Ben Strack

<div id="highlights-block_621fe69b3855b" class="highlights">
 <ul>
 <li>The proposal comes amid trend of asset managers adding bitcoin exposure to commodity- and inflation-focused funds</li>
 <li>BlackRock, Morgan Stanley and Neuberger Berman are among other asset managers that have mutual funds investing in bitcoin futures, ETFs or the GBTC</li>
 </ul>
 
</div>



Two more fund groups are looking to offer indirect bitcoin exposure through established products running macro strategies — pending regulatory approval.



LoCorr Funds and Arrow Funds are planning to add bitcoin exposure to a mutual fund and an ETF, respectively, by investing in bitcoin futures or bitcoin ETFs, regulatory filings indicate.



The LoCorr Macro Strategies Fund (LFMAX), which has roughly $1.4 billion of assets, invests in managed futures and fixed-income instruments. The mutual fund can take long or short positions in futures, forwards, options, spot contracts or swaps that are tied to currencies, interest rates, stock market indices, energy resources, metals or agricultural products.



“The fund may also invest in exchange-traded bitcoin futures contracts,” according to <a href="https://www.sec.gov/Archives/edgar/data/1506768/000089418922001600/locorr485a.htm" target="_blank" rel="noreferrer noopener">a SEC disclosure</a> Monday. “These derivative instruments are used as substitutes for securities, interest rates, currencies and commodities and for hedging.”



The LoCorr proposal was submitted a few days after Arrow Funds revealed plans to add investments in bitcoin ETFs to its macro fund that uses research from Dorsey, Wright &amp; Associates (DWA).



The Arrow DWA Tactical: Macro ETF primarily allocates to other ETFs investing in domestic and foreign equity securities of any market capitalization, fixed-income securities of any credit quality, or alternative assets, according to <a href="https://www.sec.gov/Archives/edgar/data/1527428/000158064222000966/arrowtacticalmacroetf485a.htm" target="_blank" rel="noreferrer noopener">a Feb. 25 filing.</a>



Among other alternative assets, such as commodities and real estate-related securities, the ETF would be able to invest up to 10% in US and Canadian ETFs, trusts and other exchange traded products linked to bitcoin. The fund launched in 2014 and manages about $3 million.



An analysis of existing prospectuses for the LoCorr and Arrow funds make no mention of bitcoin futures or bitcoin ETFs.



Neither fund would directly invest directly in bitcoin. Representatives from both firms could not be immediately reached for comment.



The proposals come as exposure to bitcoin is becoming more prevalent in mutual funds and ETFs.



The WisdomTree Enhanced Commodity Strategy Fund (GCC) became the first ETF to add bitcoin futures in October — just before ProShares and Valkyrie Investments’&nbsp; launch of ETFs trading bitcoin futures. The WisdomTree Managed Futures Strategy Fund (WTMF) gained the ability on Jan. 1 to allocate up to 5% to bitcoin futures.



BlackRock, Morgan Stanley and Neuberger Berman are <a href="https://cms.blockworks.co/which-mutual-funds-etfs-are-making-crypto-related-investments/" target="_blank" rel="noreferrer noopener">among other asset managers</a> that have mutual funds investing in either bitcoin futures, ETFs or the Grayscale Bitcoin Trust (GBTC).



<a href="https://cms.blockworks.co/amplify-etfs-ceo-you-want-to-own-bitcoin-amid-inflation/" target="_blank" rel="noreferrer noopener">Amplify Investments</a> last month launched its Inflation Fighter ETF (IWIN), which treats bitcoin as a commodity. IWIN’s bitcoin exposure is capped at 20% of net assets and consists of bitcoin futures trading on the Chicago Mercantile Exchange (CME) and up to 15% in GBTC.



“I think this is going to be increasingly common,” Dave Nadig, chief investment officer and director of research of ETF Trends and ETF Database, told Blockworks at the time. “Since the best most traditional finance folks can do with bitcoin is think of it as digital gold, it makes sense to see it as a small allocation in a commodities or inflation strategy.”



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Macro Funds Aim To Add Exposures to Bitcoin Futures, Crypto ETFs

<div id="highlights-block_61ef27c31cae3" class="highlights">
 <ul>
 <li>“The risks of investing in cryptocurrencies are high, and the investment case is weak,” a Vanguard spokesperson said</li>
 <li>BlackRock’s blockchain ETF may have trouble surpassing the assets of Amplify Investments’ Transformational Data Sharing ETF (BLOK)</li>
 </ul>
 
</div>



BlackRock has <a href="https://cms.blockworks.co/blackrock-files-for-crypto-etf/" target="_blank" rel="noreferrer noopener">new plans</a> to launch a blockchain ETF could spur large competitors to follow suit, according to industry participants. 



