Hedge fund mogul Alan Howard's investment blueprint from traditional finance to cryptocurrency

This article was published on Chain News, author: Zhang Anjing

Hedge fund manager Alan Howard made headlines with his significant purchase of $600 million in Bitcoin and Ethereum, with plans to increase his holdings to $1 billion.

Billionaire? Legendary hedge fund manager? Each label attached to Alan Howard seems to be filled with hype.

Who exactly is he? What legendary experiences does he have? And why is he heavily investing in cryptocurrencies? Understanding Alan Howard, a representative of the traditional finance sector, may help us clarify this era's views and attitudes toward cryptocurrencies.

Who is Alan Howard?

In the Forbes list of highest-earning hedge fund managers published in 2019, Alan Howard ranked 13th, with an estimated net worth of $1.6 billion. More impressively, he is a self-made billionaire.

Born in September 1963 to a Jewish family in the UK, Alan Howard has not forgotten his heritage after becoming a billionaire. He has served as the director of the Friends of Israel Conservative Party, helping to address issues faced by Jewish people, and established a foundation of the same name to fund various charitable organizations in Israel and other Jewish-related causes.

Alan Howard is also listed as one of the top 200 art collectors in the world today, with his keen business acumen reflected in his collecting career. One of his collected Monet water lily paintings is currently valued at $43 million.

The beginning of this series of remarkable achievements can be traced back to his legendary experiences in the financial sector.

The Wall Street Legend of an Investment Master

Risk Master of Investment Banking

After graduating with honors in Chemical Engineering from Imperial College London in 1986, Alan Howard joined the trading giant Salomon Brothers, a well-known investment bank on Wall Street at the time. He worked in the international bond department, where, unlike other ordinary employees, he sifted through a large number of notes tracking bond spreads and designed trading strategies that yielded good results.

In 1995, Alan Howard moved to the London securities department of Tokai Bank, responsible for interest rate trading in Europe. Two years later, he joined the investment banking division of Credit Suisse Group, known as Credit Suisse First Boston (CSFB), starting as a trader and later rising to head of European fixed income proprietary trading. In 1998, during a risk event when Long-Term Capital Management collapsed, Alan Howard led his team to sell off risk positions similar to those held by other hedge funds and bought relatively safe U.S. Treasury bonds, perfectly avoiding market risk.

Establishing Brevan Howard Asset Management

In subsequent work, Howard and his team generated $500 million in profits for CSFB but did not receive the bonuses they felt they deserved, prompting them to leave CSFB and establish their own company in 2002. Howard's partners included traders Jean-Philippe Blochet, Christopher Rokos, James Vernon, and Trifon Natsis, who combined the initials of their last names to create the name Brevan—thus, Brevan Howard Asset Management was founded in Jersey.

Brevan Howard hedge fund management company witnessed the brilliance of Alan Howard's career, experiencing several crises but always managing to turn risks into opportunities, achieving remarkable results over the past decade.

On the eve of the 2007 financial crisis, Alan Howard once again demonstrated his exceptional skills in risk management. He keenly sensed the risk of the subprime mortgage crisis and significantly reduced the leverage of the bonds held by Brevan Howard in advance. That year, under Howard's leadership, the company not only avoided losses but also achieved a 25% return.

In 2008, Howard adopted defensive measures, halving the holdings of credit default swaps to reduce counterparty risk and cutting the total bond portfolio from $50 billion to $10 billion. According to HFR data, the master fund managed by Howard achieved a return of 20.4% by the end of 2008, which was outstanding compared to the average 19% loss of hedge funds that year. The substantial investment returns solidified Brevan's macro strength, and Howard's reputation soared once again.

From its inception in April 2003 until the end of 2008, the master fund managed by Howard achieved an annualized return of 14.4%, which is a commendable performance. By 2013, Brevan Howard's total assets under management reached $40 billion and was once described by the media as the largest and best-performing hedge fund management company in Europe.

This was a shining moment for young Howard and his partners, each with their unique investment brands. They used asymmetric trading methods to generate enormous returns with a small amount of risk capital, becoming investment gods admired by aspiring traders everywhere.

