Complete Gate Post tasks to upgrade your rank

Credit Ranking

[//]:content-type-MARKDOWN-DONOT-DELETE
![](https://gimg2.gateimg.com/image/article/167599535411.png)
## Regulated Crypto Fund Case Study

In this section, we will present two representative cases of regulated crypto funds: one Cayman hedge fund, and one U.S. regulated public fund.

### AnB Investments

AnB is a regulated crypto SPC registered in the Cayman Islands. Currently, the SPC has two running funds:

1.One multi-strategy fund that includes all of the firm's strategies and generates greater returns by undertaking higher volatility and greater market exposure

2.One delta-neutral fund that contains only delta-neutral strategies. This fund generates steady returns by keeping minimal volatility and market exposure.

The SPC manages a total AUM of USD $50 million, with allocation split among various investments in cryptocurrencies and DeFi. In combination, the SPC aims to gain alpha from the crypto market's volatility and market inefficiencies. Strategies include directional algorithmic trading, arbitrage, yield farming, etc. Sub_script_ion and Redemption are available each month with a minimum investment of $100k. Fund revenue includes an annual management fee of 2.4% and performance fee of 20% upon reaching high watermark. Fund expenses include costs of strategy development, trading, risk management, operation, legal and audit related fees and human overhead.

### ProShares

ProShares is a regulated public fund registered in the U.S. It runs BITO Fund, the first regulated ETF in the U.S. This fund does not directly hold BTC spot (currently not permitted in the US), but indirectly tracks BTC movements by holding BTC futures. Like traditional public funds, BITO shares can be traded in the secondary market. In BITO's fund operation, the firm hires third parties including external fund admin, fund accounting agent, custodian, transfer agent, and distributor. Compared to private funds, regulated public funds are available to all public investors, and thus face stricter regulations, more frequent disclosure requirements (e. g. daily iNAV), and as a result, higher operational overhead costs.

## How to Run a Regulated Crypto Fund

In general, buy-side firms refer to the various models of funds and asset managements. Two key aspects of running any crypto buy-side firm can be categorized into a) portfolio management and b) operational and compliance management. In most cases, portfolio management is handled by a team of investment professionals who focus on determining asset allocation, and the firm's overall strategy. In some cases, external trading teams can be outsourced to take care of part of the investment decisions. Operational and compliance management, on the other hand, is handled by a collaborative effort involving both internal teams and external service providers like fund administrators and auditors, etc.

Below is a breakdown of key workstreams for running a crypto buy-side firm from the perspectives of funds' internal team and external third-party service providers.

### Internal Team
&#9679; Obtaining a license:

Depending on the location and local regulatory requirements, compliance thresholds can vary for issuance of fund operating licenses. Some regions present a very high compliance threshold--for exam<area>ple, in Hong Kong, firms must apply to the SFC for virtual asset management license and fund distribution license for crypto asset management and distribution. However, in offshore areas such as the Cayman Islands and BVI, the compliance threshold for license is much lower, and hence become popular choices for crypto funds. License applications are usually handled by professional fund admin and law firms.

&#9679;  Determining your fund statement

Like any traditional fund, a crypto fund registration, as required under regulations, must provide a detailed statement including investment scope, trading strategies, opening frequency, management fees and performance fees and relevant third parties (custody, administration…) etc.

&#9679; Fundraising

Mainstream crypto funds are generally USD-denominated (fund NAV is calculated in USD). For any USD- denominated crypto fund, investors can subscribe into the fund using USD or stable coins such as USDT/USDC. In other cases, crypto funds may also be denominated in cryptocurrency with good liquidity, such as BTC and ETH. Usually, crypto funds accounting are done in single denomination, either in USD or the denominated cryptocurrency. However, for FoFs/MoMs that invest into multiple crypto funds via managed accounts, the portfolio can be accounted in mixed denominations, say both USD and BTC. For regulated funds, external LP's funds will be secured and kept by a third party custodian. In many cases, crypto exchanges can provide custody services directly. In recent years, separate professional custodians emerged as well especially for DeFi trading purpose).

&#9679; Managing Daily Operations

Daily operations of a fund include but not limited to: investor sub_script_ion and redemption (various frequencies), trading execution of strategy, risk management of positions and collaterals, calculation of income and expenses, compliance reporting, etc.

