Irwin M. Latner, a partner in the Corporate and Securities Practice Group of Pepper Hamilton, was quoted in the September 19, 2017 Peltz International, Inc. article, "Hedge Fund Managers Entering the Cryptocurrency Space."
Many managers with currency and/or derivatives trading experience seem to be interested in cryptocurrencies, as well as technology guys who really understand the blockchain, observes Irwin Latner, partner at Pepper Hamilton. Sometimes it is a partnership between the two.
Currently, a tremendous amount of U.S. regulatory uncertainty exists with respect to the treatment of digital currencies or tokens, so many crypto funds are being formed offshore and marketed to non-U.S. investors, says Latner.
Because coin exchanges are largely unregulated, the potential for fraud and lack of liquidity may be motivating some managers, who may be conservative, to structure their funds as closed-end private equity vehicles in order to avoid many of the valuation and liquidity issues of open-ended funds, adds Latner.
As the underlying market for ICO transactions matures, Latner expects we'll likely see a parallel increase in the development and maturation of cryptocurrency funds. That could mean fund structures will become more defined i.e. hedge fund type opened-ended funds or private equity type closed-end funds.
"However, the majority of new crypto fund managers seem to want open-ended hedge funds. I believe that the underlying assets can be valued in a U.S. GAAP compliant manner that would support an open-ended fund structure. However, there might be risks with the reliability of the underlying exchanges. Liquidity might not be available when needed," adds Latner.
Valuation and liquidity risks are real. Over time, Latner thinks these risks will be mitigated as coin exchanges and markets develop, and as the underlying issuers become more compliant with U.S. law and other jurisdictions.