Brevan Howard's Comeback

However, the development of their careers was not without challenges. The quantitative easing era that began in 2012 posed severe challenges for Brevan Howard. The Federal Reserve's quantitative easing policies rendered Brevan Howard's strategies, which relied on medium to long-term positioning based on interest rate policy adjustments, ineffective, while the stable returns from short-term strategies diminished significantly. More and more people realized that hedge funds were no longer making money, leading investors to withdraw their funds en masse. Brevan Howard's assets under management plummeted from $40 billion to a historic low of $6.3 billion. However, Howard and his partners did not give up; they reduced costs through salary cuts, layoffs, and even downsizing office space, and proactively adjusted their fee structures, doing everything possible to save themselves.

In March 2017, Howard began managing Brevan Howard's AH Master Fund, adding five more funds in 2018.

They adopted a new fee structure for the new funds. For example, the AH Master Fund does not charge the usual 2% management fee and 20% profit share, but instead charges a 0.75% management fee and a 30% profit share. This method of lowering management fees while increasing profit shares addressed investors' concerns about paying hefty ongoing fees in a low-interest-rate environment. For Howard, the stakes were high. If he could successfully manage this fund, it would add a significant highlight to his impressive resume; if he failed, he might become just another "once-legendary trader," potentially ending his career.

But Howard won the bet. According to Hedge Fund Research, the average global macro hedge fund lost 3.6% in 2018. However, Howard's AH Master Fund surged by 37% in May after correctly predicting the outcome of the Italian elections, achieving a remarkable 30% return for the entire year.

In 2019, Alan Howard resigned as CEO of Brevan Howard, with the then Chief Risk Officer Aron Landy succeeding him, but his legendary status continued into 2020.

The global outbreak of COVID-19 in 2020 severely impacted hedge funds, with some well-known investors like Ray Dalio and Michael Hintze suffering significant losses. In contrast, Alan Howard's hedge fund achieved a return of 100% in 2020, marking a comeback for this legendary figure in the hedge fund industry.

Investment Landscape in the Cryptocurrency Sector

From Alan Howard's multiple successful investment experiences, it is evident that this business genius has a forward-looking vision. This billionaire has not limited his investment horizons to traditional financial markets; his focus has also shifted to the rapidly developing cryptocurrency market in recent years.

In March 2018, Alan Howard revealed that he personally held a portion of cryptocurrency assets and subsequently invested in the EOS development team Block.one and the digital asset platform Bakkt owned by the Intercontinental Exchange (ICE).

Investment in the Cryptocurrency Exchange Bakkt

The investment in Bakkt is significant for both the traditional financial sector and the cryptocurrency sector. Experts and commentators in the crypto and blockchain industry pointed out that Bakkt's launch could help the cryptocurrency market recover from the ongoing bear market of 2018.

Bakkt is an open and regulated exchange for the digital asset market, announced by ICE in August 2018. The parent company ICE is quite influential, encompassing 14 securities and futures exchanges, including the New York Stock Exchange, the Canadian Futures Exchange, the Paris Stock Exchange, and the London International Financial Futures Exchange, as well as five clearinghouses, making it the second-largest regulated exchange and clearinghouse operating network globally. As ICE's trading platform, Bakkt enjoys the trust of major institutions and announced at its inception that it secured $183 million in funding from 12 investors, including Alan Howard, Li Ka-shing's Horizons Ventures, Tencent's largest shareholder Naspers, Microsoft's venture capital M12, crypto investment firm Galaxy Digital, Boston Consulting Group, and ICE. This impressive list of investors has immense potential to open the capital floodgates on Wall Street, which is crucial for the next bull market in cryptocurrencies. This is not mere speculation; the Chicago Mercantile Exchange (CME) serves as a precedent. In 2017, during a bear market, the CME Group officially launched Bitcoin futures, causing a sensation in the crypto world, after which Bitcoin experienced a year-long bull market. Two years later, Bakkt's emergence undoubtedly heightened expectations for a bull market.

Bakkt first launched Bitcoin futures, which, unlike the Bitcoin futures products already offered by CME and CBOE, required physical delivery of actual Bitcoins rather than cash settlement, necessitating the reserve of a large amount of Bitcoin, which is undoubtedly a boon for the spot market.

Establishing Elwood Investment Company

In addition to investing in the cryptocurrency sector in his personal capacity, Alan Howard also owns an investment company called Elwood.