1.Investor sub_script_ion and redemption management: main workstreams include recording and calculating each investor sub_script_ion, redemption and settlement for single or mixed denomination funds, as well as the corresponding fund NAV adjustment.

2.Trading execution: main workstreams include setting pre-trade risk thresholds, determining trading strategies and keeping records of all trading activities. For trade execution, to minimize the overall cost and reflect the true market price, institutions often adopt algo trading strategies like TWAP or VWAP, trade through OTC, or develop in-house qua<area>ntitative strategies.

3.Risk management: main workstreams include determining key risk metrics and closely monitoring and revising each. Common risk control metrics include NAV, drawdown, exposure, LTV/liquidation alerts, stress test, VAR, etc. Different trading strategies put different focus on specific risk parameters. For instance, active strategy requires close monitoring of drawdowns, whereas risk-neutral strategy requires fund exposure to be kept around 0. For lending fixed yield strategy, ratios like LTV (Loan to Value) are applied to monitor collateral value during price fluctuation. For DeFi fixed yield strategy, it is crucial to obtain real-time contract information to monitor risks accordingly.

4.Calculations of income and expenses: main workstreams include calculating expenses (accrual, non-accrual, and amortized), and income for investors and managers including but not limited to dividends and profit share, management fees, and performance fees (per individual high-water mark). These income and expenses are calculated and reported to investors by third party fund admins, and internal fund operation team is mainly responsible for data verification.

5.Compliance reporting: crypto funds are required to reveal fund performance and submit risk reports regularly. Common metrics include fund valuation, NAV, drawdown, volatility, etc. In addition, funds are required to provide detailed operation data such as account deposit and withdrawal, transaction and trade history etc. for audit trail and reconciliation.

&#9679; Fund Termination: main workstreams include final settlement of trading and custody accounts, and clearing of both capital and investors' shares.

### Third-Party Service Providers (e. g. Fund Administration, Custodian, and Audit Firms)

Confirming service scope: typically, common services provided include investor management, account management, fund accounting, administrative compliance management, fee calculation, and audit assistance, etc.

1.Investor management: main workstreams include investors' KYC management, fund sub_script_ion and redemption, and investor shares management.

2.Trade reconciliation: main workstreams include keeping track of balance snapshots, deposit and withdraw records, transaction and transfer records, and all trading records for all accounts under various funds, as well as performing account & fund level trade reconciliation on a daily/weekly/monthly basis.

3.Calculation of fund-related expenses: main workstreams include calculating management fee, performance fee, operating expenses, etc.

4.Reporting: main workstreams include preparing fund performance report for investors with fund NAV information, normally on a monthly basis. Others include preparing and delivering quarterly, semi-annual, and annual income statements, balance sheets and cash flo<area>w statements.

In addition to understanding the key workstreams for funds' internal team and external third-party service providers, it is also important to understand the key responsibilities of various internal and external roles.

### Key Responsibilities for Internal Team

Typically, the internal team of a crypto buy-side firm consists of roles like portfolio manager, trader, risk controller, operation and compliance officer. Based on unified data source and data pipeline criteria, (e. g. get market feed via APIs, setting risk factors calculation rule), the internal team work together under both internal and external regulations.

1.Portfolio manager: main responsibilities include multi-dimensional data tracking and data analysis of the fund. The scope of data tracking and analysis covers all counterparties related to the fund, all instruments (including centralized and decentralized) individual or combined positions, PnL, KPI, and so on. Portfolio managers are also responsible for generating customized reports externally for investors, or internally for the management board, which would require additional cleaning and transformation of raw data.

2.Trader: main responsibilities include efficient and stable order executions and fund transfers. The scope of such includes monitoring market conditions, trading processes (e.g., TWAP algorithmic mandate execution), and relevant risk metrics.

3.Risk Controller: main responsibilities include setting risk control rules, monitoring and reporting risk in real-time. The scope of such includes market-level, fund-level, account-level, and instrument-level monitoring, alert checking and record keeping.

4.Compliance Officer: main responsibilities include information bookkeeping and disclosure according to internal and external regulations. The scope of such includes trading approval, report preparation, periodic disclosure, regulatory data submission, etc.

