Cryptocurrency hedge funds sprout in India unfazed by regulatory cloud

Bengaluru: In January, Authorito Capital, an actively-managed cryptocurrency hedge fund began raising money for its second fund –– an open-ended one of around $50 million –– just one year after the debut of its first fund.

Authorito’s CEO Mohit Mamoria said it was the 15-fold return delivered to investors in his first fund, which prompted him to look at raising a larger cryptocurrency fund. “We identified the potential of ethereum and invested when one ETH (the currency signal for ethereum) was $2. Within months, the value of investment shot up to $280 a piece,” said Mamoria, a blockchain enthusiast who shut his internet venture in 2016 before launching the cryptocurrency hedge fund.

While globally there are over 200 crypto hedge funds, in India the business of crypto asset management is relatively new with a few funds that have sprung up in the past 12-14 months. Globally, funds like Polychain Capital, Meta-Stable Capital are backed by marquee venture firms Sequoia Capital and Andreessen Horowitz, as well as others such as TAS and Multicoin Capital, operate with corpuses ranging from $5 million to $100 million.


Crypto currencies are not legal tender in the country. “It works in a grey area in India,” said Jitender Tanikella, founding partner at law firm TRA that specialises in representing early-stage investors. “Investing in (crypto) hedge funds is risky. They can lose all their money.” Indian crypto hedge funds say their entire transaction is in cryptocurrencies and that they do not accept cash or legal tender, so as to not fall foul with regulators. They also claim to follow strict know your customer and antimoney laundering procedures to stay away from unaccounted money.

“For individuals it is a minimum investment of $10,000, for family offices and institutional money it is $250,000. We also make sure no individuals invest more than 2 per cent of their investible corpus,” Authorito’s Mamoria said.

Cash-rich Investors Ride Crypto Wave
Typically, cryptohedge fundshave a minimum one year lock-in period for investors and charge a management fee every quarter. The funds also take a percentage of the profit incurredby the investor. In Authorito’s case, it’s a 20-80 split between the management and investor on the profitsearned. The second fund will invest 90 per cent of the corpus in initial coin offerings (ICOs).

These funds offer an opportunity for cash-rich investors to ride the cryptowave by leaving thetechnicalitiestocryptoenthusiasts.

Blockchain venture Incrypt is exploring the space but with caution due to lack of regulatory clarity. “I believe the legal costs of raising a fund internationally (especially if it’s tokenised) could be as high as $1-2 million,” said Nitin Sharma, angel investor and founder of Incrypt. “On the other hand, regulations around soliciting capital in India are still notclear.”

Mostcryptocurrency hedge funds are based in offshore tax havens such as British Virgin Islands and Cayman Islands, while the unregistered funds operate in relative obscurity. Quadarch is another hedge fund that is focused on investing in blockchain assets. The fund has a team of technologists, analysts, researchers and crypto experts keeping track of movements in the cryptosphere.

Firms such as Quadarch diversify their investments: 50 per cent in top 10 cryptocurrencies, 25 per cent in ICOs, 22.5 per cent on daily trade based on market movements, and another 2.5 per cent in high frequency bottrading.

However, chief investment officer of QuadarchFundsAbhinav Singh, who declined to disclose the size of the fund said, “We are still waiting for RBIor SEBI regulations toknow what sort of regulatory framework this type of investment will fall under.”

The RBI, in the past has issued several notices warning citizens about the risk of investing in virtual currencies. Under these circumstances, can investments in hedge funds land local investors in trouble? “Only in the case of violation,” says Tanikella. India’s Liberalised Remittance Scheme (LRS) of 2015 allows resident individuals to remit up to$250,000 per financial year, and can becombinedto$1million by a family of four in foreign investments. "If a hedge fund investment is within theLRS limit it is not a violation of FEMA. Banks are the gatekeepers for these remittances as they have to report to RBI. I doubt they would permit transaction in violation of FEMA/LRS,” he added.