Crypto SMAs Are In, Wall Street Mutual Funds Are Out: Bitwise CEO

Bitwise Asset Management is continuing apace when it comes to customized cryptocurrency investment strategies.

The San Francisco-headquartered Bitwise introduced three new separately managed account (SMA) strategies on Wednesday, keying in on what the investor manager views as attractive exposures in a tricky environment for traders.

The trio of new SMA strategies represent Bitwise’s latest partnership with Eaglebrook Advisors. The asset management platform is a standing Bitwise distribution partner that makes the investment manager’s products available to registered investment advisers (RIA) to allocate to on behalf of their clients.

The three emerging SMA plays — Bitwise 10 Crypto Index Strategy, the Bitwise DeFi Crypto Index Strategy, and the Bitwise Crypto Category Leaders Strategy — impose a minimum investment of $10,000, according to a statement from both companies. Gemini is handling the custody of cryptocurrencies accordingly.

Bitwise CEO Hunter Horsley said in an interview with Blockworks on Wednesday that SEC-registered RIA interest in digital asset SMAs and related liquid products is “actually growing quite rapidly,” despite the lingering aftershocks from the industry’s steep 2022 decline and ensuing bear market.

Bitwise, according to Horsley, has been emphasizing in its pitch for its SMA products that their underlying cryptoassets are owned by SMA investors.

Crypto custody still concern

Institutional and retail crypto traders alike have been generally wary of giving up custody of their crypto assets, at least since the implosion of the FTX cryptocurrency exchange.

Market participants are starting to pay close attention to the bankrupt exchange’s bankruptcy proceedings anew, considering recent indications that FTX may try to reopen as soon as next year — even though billions of dollars of FTX customer cryptoassets remain frozen.

And the sentiment, according to market participants, has likely been only heightened by the spate of recent SEC and CFTC enforcement actions against crypto exchanges.

“SMAs now have even more appeal in some ways,” Horsley said, speaking generally about market conditions.

The new products bump Bitwise’s SMAs up to seven total strategies. A spokesperson declined to comment on the firm’s overall assets under management, citing the private funds the investment manager operates. Bitwise reported about $17.5 million of regulatory assets under management to the SEC in March 2023. This is the most recent data available.

“The fastest-growing vehicles in asset management writ large are ETFs and SMAs,” Horsley said. “Mutual funds are sort of the old school, and a lot of assets are turning over.”

Here’s how the company described its latest three products in the statement, which noted that the first two products are tied to existing indices. The latter is a new actively managed strategy that appears to appeal to institutional investors.

Bitwise 10 Large Cap Crypto Index: “includes 10 of the most highly valued crypto assets”
Bitwise Decentralized Finance Crypto Index: “tracks an index of the largest assets in decentralized finance”
Bitwise Crypto Category Leaders SMA: a “rules-based strategy that aims to select the leading crypto asset in each of the most important sectors in crypto”

Bitwise is up to about 1,500 clients now, according to the company, maintaining relationships with the likes of RIAs investing on the behalf of retail and accredited investors alike, as well as family offices looking for crypto exposures.

Institutional SMA appeal?

Bitwise also operates a number of separate asset management lines and strategies designed for institutional investors. These are intended to cater to the likes of pension plans and digital asset portfolio managers, including SEC-accredited hedge fund vehicles.

A fund of funds operation is one of them, as confirmed by SEC filings and market participants. Fund of funds generally gather limited partner or proprietary firm assets and invest them in outside portfolio managers.

The general marketing tactic is to offer institutional investors exposure to a mix of promising emerging managers, as well as their more established counterparts that may have restrictions on new investment tickets. These often happen as a result of funds hitting their internal capacity for a particular strategy.

Funds of funds models in the US can be applied via SMA or a commingled fund structure that imposes a lockup period on limited partner capital. There are SEC restrictions in place preventing marketing of those vehicles to non-accredited investors, or retail crypto traders in the industry’s case.

Asked how Bitwise is working to meet the needs of such institutions and sell their in-house strategies accordingly, Horsley said that “that’s a different audience that we also cover, and their point of view on an SMA is direct ownership.”

That equates to owning the underlying crypto assets and having instant liquidity. The latter setup is almost always the case when it comes to SMAs managed on Wall Street and in crypto. The former hinges on the specific setup put in place by the investment manager.

Deep-pocketed investors still on the hunt for crypto exposures through the bear market are almost universally demanding zero performance fees, as well as a “professional manager looking after the strategy.”

Crypto hedge, venture plays among Bitwise focus

Horsley said that, generally, the goal of the firm’s institutional offerings is to craft a mix of exposures on behalf of Bitwise investors to crypto venture plays, as well as hedge funds “perhaps.” That’s in addition to the firm’s strategy of facilitating direct ownership of crypto assets.

The question, Horsley said, “[is] how do we do that in a durable way, where we don’t have to sort of constantly be monitoring ourselves and have a conflict with an institutional solution?”

In the case of the latest three SMAs in Bitwise’s partnership with Eaglebrook — which says it features “dozens” of SMAs run by RIAs overseeing more than $200 billion in collective assets under management — Gemini handles the crypto custody.

“What we strove to do here is to give a few different offerings to allow people to [have exposure] to large-cap digital assets, which is appealing to professional investors in general,” Horsley said. “We’re more focused on the large-cap part of the market. That’s true of institutions; that’s true of RIAs, as well.”

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