Friday, March 8, 2013
Ever since the bitcoin cryptocurrency first launched and achieved initial success, institutional investors and hedge fund managers have secretly sought a regulated investment vehicle for bitcoin placements. Malta-based Exante Ltd. has the solution with their new Bitcoin Fund.
"I hope our fund will be the first hedge fund to take advantage of using bitcoins," explains Managing Partner Anatoliy Knyazev. Exante actually announced the fund in October last year, but they did not make a serious effort to market it. Now, with more institutional interest emerging, they agreed to provide this update to Forbes.
Although any person or entity can acquire and store bitcoins on their own, institutional investors are typically restricted in the types of assets available within their investment charter. Similar to a mutual fund or hedge fund for alternative assets, Exante’s Bitcoin Fund permits institutions and high-net worth individuals to access the vibrant bitcoin market with a licensed product and this alone is an innovative development.
The fund shares are distributed exclusively through the Exante Hedge Fund Marketplace platform. Authorized and regulated by the Malta Financial Services Authority, Exante offers the Bitcoin Fund with an initial minimum subscription of $100,000 and a 0.5% upfront subscription fee.
However, U.S. persons and U.S. institutions will not be able to access the fund directly, because according to the Fund Disclaimer, “U.S. Persons may not subscribe either directly or indirectly for shares.”
Knyazev told Forbes that “the U.S. jurisdiction is tricky.” This is mostly due to the securities registration that the company is currently not prepared to complete and more recently the FATCA reporting implications for foreign financial institutions. “Typically, a feeder fund is established in the U.S. (commonly Delaware) to facilitate the investments. We are in the process of estimating our costs on creating one,” added Knyazev.
Founded in March 2011, the 60-person Exante team operates from offices in Malta, Singapore, and Russia. The Bitcoin sub-fund was incorporated as a Bermuda exempted company and is registered as a segregated account company receiving funds at Citibank London. From the Bitcoin Fund’s web site:
"We are the first fund that invests in core-level infrastructure of the new generation economy. We invest into Bitcoins. In 2011 internet transactions volume exceeded $500 billion. We believe that to win you have to be at the cutting edge. Bitcoin, based both on common and new technologies, is a perfect extension to traditional currency."Current assets under management in the Bitcoin Fund are $3.2 million (2.5€ million) and there is no performance-based fee. However, the fund charges an annual management fee o.5% of Net Share Value payable monthly in order to provide the sophisticated security and wallet management that one would expect with such large amounts at stake.
The threat modelling approach addresses data loss risk, hardware failure risk, jurisdictional risk, external hacker risk, dishonest employee risk, and employee death or disability risk.
The private key itself is AES-256 encrypted. After exporting Bitcoin private keys from wallet.dat file, data is stored in a TrueCrypt container on three separate flash drives. Using Shamir’s Secret Sharing algorithm, the container password is then split into three parts utilizing a 2-of-3 secret sharing model. Incorporating physical security with electronic security, each flash drive from various manufacturers is duplicated several times and, together with a CD-ROM, those items are vaulted in a bank safety deposit box in three different legal jurisdictions. To leverage geographic distribution as well, each bank stores only part of a key, so if a single deposit box is compromised, no funds are lost.
As the fund does not employ leverage or derivatives for risk management, Exante intends to provide a two-way secondary market for the trading of fund shares. Similar to a contract for difference (CFD), this would allow existing Exante customers to trade in and out for Bitcoin Fund shares without going through the subscription or redemption process. It would also provide shorting opportunities without having to own the underlying asset. Customers will be vetted according to the regular Exante capitalization requirements and margin funds would be provided through institutional broker financing at a fixed % over LIBOR.