How Alloy Helped Integrate Digital Assets With a Traditional Multi-Asset Portfolio
A European asset manager with a multi-asset portfolio wanted to include digital assets as part of their offering. To deliver on this objective and achieve holistic portfolio diversification, the client required an asset allocation strategy that was efficient, robust, and compatible with institutional processes.
The client’s objectives were to:
- Construct a portfolio of lower-risk crypto assets with a long-term investment horizon.
- Generate yield on top of pure price returns by optimizing DeFi compounding effects (yield farming).
- Implement this strategy with direct crypto holdings to mitigate counterparty risk and circumvent the lack of attractive crypto-denominated financial products like ETFs and ETPs
Despite securing the expertise of crypto-native team members with knowledge of emerging offerings in the market, the client quickly faced several challenges. Specifically, they were required to navigate the following considerations:
- Establishing a crypto-inclusive portfolio requires the integration of many fragmented components, including digital asset wallets, custodians, brokers, and data feeds. Each of these components must fulfill institutional requirements and be managed professionally on a daily basis.
- Setting up a portfolio that includes digital assets involves significant operational challenges that are hard to justify when considering the allocation size in relation to the firms broader portfolio.
- Many existing offerings failed to include DeFi offerings entirely, or offered a very limited set of choices, mostly at a high price.
- Once crypto assets have been obtained, they need to be deployed across DeFi protocols, which means portfolio managers must interact across various protocols and interfaces while monitoring risk exposure and potentially claiming rewards. Each additional step in this process makes errors and transactional friction more likely.
- Finally, the portfolio holdings, transactions, and other data need to flow into the clients existing data system. This functionality is crucial to enabling a holistic portfolio, risk, and compliance view, which means multiple data multiple data feeds are necessary.
As a result, the client needed an end-to-end solution that would provide them with direct, seamless access to digital assets and DeFi protocols. From a fiat on-ramp, to the digital asset ecosystem, and back to fiat off-ramp. However, this functionality was necessary while maintaining custody of funds and eliminating fragmented technologies, providers, and counterparties. In addition, the solution had to provide the client with full control of their investment process while maintaining crucial transparency across their organization. With these key requirements established, the client turned to Alloy to provide them with core infrastructure and tooling.
With Alloy, the client was able to consolidate their infrastructure, investment process, and portfolio tooling in one comprehensive solution - here are a few of the benefits:
- The client completed AML and KYC processes conducted by a BaFin-regulated German bank and was set up on the Alloy platform within days.
- To ensure compliance and mitigate counterparty risk, all digital asset wallets were created and maintained independently. Specifically, clients received personal, segregated wallets with private keys secured via multi-party computation (MPC).
- Alloy allowed the client to abstract the complexity of digital asset integration, providing an intuitive way to manage crypto assets while safely navigating DeFi stratgies like staking and lending - all on one platform.
- Alloy’s proprietary Strategy Builder will allow the client to automatically deploy and rebalance assets into custom DeFi strategies. The Strategy Builder provides a powerful and highly intuitive way to build consistent cross-protocol strategies that generate yield on digital assets.
- Because Alloy’s API integrates with existing data systems, clients will have access to granular data feeds, delivering a holistic portfolio, risk, and compliance view.
- Finally, the client has gained access to the digital asset class through one comprehensive solution that's safe, regulated, and powerful.