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Building Back Better: The Future of Digital Asset Hedge Funds After the Year That Was

16 Feb 2023

This latest Hedgeweek Insight Report starts with the immediate aftermath of the FTX collapse, and focuses primarily, on the more enduring effects. These include the heightened counterparty risk for managers, the loss of confidence among investors, and the influence on lawmakers, on both sides of the Atlantic, as they take their first steps towards creating a framework for cryptocurrency regulation.

Damage limitation

Writing for clients in November 2022, Albourne Partners’ Travis Williamson, Head of Hedge Fund Investment Due Diligence, and Steven D’Mello, Partner, Senior Operational Due Diligence Analyst, said that a confluence of factors had limited the damage from counterparty exposure to FTX for some managers as:

  • “FTX did not pass every manager’s counterparty due diligence framework, given the opaque nature of the relationship between FTX and its hedge fund, Alameda Research, and the lack of robust financial reporting and policies. Additionally, managers may not have needed to use the type of leverage that the FTX platform facilitated.
  • was challenging for some US-based fund managers to access ( vs FTX. com offered derivatives and was not CFTC registered. For managers that did not have offshore traders or offshore entities, it was difficult to access the platform.
  • did not offer derivatives and allowed withdrawals for a longer period of time than did, allowing some of those managers to reduce that exposure as events unfolded.
  • Many managers reduce their exposure to exchanges as much as possible by sweeping assets off the exchanges into segregated trust accounts.
  • There was relatively limited forced selling, as a large portion of the highly speculative investments in digital assets had been washed out after the collapse of Terra Luna earlier in the year.
  • That being said, investors should be wary of clawback risk emanating from the FTX bankruptcy proceedings that may have the result of increasing exposure to FTX beyond numbers reported by fund managers.”

Please click on this link to access the full report.