Luxembourg-based alternative investment fund manager 6 Monks (6M) is expanding into fund-of-funds strategies, using an established asset management model to package an investment universe that remains relatively new for many professional investors: crypto assets. The AIFM has obtained an extension of its licence allowing it to manage fund-of-funds strategies, adding to its existing private equity and crypto capabilities.
“In Luxembourg, an AIFM licence works by asset type,” 6M explained. “We could already manage private equity and crypto strategies. We can now also manage fund-of-funds strategies, where the investment strategy consists solely of investing in other investment funds.”
The first concrete application is the Sygnum Crypto Yield Fund, a sub-fund of Sygnum AM Sicav-Raif promoted by Swiss digital asset bank Sygnum Bank. The vehicle currently has around $25m in assets, according to 6M. Sygnum's longer-term ambition is to take it above $100m, although no specific timetable has been set.
A dozen underlying funds
Rather than giving professional and institutional investors directional exposure to bitcoin or another crypto asset, the fund seeks to combine specialised managers pursuing different market-neutral strategies. It currently invests in approximately a dozen underlying funds, according to 6M. Growth in assets would not necessarily lead to a larger number of positions. Instead, allocations to the selected managers could increase.
The underlying approaches can include arbitrage, derivatives-based strategies, lending, liquidity provision, staking and other methods designed to generate returns without relying primarily on rising crypto prices. The principle is familiar from traditional finance: diversify not only across assets, but also across managers and investment techniques.
“What is interesting compared with traditional finance is that, over recent years, the performance of these market-neutral strategies has been attractive because the market is not yet as efficient as traditional markets,” 6M said.
The AIFM says the strategy aims to target higher return than with a traditional finance market neutral strategy and also stable returns, regardless of whether bitcoin rises or falls sharply. This remains an investment objective rather than a guaranteed return.
Selecting the managers
The selection of the underlying managers is delegated to Sygnum Bank, which acts as portfolio manager, while 6M retains its oversight responsibilities as AIFM. The first requirement is that an underlying strategy fits the fund's market-neutral mandate. Candidates then undergo due diligence covering governance, risk management, audit, fund administration, past and current performance, transparency, reporting and operational compatibility.
The latter can have very practical implications. Since the Sygnum Crypto Yield Fund calculates a monthly NAV, an underlying fund must be able to provide information and valuations on a compatible basis. Once due diligence has been completed, the investment opportunity goes before an investment committee. Sygnum generally begins with a relatively small “pilot” allocation and monitors the strategy for several months.
If its performance, transparency, reporting and relationship with the manager meet expectations, the allocation can subsequently be increased. Conversely, a manager can be removed if it no longer meets the fund's requirements on strategy, risk, governance, transparency, reporting or performance.
Market neutral does not mean risk-free
Reducing exposure to crypto market direction does not eliminate risk.
One approach, for example, consists of holding stablecoins and lending them through decentralised finance protocols. In such a case, movements in bitcoin should not directly determine the portfolio's return. Yield comes instead from putting those stablecoins to work.
But this creates a different set of risks.“Whether bitcoin goes up or down shall have no impact on the fund's performance.” Counterparty, collateral and technology risks remain, particularly when lending is executed through blockchain protocols and smart contracts.
For 6M, this requires the target funds to carefully select the protocols on which assets can be deployed, as well as continuous monitoring of lending markets and the quality of collateral posted by borrowers.
“It requires very strict due diligence on which protocol the target funds accept to lend money through, which market, which type of collateral they accept and which limits they apply before deciding to exit the market if they believe it is becoming too risky,” the AIFM said.
In other words, market-neutral crypto strategies replace part of the directional market risk with risks more closely associated with counterparties, technology, liquidity and collateral management.
A Swiss bank chooses Luxembourg
The structure also illustrates another development: international digital asset players are using Luxembourg's traditional fund infrastructure to distribute crypto strategies. Sygnum is a Swiss bank specialising in digital assets and does not operate a Luxembourg banking entity. Yet it chose Luxembourg to establish its investment funds.
The Sygnum Crypto Yield Fund is structured as a Luxembourg Raif. Sygnum remains responsible for portfolio management, while 6M acts as the third-party AIFM and provides the regulatory framework around the vehicle, including functions related to risk management, compliance and valuation.
6M remains ultimately responsible, as management company, for delegated functions. For the AIFM, using a Luxembourg structure makes a significant difference when approaching professional investors.
The Raif is already familiar to international investors and operates within an established ecosystem involving an authorised AIFM, depositary and auditor.
6M argues that this framework can make crypto strategies easier for investors to assess than structures established in less familiar jurisdictions.
“Crypto or not, these remain investment funds,” 6M said. “In Luxembourg, we have the advantage of both our historical expertise in funds and an ecosystem that is much more mature for crypto than elsewhere.”
The AIFM considers that Luxembourg currently has a competitive advantage in Europe because the different service providers required to operate regulated crypto investment funds – from depositary and valuation functions to risk management – are already available locally.
From crypto investors to professional investors
The target market is also evolving. Rather than describing the clientele exclusively as “institutional”, 6M prefers the broader term professional investors. Current and potential investors include family offices, wealth managers and private banks investing on behalf of their clients, as well as other sophisticated professional investors.
According to 6M, actual allocations are already taking place, although the market remains at an early stage. Larger institutions are still developing internal policies governing digital assets, while custody, regulation, governance and risk management remain barriers to broader adoption.
The fund-of-funds model is intended to remove another obstacle: investors do not have to identify, perform due diligence on and continuously monitor multiple specialist crypto managers themselves. They can instead access several strategies through a single Luxembourg investment vehicle.
This is where 6M sees the opportunity extending beyond the Sygnum mandate.
Another fund already in preparation
The Sygnum case will not remain 6M's only fund-of-funds project. The Luxembourg AIFM says it has already signed another client and is working on the documentation for a second fund-of-funds project. It declined to disclose further details at this stage.
And the strategy will not necessarily be limited to digital assets. “Our objective is not to do this only for crypto, but also for private equity and other fund-of-funds strategies,” 6M said.
For 6M, the extension therefore broadens its potential market beyond one crypto product. For Luxembourg, the Sygnum case offers a more specific signal: digital asset managers are beginning to use the same regulated structures, delegation models, due diligence processes and distribution infrastructure that the financial centre has spent decades building for traditional and alternative funds.
