Market Views: Will HK's bitcoin ETFs spark institutional interest?

Hong Kong has joined a handful of jurisdictions around the world to offer spot virtual assets ETFs. Will it attract demand from institutional investors, especially family offices?
Market Views: Will HK's bitcoin ETFs spark institutional interest?

Hong Kong's regulator, the Securities and Futures Commission (SFC), impressed financial markets on April 15 by handing initial approvals to mutual fund managers for spot bitcoin (BTC) and ether (ETH) exchange-traded funds (ETFs).

Several traditional mutual fund managers – all Chinese ones – announced they either gained conditional regulatory approvals for BTC and ETH ETFs, or for virtual asset management services, with products under development.

They include Harvest Global Investments, Bosera Asset Management (International), and China Asset Management (Hong Kong). The virtual asset exchanges they work with are HashKey Capital and OSL Digital Securities.

This follows the introduction of virtual asset futures ETFs last year. Hong Kong now joins just a handful of jurisdictions to allow spot crypto ETF's trading, closely following the US with BlackRock and Fidelity International’s products debuting in January.

This new development came as the SFC in June last year introduced a new licensing regime for virtual asset exchange to allow retail investors – in addition to institutional investors - in Hong Kong to trade cryptocurrencies with large market capitalisation and high liquidity, such as bitcoin and ether.

We asked analysts and digital asset experts about their outlook for Hong Kong’s spot virtual assets ETFs, and how much interest they expect from institutional investors, especially family offices.

The following responses have been edited for clarity and brevity.

Zann Kwan, chief investment officer and managing partner
Revo Digital Family Office

Zann Kwan

The approval of spot bitcoin and ether ETFs is long expected by the industry and should bring a healthy liquidity injection from the region.

It will be important to determine where the supply of bitcoin and ether will be sourced for the launch, as licensed exchanges in the region might not have sufficient liquidity. Demand could be uneven and not progress linearly as banks begin to facilitate access to digital assets.

Family offices have been investing in this space for several years. Those who were hesitant or concerned about managing private wallet keys now see investing in these ETFs as a less cumbersome way to take a long position in digital assets. Family offices recognise the risk and asset diversification benefits of investing in digital assets, which have shown much higher Sharpe ratios in recent years.

For families who have invested in this space, we are seeing allocations nearing double digits. With the rapid advancement of technology, artificial intelligence, and innovation, the younger generation is increasingly involved in wealth allocation decisions.

Spot ETFs provide a more convenient way for institutions to start allocating and becoming more active in the digital asset space. However, they do not replace the need for active management of digital asset wealth, which is critical to managing the expected volatility in the industry. Investors in spot bitcoin ETFs over the past few months could have seen drawdowns of up to 15% in recent days without active asset and risk management.

Matt Long, APAC general manager

Matt Long

We expect Hong Kong-listed ETFs to attract strong demand, particularly for cash-created ETFs but it is interesting to see that in-kind creations are also available.

We anticipate that a broad range of investors, including single and multi-family offices, will be seeking exposure to digital assets via BTC and ETH ETFs listed in Hong Kong.

There is a pronounced appetite from Asian family offices for the digital asset class as a whole. Throughout this year, they tell us that they intend to increase exposure to digital assets or to start investing in the asset class.

Judging by what we have seen in the US, the availability of ETFs has ‘unlocked’ new flows from family offices and institutional investors into digital assets, driven by regulatory clarity and ease of access.

There are early indicators of similar trends among Asian family offices and institutions.

We expect Asian institutions and family offices to be significant participants in the Hong Kong-listed digital asset ETF market. This is driven by a number of factors including their familiarity with the Hong Kong market, the ease of trading ETFs via existing share-broking accounts, the ability to trade in the Asian time zone, and the buoyant market conditions we have seen in digital asset markets throughout 2024.

Additionally, continued uncertainty in macro markets and heightened geopolitical uncertainty may act as a tailwind for flows into BTC ETFs.

Tom Digby, head of ETF business development and capital markets, APAC

Tom Digby

The spot bitcoin ETF approvals are a positive development for the Hong Kong ETF industry.

This will give retail investors easily accessible transparent access to a fast-evolving asset class that has previously been difficult to navigate.

Spot bitcoin ETFs have allowed institutional and ordinary investors an easily accessible, regulated, entry point to the Bitcoin market.

Many investors had a wide range of entry barriers to crypto such as security and hacking, complexity of access and storage. ETFs solve these as they trade on major exchanges and many hold Bitcoin in institutional-grade custody facilities, reducing hacking and fraud risks while also freeing investors from the hassle of having to safeguard private keys and wallets.

Specifically in Hong Kong/Asia, the local vehicles are unlikely to have a significant impact in terms of institutional adoption or wider investor usage outside of direct retail.

Most of these investor types can trade US-listed equities and ETFs, whether on an exchange or in a live market over-the-counter (OTC) during Asia hours.

