Prime Factor Capital Ltd., an investment management firm headquartered in London, has become the first crypto-focused hedge fund to be authorized by the U.K.’s Financial Conduct Authority (FCA) as a full-scope alternative investment fund manager (AIFM) under European Union rules.
The regulatory approval means that Prime Factor Capital can now manage in excess of 100 million euros in assets, allowing the company to accept institutional-size tickets. Prime Factor Capital said it has appointed a depositary, as required for AIFM, to provide a second layer of independent fund oversight, cash-flow monitoring and safe-keeping of assets.
Why Is Regulated Crypto Investment Important?
Nic Niedermowwe, co-founder and CEO of Prime Factor Capital, said the regulatory approval was “a significant milestone not just for Prime Factor, but for the industry as a whole,” in a press statement.
“Being FCA-regulated brings us under the purview of one of the most recognized financial markets regulators globally … Investors need to be able to trust their managers not only to generate returns, but also to act responsibly and in their best interest,” Niedermowwe said in the statement. He added that the move was particularly meaningful considering that the cryptocurrency space is infamously known for poor operating standards and fraudulent activities.
For instance, QuadrigaCX, the Canadian crypto exchange that collapsed after the death of its CEO and founder Gerald Cotten in December 2018, is currently being investigated by the F.B.I. for “potential criminality” among senior staff.
In its fifth report as the company’s bankruptcy trustee, Ernst & Young (EY) claims that Cotten used consumers’ funds to trade for his own account on other cryptocurrency exchanges. The firm estimates that missing funds total CA$214.6 million.
According to cybersecurity firm CipherTrace, crypto-related thefts and frauds have surged in recent years. The company estimates that in 2018, $1.7 billion in cryptocurrency was stolen and/or scammed, representing 3.6 times more than stolen cryptocurrency value in 2017.
Paving the Way for Regulated Crypto Investment
As a regulated investment manager, Prime Factor Capital must comply with a set of rules and requirements such as providing comprehensive disclosures to investors, reporting to the regulator on items ranging from the proportion of illiquid assets in portfolios it manages, to counterparty and market risks, complying with the minimum capital requirements and submitting monthly management accounts to the regulator.
Founded in 2017 by former BlackRock Inc. bond specialists Michael Wong and Adam Grimsley, as well as Niedermowwe, a former energy derivatives trader at RWE AG, Prime Factor Capital is an investment manager that specializes in cryptocurrencies, It is one of the many crypto hedge funds that have emerged in the last three years to tap into investors’ growing appetite for cryptocurrencies and crypto assets.
According to a recent report by PricewaterhouseCoopers (PwC), there are now around 150 active crypto hedge funds, which collectively maintain around $1 billion in assets under management (AuM). Over 60 percent of these funds have less than $10 million in AuM with fewer than 10 percent managing over $50 million.
Crypto hedge funds have been so far relatively successful at fundraising, despite the difficult market conditions over the past two years, the report says. The median AuM of funds, as of Q1 2019 ($4.3 million), more than tripled compared to the median AuM at fund launch in January 2018 ($1.2 million). Bitcoin Magazine reached out to Prime Factor Capital for comment but did not receive a response in time for publication.