Elwood was founded in 2018 by Alan Howard and Bin Ren, the former Chief Investment Officer of Brevan Howard Asset Management. The Elwood team combines traditional financial institutions with in-depth knowledge of blockchain technology, focusing on digital asset research. Their first product is the Elwood Blockchain Global Equity Index, which helps investors understand the growth of the blockchain ecosystem and the potential upside of cryptocurrency-related returns. Elwood's research reports provide valuable insights for both the crypto industry and the traditional investment sector. In the second quarter of 2019, Elwood, in collaboration with PwC, released the world's first research report on the cryptocurrency hedge fund sector, and in 2020, the two companies collaborated again to investigate around 150 active cryptocurrency hedge funds, analyzing new changes, trends, and patterns in the development of the cryptocurrency hedge fund industry from 14 dimensions (including both quantitative and qualitative aspects).

The Elwood Blockchain Global Equity Index is calculated by Solactive AG, a German financial index provider, which is a globally recognized index provider with expertise in customized indices. The index is reviewed and rebalanced quarterly, currently covering 48 companies.

Elwood also partnered with investment giant Invesco to develop the world's largest blockchain ETF—Elwood Global Blockchain ETF, which was listed on the London Stock Exchange on March 11, 2019, marking the UK's first blockchain-themed ETF. This ETF aims to target companies that may generate real returns through blockchain technology and cryptocurrency-related activities. In other words, this ETF will primarily invest in the 48 listed companies within the Elwood Blockchain Global Equity Index. These include cryptocurrency chip manufacturers like Taiwan Semiconductor Manufacturing Company, Bitcoin futures trading operators CME Group and CBOE, South Korean messaging app giant Kakao, Japanese cryptocurrency trading operator Monex Group, payment processing company Square, Ripple partner SBI Holdings, new cryptocurrency exchange VC Trade, as well as emerging tech companies like Overstock and Signature Bank, along with large tech companies like Amazon, Apple, Intel, Microsoft, AMD, and Rakuten. According to announcements, the sector allocation of the index currently includes information technology (46%), finance (23%), communication services (9%), and materials and consumer discretionary sectors (8%).

The Invesco Elwood Global Blockchain ETF has over $1 billion in assets under management and performed strongly throughout 2020 and 2021, with substantial inflows, achieving a return rate of 104.3%.

Elwood also plans to launch a platform to provide digital currency hedge fund strategic investment services for institutional clients, helping investors avoid losses caused by transferring Bitcoin to the wrong address and guiding them to select rigorously vetted and robustly investigated digital currency funds to mitigate risks.

If Alan Howard's previous exploration of investments in the crypto sector was cautious and low-key, his investment in December 2020 made him a Bitcoin whale and drew significant attention in the crypto space.

Acquisition of 25% Stake in One River

Hedge fund company One River purchased $600 million in Bitcoin and Ethereum, becoming one of the largest investors in Bitcoin, which caused a sensation. Additionally, CEO Eric Peter stated that One River's cryptocurrency holdings would continue to increase beyond $1 billion. Recently listed Coinbase is a partner and custodian for One River. This hedge fund, originally focused on betting on market volatility, has begun to lay out its cryptocurrency investments. What kind of company is One River, and when did Alan Howard invest in it?

One River Asset Management was founded by Eric Peter in 2013. Brevan Howard acquired a 25% stake in One River Asset Management in October 2020. Alan Howard also had Elwood Asset Management provide trading, market analysis, and technical support services for One River.

Another investor in One River is Ruffer LLP, a UK investment company known for betting on market volatility. Ruffer LLP disclosed that one of its funds had allocated 2.5% of its investment position to Bitcoin, stating that Bitcoin serves as a "small but effective insurance policy against the continuous devaluation of major global currencies."

After One River became one of the largest investors in Bitcoin, another major news broke: in late March 2021, One River hired three members for its newly established academic and regulatory advisory committee, all of whom are highly regarded. Among them, Jay Clayton is the former chairman of the U.S. Securities and Exchange Commission (SEC). During his tenure at the SEC, Clayton focused on initiatives to promote economic growth, investment opportunities, market integrity, and investor protection. He currently serves as a senior policy advisor and legal advisor at Sullivan & Cromwell LLP and is a part-time professor at the University of Pennsylvania Law School.

