Blockchain Innovation in Private Investment Funds - a Comparative Analysis of the United States and Europe

Private investment fund managers have started to embrace the use of blockchain technology to facilitate investment and process optimization. Several private investment funds have spearheaded the implementation of blockchain technology and smart contracting in their business models and continue to expand it. While some funds simply focus on trading bitcoin and other cryptocurrencies to avoid market fluctuations, others invest in and/or acquire companies that use blockchain technology to provide synergies to their other portfolio companies. Yet others go much further by fully automating a hedge fund secured by blockchain technology. This is accomplished by improving the administrative procedures of private equity deal making, or using cryptocurrencies as incentives for data scientists’ competitive models that facilitate investment analysis efficiencies. Examples include private investment funds such as Polychain Capital, the Northern Trust in cooperation with IBM, Numerai, LendingRobot, and Intellisys Capital LLC, Vega Fund, and Melonport, among many others. 

Using a dataset of private investment fund advisers that utilize blockchain technology in their investment strategy or internal operations (N=120), my article shows that the private fund advisers who use the technology in front office and investment functions, in the securing of crypto assets, but also with regards to the growth expectation of clients, can generate many benefits. The article explores the reasons for the increasing use of blockchain technology, among other technological trends in the industry.

The article evaluates the comparative differences between European and American private investment funds that invest in blockchain technology. To provide an overview of the findings, the market for private investment funds investing in and implementing blockchain technology appears to be near equally divided between Europe and US, with China and Russia emerging as significant players. An analysis of the data related to the two markets reveals specific traits and differences, both in terms of categories and dimensions of private funds investing in blockchain. While in the US the majority of private funds is homogenously distributed among the major asset classes (hedge funds, private equity funds, venture capital), in Europe a clear predominance of venture capital emerges. In addition, the size of private funds significantly diverges in the two geographic areas: the European market is characterized by more established and larger private funds, whereas the American market benefits from the presence of smaller and potentially more innovative funds. This could be affected by Europe’s larger private investment fund advisers’ willingness to make the required investments into a blockchain infrastructure.  In contrast, in the US the legacy systems utilized by larger private investment fund advisers create barriers to entry for larger private investment fund advisers seeking to invest in and utilize blockchain technology. Nonetheless, the majority of the private fund advisers in both Europe and US invest in blockchain technology to gain exposure to crypto assets, as a potential source of exponential returns. 

While the overall proportion of strategies of private investment funds that apply modern technologies, including blockchain technology, is still small, as the use of blockchain technology grows in the private investment fund industry, the innovation benefits for private investment funds and their clients promise to result in lasting change for the industry.

Wulf Kaal is an Associate Professor at the University of St. Thomas School of Law (Minneapolis).