How such products will fare in the crowded space, however, remains to be seen.&nbsp;



The world’s largest asset manager in <a href="https://www.sec.gov/Archives/edgar/data/1100663/000119312522014777/d286885d485apos.htm" target="_blank" rel="noreferrer noopener">a regulatory filing</a> outlined an ETF that would invest in companies involved in the development and usage of crypto technologies.&nbsp;



“I think this underscores the idea that blockchain technology is now mainstream,” said Sumit Roy, crypto editor and analyst for <a href="https://www.etf.com" target="_blank" rel="noreferrer noopener">ETF.com</a>. “I do believe it will encourage competitors like State Street and others to launch similar products.”



State Street, which oversees about $40 trillion of assets, <a href="https://cms.blockworks.co/state-street-launches-digital-finance-unit-for-crypto/" target="_blank" rel="noreferrer noopener">launched a new digital finance division</a> last year. A spokesperson declined to comment on whether its asset management division is considering ETFs in the space.&nbsp;



A representative for Vanguard, which manages more than $8 trillion in assets —&nbsp; including $2 trillion in US ETFs — said the company has no plans to pursue a digital assets product.&nbsp;



“In Vanguard’s view, the risks of investing in cryptocurrencies are high, and the investment case is weak,” the spokesperson said. “Unlike traditional asset classes, such as stocks and bonds, cryptocurrencies lack intrinsic economic value and typically generate no cash flows, such as interest payments or dividends.”



The representative added that the company believes blockchain has potential, noting that Vanguard used blockchain technology to improve its data indexing and digitizing certain currency markets.



David Botset, head of equity product management and innovation at Schwab Asset Management, said clients are increasingly interested in cryptocurrencies.&nbsp;



Charles Schwab already offers four mutual funds and four ETFs with crypto ties from third-parties.



“We are currently evaluating how and when we could offer our clients additional opportunities for exposure to cryptocurrencies, including opportunities such as spot cryptocurrency or blockchain technologies in the form of an ETF,” Botset told Blockworks in an email.



Invesco, another top-5 ETF issuer, <a href="https://cms.blockworks.co/invesco-proposes-crypto-economy-etf/" target="_blank" rel="noreferrer noopener">launched</a> the Invesco Alerian Galaxy Crypto Economy ETF (SATO) in October. The asset manager said <a href="https://cms.blockworks.co/invesco-and-galaxy-team-to-build-suite-of-crypto-etfs/" target="_blank" rel="noreferrer noopener">in September</a> it was teaming up with Galaxy Digital on physically backed digital asset ETFs.



Amplify Investments’ Transformational Data Sharing ETF (BLOK) is currently the largest blockchain-focused ETF. It launched in January 2018 and has grown to roughly $1 billion of assets.



Other large funds in the space include the Siren Nasdaq NexGen Economy ETF (BLCN) and the First Trust Indxx Innovative Transaction &amp; Process ETF (LEGR), which have about $230 million and $150 million of assets, respectively. Most that have launched in the last year have not yet gained significant assets.&nbsp;



“If I’m in a product development area of an ETF company, and I’m looking at this…[the space is] way oversupplied right now,” Bloomberg Intelligence Analyst Eric Balchunas said. “On the flip side, if you’re a big firm, and you have a relationship with a bunch of advisors and your salespeople go out to talk to them, now that BlackRock has this in their toolkit, maybe you need it, too.”



<h3 class="wp-block-heading">Will BlackRock overtake BLOK?</h3>



Despite BlackRock’s reach, Balchunas said he doesn’t expect its blockchain ETF to instantly dominate markets.&nbsp;



“Even BlackRock is going to have a tough time unseating the first to market — BLOK is very known, the ticker’s easy, it’s liquid,” Balchunas said.



Despite BLOK’s lead, Roy argued that there has not yet been a “breakout product” in the blockchain category.



“I think BlackRock coming in with the respected iShares brand is going to catch a lot of investors&#8217; attention,” Roy said.&nbsp;



And the ETF could be one of several steps into crypto investments for the firm, according to Balchunas.



“This is a baby step into I think a larger ETF suite for BlackRock, which would include spot ETFs, crypto baskets,” he said, adding that he doesn’t expect the company to file for a spot bitcoin ETF until one is approved by the US Securities and Exchange Commission (SEC).



A spokesperson for BlackRock, which manages about $10 trillion, declined to comment on future crypto investment products.&nbsp;



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



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More Asset Managers May Follow BlackRock Toward Blockchain ETFs

<div id="highlights-block_619566ae83a0b" class="highlights">
 <ul>
 <li>IDX said mutual fund wrapper allows more flexibility to manage the contract roll and the ability to close the fund to new investors </li>
 <li>Head of ETF and mutual fund research at CFRA said he expects ETFs to be the primary vehicle to gain bitcoin futures exposure through funds</li>
 </ul>
 
</div>



Crypto-focused quantitative asset manager IDX Advisors has announced the launch of the first US mutual fund designed to provide a risk-managed exposure to bitcoin futures.



