Historically, individuals gained exposure to equity markets by investing directly into equities and it was not until 1774 that a Dutch man named Abraham van Ketwich created the first ‘mutual’ fund. This was called Eendragt Maakt Magt, meaning "unity creates strength,” and was comprised of a selection of government bonds and plantation loans in the West Indies. Foreign and Colonial Government Trust was launched in London in 1868 as an investment trust i.e. a closed-end fund, which is still traded on the London Stock Exchange. It was not until 1929 that the Wellington fund (now part of Vanguard) was launched, becoming the first mutual fund to own stocks and bonds. Indeed, it was Jack Bogle at Vanguard who invented the first ‘Index Fund’ in 1975, which was the start of the tussle to attract funds under management between passive and active fund managers.
Distribution of open-end funds globally between 2011-2020 by trading strategy
The demand for index funds from investors has grown steadily as more capital has been allocated to exchange traded funds (ETFs) and passively managed funds (PMFs) globally (which now accounts for 31% funds according to data from Statista). Index funds, with their lower management fees and not being reliant on individual fund managers, are now becoming more popular for those also looking to gain exposure to cryptocurrencies. Recently, German-based MV Index solutions (MVI) and CryptoCompare announced they have over $1billion in assets with fund managers who are using their various crypto indices. MVI claims, “The demand for index services has been global with products launching in markets across America, Europe and Asia”. Also in Europe, Swiss crypto investment manager FiCAS AG launched its cryptocurrency exchange-traded product (ETP) in June 2020 and has now received permission to market its ETP (similar to an ETF) on a pan-European basis.
Interestingly, the Asian Times claims that the total assets in crypto assets to be $6billion by the end of 2020 and, given the stella returns in the crypto asset class in recent months and the almost zero interest rates on bank deposits, it is understandable why cryptos have been attracting investors’ attention.
Digital Assets which trade 24/7 are ideally suited to funds that use mathematical algorithmic models, with trading being executed by computers automatically. It is almost impossible for humans to keep up to date and efficiently trade across what is believed to be over 1,100 digital asset exchanges globally. We have even seen Vanguard using Blockchain technology to improve benchmark tracking and reduce the cost of managing some of its index funds which Vanguard.
But as well as Crypto funds there is a growing range of DeFi tokens which have very similar features to funds such as the DeFi Pulse Index token, with over $62 million of assets offering exposure to range of DeFi tokens. These DeFi tokens are a new way for investors to access asset managers and styles of trading, which historically had been the preserve of only the very wealthy. DeFi tokens trade 24/7 and are accessible on-line directly, without the need for any intermediaries, custodians, administrators and other third parties which have historically increased the ‘total expense ratio’ i.e., the total costs of managing a fund for an investor.
Expect to see a lot more DeFi token/funds and crypto funds being launched in 2021 as they offer smaller investors and institutions alike an alternative and more diversified way to get exposure to this growing asset class, as opposed to holding cryptos direct. Crypto funds also potentially offer institutions a more compliant way to have exposure without the need of worrying about who owned the actual crypto before them.
But more on this another time…..