Family Office Summit Summary (part 1)

Institutions, Family Offices, & GPs and how the ecosystem is evolving in 2019

I started noticing that I retain info much better when I watch videos or listen to things and capture a summary. This also keeps a great record for notes to look back at a later time. Hopefully this also provides value to the readers. This conference was really great a few weeks back. I was able to reference the videos and capture the key thoughts from each panel discussion that are still valuable today as we head into blockchain week next week. Today, with more institutions getting involved, many of the best practices from an institutional perspective are developing a strong foundation and in the space. Here’s the linkto the talk.

Opening Keynote: Digital Asset Strategies

  • Gabor Kicked this off and shared some advice for investors. He advised that there’s 3 areas to focus on: Cryptocurrencies, platforms, & applications. A .5-1% is a good allocation to crypto for allocations according to Gabor.

  • The Newer generation is integrating into the token way of thinking

  • There are several centralized points of failure, etc… in the traditional way of thinking

  • Real institutions are participating and crypto will grow in Wall Street more than anyone else. 

  • VanEck is working on a Bitcoin ETF, and building a number of regulated structures that might be of interest for the audience.

  • Bitcoin today acts at 2/3 as a tech stock, and 1/3 as gold and alot of the buyers are tech oriented people which follow tech stocks but sometimes follows gold. The future could be a gold alternative.

  • In a recession, he thinks people will re-explore gold & bitcoin. Gold is 7.8 trillion dollars in outstanding value. The price will go up and there will be new investors that are looking for safe investments

Institutions Making the Leap: Goldman Sachs, Bakkt, Fidelity, and Galaxy Digital

link here: 

  • Many strategies didn’t even exist, and new ones especially long only ones have been created

  • Need to best isolate exposures and mitigate risks

  • You are taking on volatile risk, counterparty risks and taking measures to mitigate other risks while isolating the crypto risk

  • For family offices: make sure you size accordingly. In the next 6-12 months the products available will be very interesting

  • Pensions, endowments, and hedge funds want to make investments in this space. We initially were not comfortable making suggestions initially. Insurance, custody, and tech are needed. 

  • When it comes to institutional custody, the biggest problem has been about the SEC and the SFCC in hong kong, and there needs to be safeguarded assets

  • BAKKT will provide a federally regulated ecosystem to buy, sell, & store assets. And a physically delivered futures contract which is managed and backed by the intercontinental exchange. Their team is familiar with cybersecurity and adding layers of protection like multi-sig, and insurance on cold and hot wallets

  • BAkkt will have an app which allows you to buy crypto and purchase from brands such as starbucks, microsoft, etc…

  • The race has started with them coming into the market, which has caused institutional FOMO

  • Education needs to be the biggest problem to solve and why does it matter to an investor and what are the correct mental models to use?

  • The educational process is not about misunderstanding where the ecosystem is heading and investor’s needs. It is also important to get the right narrative out

  • Education: For LPs, they should talk to fund of funds to learn more about the deals and how they are changing

  • Education: Data on chain (whos using it, what’s the price across various exchanges like coinmetrics). There’s really only a few years of reportable data

  • Bitwise and Messari have come up with a pricing system that actually filters our volume on exchanges that aren’t meeting institutional standards

  • Galaxy also posts whitepapers and hosts educational sessions.

  • Patience is also needed to address the most nimble institutions when it comes to understanding risks, the allocation, and how it fits into all work processes.

  • But what we need to solve for is getting all the institutions to be comfortable 

  • Crypto can help to solve the centralized risk

  • We trust our financial institutions, but when you look at Venezuela or Argentina, crypto is censorship resistant and it can’t be taken away from “me”. Also the simplicity of the solution is important to understand.

  • Digitization of everything (LP interests, etc..), Organizing information in a better way that is truly decentralized, and use cases (digital store of value & dentralized/centralized payments)

  • Cosmos & Polkadotshelps to create interoperability between different chains and there’s an SDK kit. It is important for the underlying technology to be easily grasped. Supply chain companies & traceability (acient grains & fish) to ensure farmers are getting paid the right rates, etc…

  • Survey Results: Over 50% of institutions (400 of the worlds largest pension funds and endowments) will make an allocation to crypto in the next 5 years.

  • After speaking with over 700 institutions, there is alot of latent demand that you woudn’t expect. The 1st time they brought a crypto, their boss and committees laughed at them, the 2nd time they laughed again since the drop, and now the 3rd time, there are more people starting to get involved.

  • It took 2 years to get an equity ETF through the system, and it doesn’t move fast enough, things will go through places like Malta

  • Beyond bitcoin, are there other cryptocurrencies that should be seriously considered? Yes, but these are like venture projects prices in real time and it needs active people with it

  • We are only 10 years old and the centralized financial system has been thousands of years old.

