Broadening your distribution while cutting out the middleman. Futureproofing your technology and saving money. It sounds like a dream ticket for fund groups.

This is the bullish take on the benefits of tokenising funds – a consequence of tapping into the utility of blockchain. Although a lot of these claims hold some truth, the process is not simple. And there are pitfalls.

Several successful tokenised share class launches by high-profile alternative asset managers such as KKR over the past year have caught the eye, with serious players now backing the technology. They have shown that the digital market is a small but fast-growing, and increasingly viable, distribution channel it would be remiss to ignore.

Custodians have taken note and are also wanting a piece of the action. BNY Mellon launched a new digital asset custody platform earlier this month and State Street is readying its proposition for early 2023. The back-office giants’ cryptocurrency asset servicing will grab most of the headlines, but for a lot of investment managers, their fund tokenisation capabilities will likely be more of interest.

‘As the head of investment at a large private bank told me, the use of blockchain technology “reduces operational processes across the board”, having a significant impact on costs.’

Virtually any type of investment, from stocks and bonds to agricultural commodities, art, real estate and funds, can be offered to investors in tokenised form.

For a fund, the manager registers its assets on a distributed ledger, typically outsourced, with shares digitally represented through tokens. As the head of investment at a large private bank told me, the use of blockchain technology ‘reduces operational processes across the board’, having a significant impact on costs.

All aspects of fund oversight, such as dividend distributions and net asset value calculations – many of which still require varying degrees of manual input – can be automated.

Tap liquidity

One of the biggest draws is that illiquid assets can be fractionalised, ie, sold in much smaller lot sizes and then traded. This opens up a lot of strategies to a wider audience that were previously the preserve of large institutional investors able to lock up money for long periods.

The cost-savings from blockchain make reaching mass-affluent clients economic for the first time for many alternative asset managers. The phrase ‘democratisation’ is almost overused in tech and is talked about a lot by private asset platforms, even without tokenisation technology.

But, moving access online and removing the intermediaries, whose own minimum client size requirements would limit a fund’s distribution, would indeed allow many more people to benefit from alts investments.

Asia has been leading the way, with Singapore at the forefront. The city-state is a gateway to the rising wealth in Asia, where digital assets are more established, and also benefits from a friendly regulator and established investment infrastructure.

Many asset managers have opted to partner with ADDX, the Singaporean digital exchange part-owned by Temasek, one of the island’s huge sovereign wealth funds. It listed the first tokenised fund, the Eternal Glade fund, in March 2020.

As a regulated exchange, it carries out the anti-money-laundering and know-your-client checks to ensure only accredited investors can access alternative strategies, as per the rules in the country.

ADDX has since gone on to tokenise a private credit fund from alternatives house SeaTown and a private equity fund run by Fullerton Fund Management – both firms also backed by Temasek.

Tokenised versions of a US residential real estate investment trust and alternative asset manager Hamilton Lane’s Private Assets fund have also been listed on the exchange. The latter was made accessible to investors with $10,000 – down from $125,000 through traditional distribution channels.

We understand the funds have pulled in around $5m apiece, which may sound small, but these are early adopters and investors are still getting to grips with tokenised funds.

Meanwhile, over in the US, momentum is slowly gathering. KKR opened a $4bn healthcare strategy up to new investors through a tokenised tranche, and Hamilton Lane partnered with Figure Technologies earlier this month to tokenise three funds on the other side of the Pacific.

For alternative asset managers tempted to try and open their funds up to the wider market, a few things they should bear in mind. The regional boss of a major custodian explained: the money spent on setting up the technology can easily be outweighed by the costs of dealing with the legal and compliance side.

Alts managers accustomed to less frequent client communications will likely need to provide more regular updates, depending on the rules of the jurisdiction. And bear in mind that those rules may well change at short notice; the area remains fledgling with the regulatory landscape evolving, so partnering with local players makes sense.

James Phillipps is the investment editor of Citywire Asia. Email him or contact him on LinkedIn.