5.Operation Officer: main responsibilities include data integration and coordination between internal team and external service providers (normally with fund admins). The scope of such includes fund sub_script_ion and redemption, NAV calculation, expense management, fund valuation, reconciliation, historical data tracking, and data analysis.

### Key Responsibilities for Third-Party Service Providers

Fund admins: main responsibilities include provision of accurate and timely ((weekly or even daily) NAV calculation. Like traditional funds, crypto funds may see variances in the accrual of performance fees, based on factors such as investor category, fund category, investment amount, holding time, fund performance, etc. With increasing number of investors or frequency of sub_script_ions and redemptions, manual calculation of NAV would become extremely labor-intensive and time-consuming. Str<area>ong IT infrastructures that standardize and facilitate data processing and calculation can be key in improving efficiency and differentiating the quality and speed of service delivery for crypto fund admins.

Auditors: main responsibilities include reconciling the changes in account balances to 100% matching the net movement of deposits and withdrawals, transfers, funding and trading activities. Thus, it is necessary for auditors to support reconciliation for all types of crypto assets (spot, derivatives, DeFi, etc.), and be familiar with all 'rabbit holes' regarding data collection. For exa<area>mple, in many cases, incompletion or errors in transaction history can be caused by exchanges not being able to provide historical balance snapshots, not having exact instrument lists to generate trading history, or keeping special fees like maker rebate separately. An efficient solution to such common pain points is to streamline reconciliation with an IT system, taking regular balance snapshots, collecting all asset movement data and conducting automatic reconciliation.

Custodians: main responsibilities include authorizing transfers to be restricted to authorized addresses and accounts. Pre-transfer control (monitor and alert) and approval are necessary to ensure investors' asset security.

## Market Opportunity for Third-Party Service Providers

From 1Token's many prospective clients, feedbacks are showing that there is a growing need for crypto-specific reporting services:

&#9679; Higher reporting frequency: most fund admins can only provide NAV by manual process, which does not satisfy crypto funds and investors in this 7*24 volatile market. To be able to generate daily/weekly, fund admins/auditing firms require an IT system for operational scalability.

&#9679; Accounting reconciliation for complex trading strategy: qu<area>ant trading, especially high-frequency trading, can generate thousands and tens of thousands spots and derivative orders per day, causing a big challenge for fund admins to ensure correct reconciliation output. Fund admins/auditing firms require a robust IT system that perfectly addressed such complexity.

&#9679; Diversified crypto asset class: crypto funds can contain various types of assets, including spots, derivatives, DeFi, loans, etc. To maximize well-roundedness, crypto fund admins and auditing firms need a comprehensive portfolio management software that supports and evolves quickly with all crypto assets.

&#9679; Data security: for institutional clients, it is crucial that vendors (fund admins/auditing firms) comply to data security and confidentiality, which are commonly ensured by 1) technical solution like on-premises local deployment and 2) process audit like SOC 2 certification.

***Disclosure: This article is from 1Token, crypto native technology provider since 2015.
1Token is a software provider for crypto-financial institutions, offering a one-stop tech solution. For more information on 1Token, please visit [https://1token.tech/](https://1token.tech/ "https://1token.tech/")***

**Reference**
【1】DeFi 大潮下，资管机构应如何稳健掘金. https://note.youdao.com/ynoteshare/index.html?id=2b77cf9f844d66926abefc6ab93de111&type=note&_time=1650172263879
【2】ProShares Trust Form N-1A REGISTRATION STATEMENT.
https://www.sec.gov/Archives/edgar/data/0001174610/000168386321006052/f10028d1.htm#xx_da9783d3-0834-486d-895a-bf5a204a274f_1
【3】有關針對虛擬資產投資組合的管理公司、基金分銷商及交易平台營運者的監管框架的聲明.
https://www.sfc.hk/TC/News-and-announcements/Policy-statements-and-announcements/Statement-on-regulatory-framework-for-virtual-asset-portfolios-managers

<div class="blog-details-info">
<div>Author:**Yixuan Huang**, BD Director of 1Token; **Phil Yang**, Head of BD of 1Token
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
</div>

Crypto Funds 101: Regulated Fund Compliance Operations