Many of the existing spot bitcoin ETFs in the US are now trading tighter than the underlying bitcoin market for Institutional size with very low tracking error and very low fees, in some cases zero.

There are however segments of retail investors that may not have been able to access international markets, and this is where Hong Kong-listed ETFs can provide a solution.

Even for an ETF issuer, the cryptocurrency market can be challenging to navigate, therefore experience and expertise in this field are crucial.

Time will tell whether the approved Hong Kong ETFs will be able to provide investors cost-efficient access to the underlying cryptocurrency market.

Katie He, head of product and strategy
China Asset Management (Hong Kong)

Katie He

The evident diversification benefits of bitcoin and ether to portfolios make them appealing assets, and an ETF wrapper offers a convenient and efficient means to access them.

The introduction of spot bitcoin and ether ETFs broadens investment opportunities in these assets for a wide range of investors, from retail to institutional.

The in-kind feature is also a significant draw for coin holders, providing the convenience of converting spot Bitcoin to a fully regulated spot Bitcoin ETF managed by professional fund managers and regulated custodians.

With the growing adoption of ETFs in institutional asset allocation and retail trading in Hong Kong, we expect strong demand.

If we look at the US which has a huge institutional investor base, the spot products launched in January have accumulated significant flow, which was greatly attributed to institutional investors, and we do not expect otherwise in Hong Kong.

From the conversations we have been having here in Hong Kong, institutional investors have been more actively exploring this space.

With the seal of approval from SFC and the fact that the spot ETFs will be traded on Hong Kong Stock Exchange (HKEX) and are managed and supported by trusted, licensed entities, we can certainly expect institutional interest to come into these spot ETFs.

The launch of virtual asset ETFs across various jurisdictions – now finally approaching in Hong Kong - underscores institutionalisation of virtual assets which paves the way for family offices to obtain exposure within their overall portfolio for risk diversification and return improvement reasons.

The level of regulatory clarity and oversight that accelerated the introduction of spot virtual assets ETFs could further boost confidence in allocating to these assets.

Robert Zhan, director, risk consulting, Hong Kong
KPMG China

Robert Zhan

I think Hong Kong has its advantages compared to other jurisdictions and will attract certain types of investors.

First and foremost, investors interested in regulated spot ETH ETF will only have Hong Kong at the moment, and first mover advantage cannot be understated.

Hong Kong’s regime offers more protection relative to other jurisdictions in terms of the insurance requirements and custody solution setup.

This will be attractive to asset safety-focused investors.

The in-kind redemption and subscription could also be attractive for investors that appreciate such optionality, for example, existing institutional BTC and ETH owners that custody their own virtual assets may consider the benefit of holding through the ETFs without the cost of first converting to fiat money.

The requirements under the Hong Kong regime to issue spot bitcoin ETF and ether ETF are robust and include scrutiny of the control environment and the capabilities of those interested in issuing spot virtual asset ETFs to ensure a high level of customer protection, and compliance with applicable laws and regulations.

These features of Hong Kong-issued spot ETF would be very attractive to institutional investors.

Ultimately, people are interested in what they have a stake in, and spot virtual asset ETF listed in traditional venues, such as the HKEX, will increase accessibility to a wider range of potential investors.

I believe it is natural to assume that once someone has a stake in the topic, including virtual assets, this naturally increases their curiosity to learn more and gradually become more and more active in the topic.

Xu Yang, partner
Tiger Brokers

Xu Yang

The market outlook for spot bicoin and ether ETFs in Hong Kong appears to be positive and promising.

The approval by the SFC of Hong Kong for the listing of these ETFs indicates a significant step towards the acceptance and integration of virtual assets into the traditional financial market structure.

This move is expected to attract a substantial amount of capital, particularly from Asian investors, enhancing Hong Kong's position as a global blockchain financial centre.

Furthermore, the unique advantage of Hong Kong's spot ETFs, which allows for both cash and physical redemption methods, is expected to enhance liquidity and arbitrage opportunities, thereby promoting market efficiency.

The approval of bitcoin ETFs provides a regulated investment channel for institutional investors, reducing the compliance risks and operational complexities associated with direct bitcoin investments. This is what institutional investors typically prefer.

The liquidity and trading convenience of bitcoin ETFs offers a simple way to gain exposure to Bitcoin, helping institutional investors manage risk and improve risk-adjusted returns. So, the regulatory compliance of bitcoin ETFs could increase their interest.

The introduction of a bitcoin spot ETF in Hong Kong offers a valuable opportunity for institutional investors and family offices in Asia, aligning with regulatory compliance and improving investment accessibility.

Moreover, it integrates professional asset management and risk diversification, crucial for institutions wary of the operational risks associated with cryptocurrencies.

Bitcoin's low correlation with traditional assets offers strategic portfolio diversification, potentially enhancing returns while reducing volatility.

Thus, a bitcoin spot ETF represents a balanced, secure entry point for institutional capital into the virtual asset space.

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