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

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Conventional traders corresponding to pension funds are offering the financing to a dealer that’s serving to hedge funds take larger bets on unstable cryptocurrency property.

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 folks with data 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 trade Coinbase amongst others, has emerged as an important participant in bridging the hole between conventional traders and digital property. 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 sequence of scandals, together with the collapse of trade FTX.

Prime brokerage is a typical manner for merchants in mature markets corresponding to shares to get leverage, as a manner of juicing their bets. Conventional prime brokers usually sit inside Wall Avenue 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 massive losses on its investments, then the prime dealer or its traders might be left footing the invoice.

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

Cyrus Pocha, companion at Freshfields, mentioned elevating finance from exterior traders is just not a typical set-up. A primary dealer working on this manner might imply “they don’t have a proprietary curiosity within the compensation”, he added.

Hidden Highway declined to remark.

Crypto markets have confronted a bruising yr following the collapse of trade FTX and a sequence of US enforcement actions in opposition to 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 looking for methods to enhance their very own returns. Lockheed Martin declined to remark.

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

An individual acquainted with Hidden Highway’s pondering mentioned the corporate sees itself extra just like a personal fairness or funding agency that raises exterior capital to fund actions, moderately 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 trade prime brokerage earlier than increasing into digital property.

Massive market makers together with Circulate Merchants and Virtu Monetary already use Hidden Highway, which has secured regulatory licences from nations together with the UK, Netherlands and has utilized for one more in Singapore. Its crypto companies aren’t provided to US traders.

Hidden Highway additionally doesn’t commerce any property itself, easing worries about potential conflicts of curiosity in having one firm act concurrently as an trade, 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 most important 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 legislation agency Harry Jho LLC, which specialises in prime brokerage, including that “for those who’re offering full financing, you may have to have the ability to assess the credit score danger”.

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 measurement. Its steadiness sheet is within the a whole bunch of hundreds of thousands moderately than billions of {dollars} that banks usually have, in keeping with folks acquainted with the matter. Whereas Hidden Highway could be on the hook for any losses, some worry its steadiness sheet wouldn’t stand up to a big market occasion, and the traders offering capital might have to stump up extra at quick discover.

“I’ve to have 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 trade, including: “To be taken critically they should have a major diploma extra steadiness sheet behind them.”

Hidden Highway expenses an “trade danger unfold” to guard in opposition to the potential failure of a venue. Clients who paid this and traded on FTX by way of Hidden Highway have been made entire when the trade collapsed, folks with data 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 exhausting manner that prime broking could be a precarious service. Within the final yr Digital Forex Group’s Tradeblock closed whereas the lending unit of Genesis, one other prime dealer, filed for chapter.

“It’s utterly empty, the entire [crypto] prime brokerage, institutional broking house is vast open,” mentioned Gautam Chhugani, senior analyst of worldwide digital property at Bernstein.

Nevertheless, 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 numerous 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