Here’s how to invest in a hedge fund for just $5k… instead of $1m
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Investing in private markets has traditionally been the domain of the rich, but now with blockchain technology, smaller investors can get in on the action.
The use of blockchain has enabled what’s often called ‘fractional investing’, a term that refers to the buying of shares or fund units in fractions of the whole price.
On the ASX, platforms that allow you to buy into fractions of listed shares or ETF fund units already exist – such as Raiz, Stake, Interactive Brokers and eToro.
But now, fractional investing has finally arrived in private markets with a Singapore-based platform called ADDX.
ADDX is a global private market exchange that leverages blockchain technology to provide access to alternative assets such as private equities, hedge funds, unicorns, venture capital, private credit, real estate, debt and structured products.
On the ADDX platform, investors can invest at a minimum buy-in of just SGD$5,000.
ADDX, CEO, Oi-Yee Choo, told Stockhead that the emergence of cryptocurrencies has demonstrated the use case for blockchain technology in fractional investing.
“There’s a lot of criticism of cryptocurrency as an asset class, but what it has shown us is the power of fractionalisation, the power of decentralised security, and how investing could be fractionalised and traded across retail,” said Choo.
The ability to buy cryptos in fractions means that blockchain can also be applied to the private market – a sector with a reputation for being a playground for the rich where minimum investments could be as high as $1m.
We all know that blockchain’s distributed ledger model has many efficiency advantages over a traditional systems.
The blockchain itself is a very sophisticated ledger that keeps information about ownerships, which then facilitates transactions.
It’s essentially a decentralised database that could store transactions data at a fractionalised level, but at scale.
“So rather than 10 big investors of $10 million, with blockchain you could process 1,000 investors of $100,000 and still run accurately, efficiently, and quite precisely,” said Choo.
Choo explained that ADDX’s use of blockchain required the platform to make the leap from the unregulated world of cryptocurrencies, to a regulated sphere.
“A blockchain token has ownership information that can come in different ways. In the crypto world, it’s a wallet address and that’s anonymous.
“In the case of ADDX, that token holds information about someone that we have done Know-Your-Client and Anti-Money-Laundering on,” said Choo.
As an example of how this works, a $10m KKR fund marketed on ADDX would be transcribed into tokens that reside on the platform.
These tokens could then be sold to retail investors at a fraction each, say $20k, where each token would then hold information on how much each investor owns.
“What happens is that this ledger cuts across many different functions, in what we call immutable information.
“Everytime some action happens, for example a fund distribution gets paid, the smart contract will calculate how much of that distribution gets paid to you, which will be reflected in the token,” Choo said.
Choo believes alternative investments have the potential to offer investors a safe harbour at a time when the outlook for global growth is shaky amid an unprecedented pace in rate hikes.
She pointed to the fact that traditional “balanced portfolio of stocks and bonds” may not offer enough diversification for investors in today’s environment.
“In the last two years, there has been a very high correlation between bond performance and stock performance,” said Choo.
“This means that you’re completely exposed to both the equity and the bond market, and the 60-40 balance strategy doesn’t work anymore. So, there was a break in that thinking.
“And over time, what’s also been happening is that the Alpha had disappeared from the listed stock markets. So that’s no longer sufficient from a portfolio return point of view,” Choo added.
The ADDX platform meanwhile offers a diverse range of assets classes in the private space which includes luxury investments such as wines or watches.
Without fractionalisation enabled by blockchain, it would have been very expensive and almost impossible for the average investor to build a similar wine or watch portfolio.
But Choo acknowledged there are risks with investing in the non-listed market.
Liquidity for example is one of them, and this means you may not be able to withdraw your money when you need it.
Choo referred to what’s called ‘gating’, the practice of temporarily blocking withdrawals from a fund.
“So there is generally a very structured process for redemptions, for example they cannot be more than 5% of your investment,” she said.
Meanwhile, ADDX is regulated by the Monetary Authority of Singapore.
According to its website, the company has a shareholder base which includes the likes of Singapore Stock Exchange (SGX), UOB Bank, and the Development Bank of Japan.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.