  • When Galaxy was working with Bloomberg on the index, from a construction perspective in terms of the index, there are too many 2nd and 3rd order effects.

Family Offices and how they evaluate opportunities in the Digital Currency Space: Aberdeen (Single Family Office). Greg Landegger (Family Office), Benjamin Bronjman (Single Family Office).

link: here

  • In the last 6-8 months things are incredibly real, and this allows to help change financial systems

  • Illiquid investments: We are past the get rich quick story.

  • 2017 was crypto, 2018 was about cannabis, and 2019 is about opportunity zones. There’s alot of companies raising money

  • Most of the deals have not reached the amount of money that they were looking to raise

  • Atmospheric Carbon Capture: The values in that space took 12 years of research

  • Aberdeen is not focused on the illiquid side. It is similar to pick companies in the 90s. Enterprise examples could be a great segment to invest in for a while.

  • Many of the things today have been communicated academically back in the 90s.

  • Back in the day, to get to Amazon.com you had to put a bunch of numbers before the url. ( the change happened when ips moved to DNS)

  • Dharmaallows you to create collateralized loans. 

  • The cart was put before the horse in 2017 and the infrastructure was not there. The retail investor was missing out of the equity bullmarket.

  • When it comes to a fund manager doing this day in and day out, families are able to get access to deals through funds. 

  • Education is a major issue and Parson’s & Whittmore invested in Digital Currency Group and it was a great outcome

  • There are over 500 funds that focus on digital assets and crypto, and in 2017, there were only 50.

  • It is hard to do due diligence on fund managers when it comes to custody

  • Doing direct investments is not easy since it is hard to determine valuation. Alot of networks and protocols don’t have users or values. 

  • Bakkt raised $180M. Many companies are raising in equity and not tokens. It is a great time to invest since the hype is gone.

  • With cryptokitties being a nonfungible token, there is more of an emerging excitement about digitally native currencies. Kids were surveyed about fortnite currencies vs. fiat and the digitally native currencies were chosen.

  • The COO of bridgewater left to go to true digital

  • There is alot of headline risk which also makes family offices hesitate before investing

  • Secondary brokers can take advantage of investors when providing liquidity in the secondary markets

  • Asset classes to focus on: (1)When it comes to the true cost of climate change, (2) Gaming is a very interesting space to look for since there are 2.6Billion people playing video games, 

  • Templum, Harbor, are also other opportunities to provide liquidity pools.

  • Private blockchains can be attacked with less validators and a security threats

  • Stat-arb with be used more often. Fundamental intrinsic work can be done in the dev community.

    How are Crypto Funds are raising money

    link here:>

  • Hutt Capital focuses on venture only closed end fund

  • Fundamentals is what most people are familiar with. When thinking of token value accrual, there are either long only strategies or a developing short market. It’s difficult to short assets in this asset class which is developing

  • When it comes to opportunistic, it’s not like how the traditional funds do it. Generalized mining is supporting the network. Credit works like buying a portfolio of loves

  • On the quant side, traditional momentum driven strategies can now also be applied

  • Or smart beta can be like how bitwise handles it

  • When it comes to staking, there is sophistication on the software needed

  • The ability to stake your coins is a great opportunity on the venture side to be committed to the investment & technology, and the outcome can be interesting when compared to inflation

  • On the hedge fund side, staking is currently not a viable strategy

  • Prime brokerage is just as important as custody. Alot of revenue from trading is from moving across exchanges quickly. There are interesting developments from fidelity

  • We are starting to see integrated custody, settlement, & trading

  • Bitwise investments revealed that there is really only 10 exchanges that should be really trusted for true volume. This is important for 2 reasons. (prevents wash trading from dissolving integrity & data integrity)

  • 3 lies: lies, damn lies, data

  • Active Mgmt vs. Passive Mgmt: When it comes to active management you need to trade with counterparties who you trust.

  • Will the active managers outpace the market? Benchmarks were put in the space. In the 5 categories, we collect quartile performance on them based on those benchmarks.

  • When it comes to venture only, it is important to think of long term businesses that are being built on scalable technologies

  • What is keeping us up at night? (1) custody is a big challenge in managing access on an exchange and trying to encourage more quant funds to adopt them. The problem seems to still be there although there is custody. (2) Paradigm is a hedge fund which only has a small % of venture which is a long lockup. The closed end venture model is an important thing to consider and have a flexible mindset. (3) Alot of the market is asking for specialization of product such as shorter duration products. With 2018, there is a 85-90% drawdown, and this is why there are more pensions and institutions are allocating more.

  • You can either go through a broker dealer or a custody service. Alot of institutions are used to working with either BNYMellon or state street. 

  • “If you don’t own your key, you don’t own your crypto” is a matra that people are still getting used to.

    Hope this was helpful!!