Pension funds shake off crypto worries with backing for broker Hidden Road

Obtain free Cryptocurrencies updates

We’ll ship you a myFT Day by day Digest e mail rounding up the most recent Cryptocurrencies information each morning.

Conventional buyers reminiscent of pension funds are offering the financing to a dealer that’s serving to hedge funds take larger bets on risky cryptocurrency belongings.

Retirement plans together with that of US defence contractor Lockheed Martin are among the many backers of crypto prime dealer Hidden Highway, in keeping with individuals with information of the matter, offering the financing that in conventional markets usually comes from banks.

London-based Hidden Highway, which final yr raised a $50mn fairness funding from Ken Griffin’s Citadel Securities and alternate Coinbase amongst others, has emerged as an important participant in bridging the hole between conventional buyers and digital belongings. The group additionally serves as a possible lifeline for the crypto market, which is dealing with a deep squeeze on leverage and dwindling buying and selling exercise after a collection of scandals, together with the collapse of alternate FTX.

Prime brokerage is a typical means for merchants in mature markets reminiscent of shares to get leverage, as a means of juicing their bets. Conventional prime brokers usually sit inside Wall Road banks and use the lenders’ huge steadiness sheets to increase credit score to hedge funds, household places of work and high-speed merchants.

If a hedge fund borrowing cash from the prime dealer suffers giant losses on its investments, then the prime dealer or its buyers may be left footing the invoice.

“It’s a very dangerous funding to make,” mentioned Andrew Urquhart, professor of finance and monetary know-how at Henley Enterprise College, including: “If my pension fund mentioned we’re going to get into crypto, I’d be very fearful about that.”

Cyrus Pocha, accomplice at Freshfields, mentioned elevating finance from exterior buyers shouldn’t be a typical set-up. A first-rate dealer working on this means might imply “they don’t have a proprietary curiosity within the reimbursement”, he added.

Hidden Highway declined to remark.

Crypto markets have confronted a bruising yr following the collapse of alternate FTX and a collection of US enforcement actions towards Coinbase and Binance. Spot crypto buying and selling volumes have greater than halved — dropping to $515bn in July, in contrast with $1.2tn in the identical interval a yr in the past, in keeping with CCdata.

The transfer by Lockheed Martin’s plan and others marks the most recent enterprise into crypto by pension funds, lots of that are in search of methods to enhance their very own returns. Lockheed Martin declined to remark.

Nonetheless, a quantity have been burnt, highlighting the dangers of digital belongings markets. Canada’s $190bn Ontario Academics’ Pension Plan and $300bn CDPQ misplaced their investments in crypto alternate FTX and lender Celsius, respectively.

An individual conversant in Hidden Highway’s considering mentioned the corporate sees itself extra much like a personal fairness or funding agency that raises exterior capital to fund actions, somewhat than like a financial institution prime dealer.

Based in 2018 by Marc Asch, who labored beforehand at Steven Cohen’s hedge funds SAC Capital and Point72, the corporate is called after the Massachusetts avenue the place he grew up. Hidden Highway started as a overseas alternate prime brokerage earlier than increasing into digital belongings.

Giant market makers together with Stream Merchants and Virtu Monetary already use Hidden Highway, which has secured regulatory licences from nations together with the UK, Netherlands and has utilized for an additional in Singapore. Its crypto companies will not be provided to US buyers.

Hidden Highway additionally doesn’t commerce any belongings itself, easing worries about potential conflicts of curiosity in having one firm act concurrently as an alternate, dealer and dealer. Venues together with Coinbase and Gemini supply prime broking — elevating these considerations.

Prime brokerage is an inherently dangerous enterprise, even for the largest banks. Credit score Suisse took a $5.5bn loss on its steadiness sheet after the collapse of household workplace Archegos — a gap that contributed to the financial institution’s eventual demise.

“It’s a really robust enterprise,” mentioned Harry Jho, founding father of regulation agency Harry Jho LLC, which specialises in prime brokerage, including that “in the event you’re offering full financing, you’ve got to have the ability to assess the credit score threat”.

One investor who met Hidden Highway described it as “prime broking on steroids” and mentioned there have been dangers of counting on another person’s capital.

Some executives additionally fear about Hidden Highway’s dimension. Its steadiness sheet is within the tons of of hundreds of thousands somewhat than billions of {dollars} that banks usually have, in keeping with individuals conversant in the matter. Whereas Hidden Highway can be on the hook for any losses, some worry its steadiness sheet wouldn’t stand up to a big market occasion, and the buyers offering capital might must stump up extra at quick discover.

“I’ve to take a look at it from an arm’s size distance to be comfy. They’re intermediating credit score with a reasonably thinly capitalised steadiness sheet,” mentioned the pinnacle of 1 crypto alternate, including: “To be taken severely they should have a major diploma extra steadiness sheet behind them.”

Hidden Highway costs an “alternate threat unfold” to guard towards the potential failure of a venue. Clients who paid this and traded on FTX by way of Hidden Highway had been made entire when the alternate collapsed, individuals with information of the matter mentioned. Clients say its due diligence is stringent. “They put us by way of the wringer,” mentioned the pinnacle of 1 market maker.

However the crypto trade has realized the laborious means that prime broking could be a precarious service. Within the final yr Digital Foreign money Group’s Tradeblock closed whereas the lending unit of Genesis, one other prime dealer, filed for chapter.

“It’s fully empty, the entire [crypto] prime brokerage, institutional broking area is large open,” mentioned Gautam Chhugani, senior analyst of worldwide digital belongings at Bernstein.

Nonetheless, he mentioned the volatility of bitcoin and different tokens makes it a very robust asset to handle. Others “have tried the prime broking fashions in several methods and a few blew up”.

This text has been amended to make clear that Hidden Highway has not but secured a licence in Singapore