Kevin Hassett also joined One River's advisory committee. He was a senior advisor to President Trump and the 29th chairman of the White House Council of Economic Advisers. He has served as the research director at the American Enterprise Institute, a senior economist at the Federal Reserve, and a faculty member at Columbia University. He currently serves as vice president and managing director at the Lindsey Group and is a distinguished visiting scholar at the Hoover Institution.

The final member is John Orszag, who specializes in economic and financial analysis of complex issues in antitrust, regulation, policy, and litigation for corporate and public sector entities. Orszag has served as chief policy advisor to the U.S. Secretary of Commerce, director of the Office of Policy and Strategic Planning, and economic policy advisor to the National Economic Council under President Clinton. He currently serves as a senior managing director and executive committee member at Compass Lexecon.

The three issued a joint statement expressing their attraction to One River's willingness to consider their views on the digitization of the currency, banking, and capital market ecosystem, and they were impressed by One River's commitment to transparency. The addition of these three prominent figures with achievements in traditional markets and government is bound to become a driving force for One River's progress.

One River's CEO Eric Peter is also optimistic about digital asset investments, stating, "Investing in Bitcoin is the most interesting macro trade of my career." In a letter titled A Letter to Traditional Investors published on January 26, 2021, he wrote: "Bitcoin has attracted many smart and ambitious entrepreneurs. Bitcoin and Ethereum are the technological platforms that will shape the future of currency and finance, creating wonderful things we cannot yet imagine."

Investment in Cryptocurrency Payment Startup Bottlepay

As more traditional financial institutions enter the cryptocurrency space, Alan Howard is also accelerating his pace.

On February 23 of this year, Alan Howard participated in a seed round financing of approximately $15 million for the cryptocurrency payment startup Bottlepay.

Bottlepay claims to have solved the "largest unresolved problem in finance." Two years ago, it was just a small company with nine employees. Bottlepay believes that micro-payments, especially cross-border payments, are the biggest challenges that fintech companies have yet to overcome. Although nearly 65 million people globally own Bitcoin, only a small fraction of them transact daily. Using Bitcoin to buy a cup of coffee is not a simple task, as existing payment tools charge high fees for micro-payments. Bottlepay addresses this issue by allowing users to make instant payments from anywhere in the world using either conventional currency or Bitcoin, facilitating all purchase transactions from coffee to digital content.

Bottlepay was founded by Pete Cheyne, co-founder of Partnerize. The ambitious Bottlepay has faced challenges; after the European anti-money laundering regulations (AMLD5) were enacted, Bottlepay faced the risk of shutdown. However, after several months of restructuring its Bitcoin wallet series, Bottlepay not only resumed services in December 2019 but also launched a social trading wallet with features on Reddit, Twitter, and Discord. Bottlepay is now available on the App Store and Google Play.

Investment in European Commission-Free Broker Nextmarkets

In March, Alan Howard invested in the German broker Nextmarkets, which raised $30 million in this round of financing.

Nextmarkets is a European commission-free broker that, unlike other companies, not only offers free trading opportunities but also provides investors with trading brokers for free, offering 300 real-time trading suggestions each month across seven asset classes.

However, Nextmarkets does not rely on providing investment services for profit; users do not pay any order or custody fees during trading, nor are there hidden charges like fixed rates or third-party fees. Nextmarkets stated that, from the perspective of the traditional music industry, music companies used to profit by selling music itself in the form of CDs, but rampant piracy devalued CDs. Now, the music market mostly profits by offering free music while selling related merchandise or concert tickets.

As a result, Nextmarkets' profit model supports customers to trade completely free, but as long as customers use one of its portfolio management tools, leverage their trades, or invest in selected bundles of assets, they can make money.

Fourth Largest Shareholder of CoinShares

In addition to showing great enthusiasm for investing in cryptocurrency startups, Alan Howard has also invested in well-established companies in the cryptocurrency asset management sector.

Founded in 2015, the cryptocurrency management company CoinShares manages a range of exchange-traded products, providing investors with risk exposure to cryptocurrencies like Bitcoin and Ethereum, managing $4.64 billion in assets, making it the largest digital asset management company in Europe.

