Blue Chip Issue 84

BLUE CHIP COLUMN

BLUE CHIP COLUMN CryptoMania There may even be a future for Bitcoin as an asset. Kobus Kleyn, CFP®, Tax and Fiduciary Practitioner, Kainos Wealth Kobus Kleyn has published over 200 articles and authored three books. He is a multiple award-winning professional and holds eight memberships with professional associations. His most recent awards were lifetime achievements awards from the FPI (Harry Brews), The Million Dollar Round Table (Top of the Table Life Membership) and Liberty Group (Life Membership) in 2021/22. In my second column, I will focus on one of the most topical issues for financial professionals, namely crypto. People widely refer to cryptocurrency, but crypto assets seems to be the term more frequently used today. I have combined these two terms into what I call CryptoMania, as per the title of my book on the subject matter. I launched CryptoMania on 1 April 2018 (April Fool’s Day) as the only independent book on Amazon about crypto, with a view on both sides of the coin, and I believe it is still the case today. Although I will refer in my column to Bitcoin only, it would have relevance to all altcoins (alternative coins), as Bitcoin is the mother coin. I am not going into the history of Bitcoin and will instead focus on the principles and future of Bitcoin and crypto as I observe it. The whitepaper on Bitcoin always designed it as a cryptocurrency with a restricted supply of Bitcoin of 21-million. Why is Bitcoin being used as a crypto asset with no intrinsic value and not primarily as a cryptocurrency? This is where I believe a severe fault line is developing within the crypto industry. When something designed for one use is being abused for another purpose, questions must be asked. When Bitcoin is not used as a currency by most holders but as a speculative asset, we should not be surprised by its volatility and regular crashes. Over the last ten years since it launched, we have seen 15 significant hits above 30%, with four at 50% plus and three above 80% plus. We are busy with number 16 as I write this column. Over the last 10 years, it has only not crashed in three years. We all know a currency requires stability, which is not the case with Bitcoin, but also not with any of the 19 000 plus alternative coins, including the so-called Stable Coin, which was supposed to peg against the dollar. If Bitcoin as an asset class has no intrinsic value, why is not only the herd climbing into Bitcoin but also significant institutions? It is a case of fear of missing out (FOMO), as we often see when it comes to investment opportunities. It brings me to the greater fool theory that argues that prices go up because people can sell overpriced assets to a “greater fool”, whether or not they are overvalued. That is, of course, until there are no greater fools left, which is not the case yet with Bitcoin, but we see it happening with many alternative coins regularly. According to the greater fool theory, investing means ignoring due diligence on valuations and other relevant data. It means people subscribing to the greater fool theory could be left holding the bag after a correction, as we are currently observing again. I launched my book on April Fool’s Day for a reason, to make a point. I, for one, believe there is a considerable future for crypto if used as a currency. It may just be the Internet of 25 years ago. There may even be a future for Bitcoin as an asset, but then someone or the investment industry must find a value for it to be used as an asset class. I believe blockchain has a much bigger future. Remember that blockchain does not need Bitcoin, but Bitcoin needs blockchain to prevent double transactions. However, the blockchain technology brand is used to manipulate the herd to buy crypto. If Bitcoin as an asset class has no intrinsic value, why is not only the herd climbing into Bitcoin but also significant institutions? As financial professionals, we must be aware that we are not allowed to advise on unregulated products, and I believe the reason the Financial Sector Conduct Authority (FSCA), as well as many global regulatory bodies and governments, are looking at regulations for crypto. As Bitcoin has been designed to be decentralised and operate unregulated, interference by regulators will cause another crypto fault line in the future with disastrous consequences for the crypto herd, which the crypto whales are manipulating. My complimentary book with all the detail you, as an advisor, requires to have conversations with clients and investors can be downloaded from Blue Chip Digital at www.bluechipdigital.co.za. 22 www.bluechipdigital.co.za

HEDGE FUNDS BLUE CHIP The MOST exclusive club is open, but where is the door? By Mike Titley, Business Development Fund Manager For many years, hedge funds in South Africa were unregulated and available to only the wealthiest via complicated structures. This changed with the introduction of the hedge fund regulation under CISCA in 2015, essentially opening the door to retail investors. With South African hedge funds being some of the most regulated and transparent in the world, the black box risky label that has been internationally attached to the asset class is unwarranted. Fortunately, hedge fund managers in South Africa have proven themselves to be more conservative than their international counterparts – there are several experienced South African hedge managers in the country, including Laurium Capital, that have 10- to 20-year consistent track records to prove it. Hedge funds are obviously not without risk, and it is very important how this risk is managed. Risks like liquidity, leverage limitations and net positioning are all regulated and integrated into the portfolio risk management daily. The relatively small size of the hedge fund industry (R73-billion according to the 2020 HedgeNewsAfrica report) versus the long only R3-trillion makes it highly flexible when taking positions. As hedge funds always carry a sizeable cash position, the fund does not need to sell a position to take advantage of a new opportunity. This magnifies the nimbleness to exploit the full breadth of the liquid market and its broad investable mandate. Reporting has significantly improved with the regulation of hedge funds. Governed by CISCA, hedge funds are required to report fact sheets, total expense ratios and positioning. A concerted shift has been made by the South African hedge fund industry to meet investors requests for more information. The combination of the improved regulation, successful performance and improved understanding of hedge funds is driving increased demand in South Africa currently. In our recent webinar poll on hedge funds, 78% of the audience voted that hedge funds should receive a weighting of between 5% and 20%. The question asked by these interested parties now is: how does one access hedge funds? Where is the door? Given the current wording of Board Notice 90, unit trusts cannot make an investment into a hedge fund. The industry remains hopeful that this will be amended in the much-anticipated revamp of Board Notice 90. In the interim, the inclusion of hedge funds for financial advisors can either be done directly into the fund or via a model or wrap fund. Going direct can be quite onerous for retail investors given the minimum investment requirements and the choice of funds. A better solution would be gaining access to a pre-approved select list of funds via the LISP platforms. This would provide comfort to allocators that the hedge funds have passed due diligence processes and carry the LISP’s approval. They can then make a choice of the hedge fund strategy they require and split their allocation across a few funds. Although unlimited for discretionary investors, Regulation 28 limits single manager hedge funds allocations to 2.5% and fund of funds to 5%. With the overall hedge limit being capped at 10%, an allocator could splitfund their allocation to hedge across four different funds equally. This has not been possible up until now as no-one could find the door to a LISP with a selection of approved hedge funds available. This is changing as several LISPs are seeing the demand for hedge funds, allocating the research time, and adding their preferred funds to their platforms. If you are interested in adding a great diversifier to your portfolios, offering equity-like net returns at lower volatility or elevated returns at market-like volatility, then please contact your preferred LISP consultants to motivate for hedge funds to be added to their platforms.