At their core, investment managers perform the important function of matching savings with investment opportunities. They either employ strategies to invest client cash into market tracking products (passive, index/ETFs) or into products which try to outperform (active, alpha-generating).
For most managers, the past 10 years since the crisis have presented a conundrum. Increasing central bank liquidity (Quantitative Easing), coupled with an increasing shift into passive strategies that do not consider fundamentals in their valuation, has led to a regime change in the global financial market structure. To generate alpha, most have had to take on more risk to generate similar historical returns.
Against this backdrop, the emergence of blockchain-based digital assets presents an interesting opportunity for managers. Based on the statistics alone (caveat: which are backwards looking), some Yale University researchers have calculated potential risk-diversifying benefits to holding digital assets. However, this alone would not be sufficient to catalyze a real shift in asset allocations. For investment managers to seriously begin looking at this asset class, there also needs to be some fundamental “plain English” factors which plausibly explain why this asset class has value and will persist for the long-run.
This article attempts to introduce some of the unique features of digital assets for managers, and outline what the potential opportunities are going forward. This builds on many of the concepts introduced in an earlier paper: Macro narratives for blockchain-based digital economies.