According to the important shareholders publicly disclosed on the CoinShares website here, Alan Howard's entity AH (St Helier) Limited holds 5,484,580 shares, accounting for 8.24% of CoinShares International Limited's issued share capital, making him the fourth largest shareholder of CoinShares, with holdings only surpassed by Executive Chairman Daniel Masters, CEO Jean Marie Mognetti, and co-founder Russell Newton.

From CoinShares' IPO prospectus, it can be inferred that Alan Howard owned these shares before CoinShares' IPO in March this year, although the exact investment time remains unknown. CoinShares' stock market capitalization is approximately $750 million, indicating that Howard's stake in this cryptocurrency asset management company is currently valued at around $61.5 million.

Investment in Digital Asset Custodian Komainu

In March of this year, Alan Howard led a $25 million Series A financing round for the digital asset custodian Komainu. This custodian's co-founder is CoinShares, in which Alan Howard holds shares, indicating that his layout in the cryptocurrency industry is comprehensive and methodical.

Komainu was jointly established by Japan's Nomura Holdings, digital asset security company Ledger, and cryptocurrency management company CoinShares. Launched in June 2020, Komainu provides regulated, secure, and compliant digital asset investment custody services for institutions. The company currently holds $3 billion in assets under custody and began providing custody services for illicit funds to the UK police in January this year. Komainu aims to offer institutional entities and investors the same level of regulatory assurance as traditional assets.

Compliance and security have always been significant challenges in cryptocurrency storage. Alan Howard's investment in Komainu shows that he values not only the payment and investment functionalities of crypto assets but also their security.

Brevan Howard Fund Allocates 1.5% of Investment Position to Cryptocurrency

After making numerous investment preparations, in April of this year, Alan Howard's managed Brevan Howard announced it would officially begin investing in digital assets, allocating 1.5% of its $5.6 billion hedge fund to cryptocurrency investments.

This move signals that cryptocurrencies are becoming mainstream.

What Exactly Does Alan Howard Want to Achieve?

From Alan Howard's series of investments, it is evident that this financial giant from the traditional industry is not only utilizing his substantial personal assets for cryptocurrency investments but is also committed to building cryptocurrency service infrastructure, encompassing payment, asset management, and fund security.

Upon reflection, this investment path makes sense. Digital currencies, represented by Bitcoin, need specialized, large-scale, and standardized digital asset management institutions to fulfill their asset "hedging" functions, thereby improving the entire industry chain of cryptocurrencies and providing more secure services for large funds. This way, large players and traditional institutions can enter the market with confidence.

However, as a nascent industry, cryptocurrency asset management is still in its infancy compared to the mature asset allocation service channels of traditional finance. Although current capital is primarily concentrated in cryptocurrency trading platforms and wallets, helping asset management institutions gain an advantage in funding could be a good strategy to encourage large players and traditional institutions to enter the market. This may also explain Alan Howard's enthusiasm for investing in cryptocurrency service infrastructure.

Traditional Finance is Entering the Cryptocurrency Sector

The allure of the cryptocurrency sector goes beyond this. As Eric Peter stated, an increasing number of the sharpest minds in the world are beginning to pay attention to and take this emerging asset class seriously. The emergence of heavyweight cryptocurrency asset management/investment firms like Pantera Capital, Polychain Capital, and Galaxy, along with the Grayscale Bitcoin Trust's assets swelling to over $10 billion, all prove one thing: capital has begun to enter the market.

Ray Dalio, founder of Bridgewater Associates, expressed his views on Bitcoin in January, stating that he is "considering using cryptocurrencies as an investment for new funds to provide clients with protection against the devaluation of fiat currencies." Ray Dalio has shifted his previous biases against Bitcoin, reevaluating his views and calling Bitcoin a brilliant invention. On March 16, Ray Dalio proposed in his article Why In The World Would You Own Dollar Debt? that the proportion of non-debt, non-dollar assets should be increased in the current macro environment.

The views of Alan Howard and Ray Dalio on cryptocurrencies may represent the general sentiment of Wall Street institutions, as more and more Wall Street investment firms recognize the value of Bitcoin. Against the backdrop of global central banks engaging in massive monetary easing, Bitcoin's ability to resist inflation risks has accelerated this shift in attitude.