The IDX Risk-Managed Bitcoin Strategy Fund (BTIDX) is different from other public offerings, as it specifically seeks to provide exposure to bitcoin while reducing the volatility and drawdowns, said Ben McMillan, the firm’s founder and chief investment officer.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“This is very different than a static, long-only exposure, which we believe does not make sense for many investors,” he told Blockworks. “We designed this product mainly for institutional investors and fiduciaries that are very risk-conscious and are looking for what we believe is prudent exposure to the asset class.”</blockquote>



The new fund expects to maintain bitcoin futures exposure of between 50% and 100% of the fund’s net assets, according to a recent <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/1643838/000138713121010948/idx-485bpos_111021.htm" target="_blank" rel="noreferrer noopener">regulatory filing</a>. Its managers may drop this exposure to 25% during “stressed or abnormal market conditions,” the document notes, but will not go below 25%.



The offering may allocate up to 10% of the fund’s assets in other bitcoin-related investments, such as ETFs, but will not invest in bitcoin directly.&nbsp;



The announcement came the same day that fund managers <a href="https://cms.blockworks.co/vanecks-bitcoin-futures-etf-set-to-launch-tuesday/">VanEck</a> and <a href="https://cms.blockworks.co/global-x-offers-different-type-of-bitcoin-futures-etf/">Global X</a> launched bitcoin-linked ETFs. While VanEck’s Bitcoin Strategy ETF (XBTF) invests primarily in bitcoin futures contracts, the Global X Blockchain &amp; Bitcoin Strategy ETF (BITS) invests in a mix of futures and the equity securities of blockchain companies.



Bitcoin futures ETFs from ProShares and Valkyrie Investments hit the market last month, with the former being the first of its kind to launch in the US. The ProShares Bitcoin Strategy ETF (BITO) has already grown to $1.4 billion assets under management.&nbsp;



McMillan said the BITO launch demonstrated an appetite for exposure to bitcoin in a vehicle offered by a registered investment company as defined in the 1940 Investment Companies Act, commonly known as the ‘40 Act.



The US Securities and Exchange Commission (SEC) <a href="https://cms.blockworks.co/profunds-launches-bitcoin-futures-strategy/">approved ProFunds’ bitcoin futures-based mutual fund (BTCFX)</a> in July. SEC Chairman Gary Gensler said in August that the agency would favor bitcoin ETFs filed under the ‘40 Act that were limited to bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME).&nbsp;&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“ProShares/ProFunds has both an ETF and mutual fund providing bitcoin futures exposure, and the ETF has significantly more demand and can be used by short-term traders,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “We would expect ETFs to be the primary vehicle to gain exposure through funds.”</blockquote>



ProShares’ bitcoin futures ETF is doing what it was designed to do, the IDX executive added, though the biggest issue with any futures-based product is the roll tax associated with maintaining exposure to the futures contracts over time.&nbsp;



“As a firm, we’re very experienced with navigating futures term structures,” McMillan explained. “One of the reasons we chose to launch this offering as a mutual fund — and not an ETF — is so that we could have more flexibility to manage the contract roll as well as the ability to close the fund to new investors if and when it makes sense.”&nbsp;



David Snowball, publisher of the Mutual Fund Observer, said that though managed futures funds are driven by research about their ability to outperform the market with little downside, many have seen poor performance.&nbsp;



Over the past three years, such offerings have returned 5.9%, with a Sharpe ratio — a measure of risk-adjusted return — of 0.39, Snowball added. Managed futures funds have returned 1% in the trailing 10 years, with a Sharpe ratio of 0.04.



“The vast majority of managed futures funds have been liquidated,” he said, “taking their dark records to the grave with them.”



The management fee on the fund’s investor and institutional share class is 199 basis points. The fund will initially be available through select platforms, including Fidelity, Interactive Brokers, Pershing, AXOS, Matrix and SEI.



The firm’s next fund launch will likely be its Risk Weighted DeFi Strategy, which will be a private placement trust seeking to track an index calculated by S&amp;P Dow Jones.&nbsp;



“The innovation happening in the broader digital assets ecosystem, including [decentralized applications] and other [layer-1 protocols], very much reminds us of the internet in the ’90s,” McMillan said. “It’s a space we’re very excited about as asset managers and as developers.



To read Blockworks’ Q&amp;A with McMillan last month, click <a href="https://cms.blockworks.co/idx-offers-risk-managed-exposure-to-bitcoin/">here</a>.