Crypto for Advisors: Are Crypto SMAs Right for Institutions?

Separately Managed Accounts, or SMAs, offer significant advantages over ETFs for institutional investors who want to invest in crypto via actively managed accounts.

Institutions that want to invest in crypto via actively managed accounts have several advantages over ETFs.

Earlier this year, cryptocurrencies made a great leap toward mainstream adoption as the U.S. Securities and Exchange Commission (SEC) finally approved trading U.S. exchange-traded funds (ETFs) that track spot bitcoin and ether.

This meant that, for the first time, investors could trade regulated Bitcoin and Ether spot-based instruments on regulated U.S. exchanges. More importantly, it meant that crypto had finally gained the imprimatur of securities regulators and was no longer considered some sort of rogue investment, bought and sold only by technology fanatics.

As a result, millions of novice investors are getting their first taste of crypto by buying bitcoin and ether ETFs. But for more experienced institutional investors, are ETFs the best way to invest?

Here's a look at the advantages of Separately Managed Accounts, or SMAs, over ETFs for institutional investors to invest in crypto via actively managed accounts.

What Are SMAs?

Crypto SMAs are portfolios of digital assets managed on your behalf by a professional investment manager. This last part – “professional investment manager” – is particularly important with crypto.

Crypto is still new, in some ways, crypto doesn't trade in the same ways as stock does. Plus, crypto “fundamentals” don’t refer to earnings and accounting metrics but rather to a whole set of new metrics related to usage, their issuing blockchain, individual activity (which can be seen) of huge holders, and so forth. If you’re investing in crypto, it pays to use an active investment manager who is experienced in crypto.

Direct Ownership: More Control & Tailored Risk Management

Unlike ETFs, SMAs give you direct ownership of your assets, which enables greater portfolio customization to meet your specific risk/return needs goals.

That is, SMAs can be custom-tailored by your investment manager to meet your unique requirements – risk tolerance, investment horizon, financial goals and more. Direct ownership also facilitates more transparent and straightforward tax management strategies, such as tax-loss harvesting.

Finally, SMAs are custody-agnostic, allowing investors to choose from a wide variety of custodians and venues ranging from Anchorage, BitGo, Coinbase and Kraken.

Diversification

Along with custom-tailoring, actively managed SMAs also enable diversification. If you own a BTC ETF, you track (more or less) the returns of BTC, period.

With an actively managed SMA you have access to the entire universe of cryptos (248 cryptos currently listed on Coinbase and 200+ on Kraken) and can diversify your portfolio any way you like.

Additionally, active management allows you to change the allocations. While passive management may be great for some investments, it can lead to very steep losses for crypto. Cryptos often move fast, not a good dynamic for passive strategies.

Outperformance

Active management in SMAs can of course, potentially outperform an underlying coin or coin index. Experienced managers can leverage market analysis, trading strategies and timing to capitalize on market opportunities, which you don’t get with an ETF.

And for those investors who are only interested in select coins, SMAs can provide the potential to overlay additional alpha (outperformance) on top of the coin exposure (beta).

24/7 Trading

ETFs trade during normal weekday market hours when the major exchanges are open. The crypto markets operate 24/7. This is a significant difference if you're not a crypto investor. The biggest, of course, is that it eliminates opening gap risk, which, if you’ve traded for any length of time, has probably bitten you at least once.

Actively managed SMAs provide your manager the ability to ALWAYS swiftly react to market movements and adjust portfolios accordingly.

What is Right for You?

Crypto ETFs are proving to be very attractive to new crypto investors. Trends indicate, however, that institutions, high-net-worth individuals and registered investment advisors will likely gravitate towards actively managed SMAs over time. The personalized nature, flexibility, and potential for enhanced returns offered by SMAs make them an attractive option for sophisticated investors.