Growth curve: how Trident Trust is flourishing as the crypto fund sphere matures - July 2021
In this interview with Hedgeweek, our Head of US fund services, Dan Smith, tells readers how Trident Trust's journey in the crypto world began, and how both the crypto space and Trident's offering evolved to meet fast-changing client and industry requirements.
Trident Trust entered the cryptocurrency sector in early 2017 as bitcoin was beginning to appreciate in value, and since then the global fund administrator – which services more than 500 funds globally, with AUM exceeding USD40 billion – has steadily carved out a burgeoning presence in the rapidly-growing digital assets sector, and now counts around 45 crypto funds among its clients.
“Trident as a business has always been very opportunistic,” says Dan Smith, Head of Trident Trust’s US fund services operations. “In terms of professional firms and hedge funds getting into the crypto space, we were fairly early into the game, and because of our private ownership, because of our culture, when we first dipped our toe in, the leaders of the firm were keen to give it a go, and it’s paid dividends.”
Following the initial crypto surge - “a fast and frenzied time” which was characterised by smaller fund launches centred largely around west coast tech-types - and the subsequent “crypto winter” of 2018 when prices corrected down to some USD4,000, the sector has once again galvanised in the last 18 months, becoming increasingly institutionalised in nature.
Against that backdrop, Smith points to a “broad maturation” across the investor, manager and service provider sphere, which has thrown up an assortment of opportunities for Trident Trust.
“As the asset class has appreciated in value, the infrastructure – the administrators, auditors, tech providers, service providers – has been maturing,” he explains. “The space is now better-positioned to deal with the next run of fund launches, which have been more institutional in nature – more traditional fund managers; many more Wall Street types and investment bankers who see the potential there. Investors became more interested again.”
Turning to Trident Trust’s offering, Smith says the fund administrator needs to be able to do for a cryptocurrency fund what it already does for a long/short equity or credit manager. He points to Trident Trust’s US fund services hub in Atlanta , along with its respective presences in Malta and Singapore for European and Asian coverage, and says the business is well-placed to cover this “24/7 asset class”.
“We have to book the trades, so our main focus is how we access the data, what the managers are buying and selling, how they are making money, so that we can do the accounting for the fund, which then leads to the auditors being able to audit it, and tax firms being able to do tax returns based on that data,” he says.
This process goes hand-in-hand with the evolving market infrastructure and institutional framework of the digital assets sphere and, looking ahead to future challenges, Smith predicts a “bifurcation” of the crypto fund administration and service provider sector.
“Certain counterparties who want institutional fund managers and traders will gear their businesses to make that data available and consumable and readily accessible to fund admins. If you're a fund manager, you will want to transact on certain platforms with certain counterparties who are willing to be transparent and be regulated. Then there will be others where you just can’t – they don’t want to make that data available, and so you’re just not going to be able to trade because those counterparties are not willing to play ball with institutional-grade managers and make the data accessible and regulated.”
Talk inevitably turns to ongoing discussions surrounding tougher regulation of the cryptocurrency market, and Smith indicates that a tighter framework, particularly around counterparties, would ultimately make life easier for institutional players.
“As fund administrators, we do work with some emerging managers, but the big dollars and the big funds are institutional-grade, so they want to be comfortable enough to allocate to these funds,” he notes.
“Allocators are risk-averse. They like regulation because it makes them more comfortable, and if you want the big dollars in this space, regulation is just a reality of what’s going to have to happen.”
As the sector continues to be reshaped by innovation, Smith points to the growing hybrid nature of many cryptocurrency fund managers, who invest both in the digital coin market as well as in companies and projects in the blockchain space using venture capital approaches.
“Those are illiquid assets and are a different kind of animal when it comes to fund administration,” he explains. “But because of our broad client base – we’ve got a big committed capital illiquid asset administration business, which spans venture capital, real estate, private equity - we are well-situated to work with those funds that are in both spaces.”
Delving deeper, he continues: “The evolution of the crypto space comes in waves. While we solved a lot of those early challenges, now DeFi is the current challenge that everybody is looking to address. 2021 and 2022 are going to be for DeFi what 2017 and 2018 were for early traditional crypto strategies.
“There have been struggles along the way but you have to fight through the learning curve to get to a good spot, so you can add value to the new funds that are coming out and help them with the lessons you have learned. We’re firmly on a growth curve now.”