmidt is not surprised by the pace and size of institutional adoption, which remains small given the thousands of mutual funds in the US market.
“As institutions look to get into crypto, they’re doing so at institutional speed and taking a thoughtful approach. I wouldn’t expect them to suddenly just drop all of their experience and start operating at crypto speeds,” he says.
Regulatory focus
The rising interest in crypto investments from US mutual funds comes as regulators also take a closer interest in the asset class.
In May, the SEC’s investment management (IM) division warned investors about putting money into mutual funds with bitcoin futures positions, citing the “highly speculative” nature of the investment and the lack of regulation in the underlying bitcoin market.
“IM staff believes at this time that investment in the Bitcoin futures market should be pursued only by mutual funds with appropriate strategies that support this type of investment and full disclosure of material risks,” the division wrote.
Funds increased their bitcoin futures notional exposure by more than 10 times in the first quarter, from $4.5 million in Q4 2020 to $54.7 million. All three of the BlackRock funds held their cryptocurrency positions in listed derivatives.
The SEC has continued to delay a decision to approve crypto ETFs, which could threaten the dominance of investment trusts such as Grayscale. The VanEck and WisdomTree versions would have independent trustees to verify their holdings, and State Street would provide record-keeping services for the VanEck fund.
Other jurisdictions though have moved forward with the asset class. Canadian regulators gave the green light to the first bitcoin tracking ETF earlier this year, and cryptocurrency exchange-traded products have been available in Europe for some time.
