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Seeking Alpha with Institutional Prime Services

With the prevailing fear, uncertainty and doubt driving market sentiment, it is timely to reflect on opportunities to enhance capital efficiency and position for the eventual upcycle. 

Unlocking Alpha

Alpha opportunities that were once easy to access in centralised exchanges are no longer available; pushing many institutions to explore new opportunities, notably in DeFi. The fact remains that DeFi offers attractive risk-free arbitrage opportunities for leverage to amplify yield. But as institutional investors are mixing their CeFi and DeFi strategies in the current volatile market, how do we optimise for trade execution and best practices in risk management? 

The answer lies in prime services. Prime services are the key to finding capital efficiency in what is an inefficient and fragmented financial industry where CeFi and DeFi are currently operating in silos — typically executed bilaterally with pocketed clearing. Recent service innovations at Matrixport include connectivity to multiple central exchanges - up to seven - as well as automated custody security on funds not deployed with a DeFi protocol.

Prime services enable investors to access digital assets with the added ability to manage their portfolio margins holistically with better collateralisation. Furthermore, prime services take on both clearing and intermediary risks, something banks aren’t able to provide, ultimately offering a measured route to better performing digital assets amidst ongoing volatilities. 

“It’s a demand trend that’s likely to continue accelerating as more and more start-up hedge funds — who have around 10 to 15 million AUM — are moving in that direction and getting quickly more sophisticated about their DeFi strategies.” — Cynthia Wu, Founding Partner & COO, Matrixport

While prime services are a great incentive for onboarding institutions, the industry must continue to professionalise such services for their sustained participation. It is why risk management remains a critical area where we need to continue developing, ultimately building trust and credibility for even the most critical crypto sceptics. 

Both stakeholders and institutional investors need to make risk management the bedrock of their business and adapting TradFi best practices — like analysing tail moves and counter dependency traits — would be a good place to start. On a more sophisticated level, a deep analysis of projects and protocols should be undertaken, conducting project background checks and utilising smart contract auditors and whitelisting mechanisms to cultivate a robust risk management infrastructure.

As the space continues to evolve with new innovations and their associated risks, proper risk management is the anchor to secure capital from TradFi into crypto.

Path Ahead

While this is the first downcycle with unfavourable macroeconomics, the digital assets ecosystem is still bustling with innovations. In DeFi, there is a community of passionate individuals who are pushing the envelope in how blockchain technologies will redefine what’s possible in the financial network of tomorrow to better serve society’s next generation of wealth creators.


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