Hedge Funds Hope For Bitcoin ETF Approval In 2020
U.S. regulator, the Securities and Exchange Commission, has rejected all but one Bitcoin ETF proposal submitted to it so far. Bitwise’s proposal was the most recent to be shot down in October last year, with the SEC stating that the application didn’t meet legal requirements to prevent fraudulent and manipulative acts and practices.
The lone survivor is the United States Bitcoin and Treasury Investment Trust, sponsored by New York-based Wilshire Phoenix Fund, which is a Bitcoin and U.S. Treasury Bill hybrid ETF that rebalances between the two assets monthly based on Bitcoin’s price volatility – higher volatility means a lower allocation to Bitcoin in the following month, and vice versa. The SEC has set a date of February 26th 2020 as the date when it will either approve or deny Wilshire Phoenix's application.
Equity hedge funds will be crossing their fingers that this ETF gets approved. Hedge funds trading ETFs is nothing new and hedge funds that trade cryptocurrencies do so on the spot market. The launch of Bitcoin futures contracts on the Chicago Mercantile Exchange and the recent launch of physically settled products on Bakkt each provided managed futures and macro traders with access to a regulated product, but equity hedge fund managers have, thus far, largely been left out of the game.
“Not all hedge funds can access the futures market”, said William Cai, a Partner and Head of Funds at Wilshire Phoenix. “And futures contracts may not be the most efficient instrument to use as one would have to roll them when they expire and they are subject to contango or backwardation. Getting our ETF product into the equities market is critical to broaden access to Bitcoin in a regulated manner.”
Bitcoin is often uncorrelated to traditional assets classes, which makes it naturally attractive to hedge funds as it provides another instrument within various alpha generation frameworks for equity strategy and portfolio managers.
“Our ETF will enable transparent, efficient, and regulated access to Bitcoin, allowing retail and institutional investors, alike, to benefit from Bitcoin’s attributes as an alternative asset”, said Cai.
Hector McNeil, Co-CEO at HANetf, says the benefits for hedge funds to being able to trade Bitcoin via an ETF extend beyond access to volatility.
“The benefits are mainly around the exchange traded nature of it and the security behind it. An ETF has to go through many hurdles from regulators. Being exchange listed makes it much more accessible and gives standard access for hedge funds. Plus, you can short an ETF, which is something that hedge funds certainly want to be able to do” he said.
Another key benefit for hedge funds and other investors alike is access to liquidity. The listing of the ETF on a national stock exchange, such as NYSE Arca, means a potential options market. The options market would further enhance liquidity and ways for hedge funds to incorporate Bitcoin into their strategies.
“The current Bitcoin market is fragmented across several exchanges. To have a liquid market on an easily accessed and regulated equities exchange in the U.S. is a huge benefit for hedge funds and institutional investors”, said Cai.
Back in the early 1990s, when ETFs first came out, it took a while for them to really take off but the initial scepticism subsided and now ETFs are a staple of institutional investor portfolios.
“It took time for ETF’s to gain popularity, but once they did, everyone including hedge funds started using them. For example, hedge funds can replicate and gain exposure to S&P 500 themselves, but the ease and liquidity of the SPY ETF gave hedge funds a trading instrument that was too attractive (liquid and ease of trading) to ignore” said Cai. “We look forward to giving retail and institutional investors the regulated product that they are looking for.”
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