Published: 04/21/2025
This is the full-length version of the piece, "The “Indexification” of Hedge Funds and Active Strategies", published on CoinDesk's Crypto Long and Short newsletter.
In an earlier piece, I introduced the concept of the "Shopification of Wealth", or the idea that onchain rails can lower the barriers to entry and radically scale operations for financial advisors and wealth managers. Just as Shopify enabled anyone to launch a retail business online, crypto is enabling a new generation of investment professionals to start and scale advisory businesses without the legacy layers of TradFi infrastructure.
This democratization of advice foreshadows broader changes in asset management. Because when you zoom out — beyond the advisor and beyond the assets — you start to see something else: a transformation in the investment strategies themselves, as well as in the machinery behind them.
Beyond advice, crypto and tokenization are poised to re-engineer entire asset classes by making assets globally accessible, fractionalized, composable and tradable 24/7. Consider stablecoins, which in 2024 facilitated $27.6 trillion in onchain transfers, surpassing the combined volume of Visa and Mastercard. The efficiency is clear: transactions settle instantly worldwide, with far lower friction and downtime. Even traditionally staid products like money market funds are going onchain. Traditional money market funds charge around 10 to 25 basis points in fees, whereas crypto rails can trim those costs substantially. One Boston Consulting Group study estimates fund tokenization could add around17 basis points of annual return (or roughly $100 billion per year globally) by eliminating operational inefficiencies. In short, tokenization is making markets always-open and hyper-efficient, unlocking assets for a global investor base.
It’s now a consensus view that tokenization also brings greater asset transparency. onchain reserves and transactions are often auditable in real-time. However, active investment strategies and managers remain a black box. We can monitor tokenized assets onchain, but the logic of how portfolios are managed is still opaque when strategies reside off-chain. While anyone can inspect a DeFi lending contract’s holdings, one cannot yet peer into a hedge fund’s flows, allocations and economics the same way. The next frontier is bringing that same transparency and composability to the strategies and their managers themselves, not just the underlying assets.
Hedge funds are privately managed pools of capital employing complex trading and risk management techniques to seek absolute returns. Globally, hedge funds oversee trillions in assets across strategies ranging from equities and credit to global macro and quant models. Their investor base is almost entirely institutional investors and ultra-high-net-worth (UHNW) individuals, often accessed through private banks or feeder funds. Direct investment typically requires being an accredited or qualified investor, with typical minimum commitments of $1 million or more (elite funds frequently demand $5 million to $10 million).
Many investors gain exposure via fund-of-funds, which bundle multiple hedge funds for diversification but add another layer of fees, often ~1 to 1.5% annual management fees, plus 10% of performance on top of the underlying funds’ “2 and 20” fee structure. These vehicles remain opaque, disclosing minimal information about holdings or trades. Investors must trust managers who provide only periodic and partial insight into their strategies. Access is exclusive and information is scarce.
Crypto promises to crack this open. By tokenizing their investment strategies, hedge fund managers can expand their total addressable market dramatically. A tokenized hedge fund would issue tokens representing their share of the pooled funds in a fund or strategy. Investors globally could buy small fractions – think staking $1,000 into a strategy that used to require $1,000,000. All that’s needed is a compliant or permissioned wallet instead of a prime brokerage account. This reduces minimums and frictions for investors, allowing managers to tap a worldwide and more diverse base of retail and institutional capital. Essentially, a hedge fund could fundraise onchain, 24/7, with smart contracts handling investor onboarding, fee calculations and redemptions. Several forward-looking managers and platforms are already experimenting here. Crypto rails thus turn hedge funds into more accessible, liquid products – units that can be transferred, traded, or borrowed against, subject to compliance, much more easily than traditional partnership stakes.
As hedge funds become tokenized and widely accessible, the next evolution is the “indexification” of hedge fund investing – enabling investors to easily hold a basket of multiple strategies. In the traditional world, allocating to numerous hedge funds is cumbersome and costly, often done through fund-of-funds or consultant-managed portfolios. With tokenized funds, an investor could simply buy small token stakes in 10 different strategies, creating a personal index of hedge funds in their wallet. This approach mirrors how ETFs and index funds allow one-stop diversification across many stocks. Importantly, crypto lowers the costs and operational complexity of such multi-fund exposure. There’s no need for an intermediary vehicle charging extra fees; the indexification can be done by the investor or a simple smart contract. Strategies in token form become composable Lego blocks – one can combine, swap, or programmatically rebalance them with ease. Compared to a legacy fund-of-funds (with its high fees, quarterly liquidity, and paperwork), an onchain “index” of hedge tokens could be low-cost, near-instant to enter or exit, and transparently priced. In essence, crypto rails can turn actively managed strategies into building blocks as easily deployed as index ETFs.
The ability to indexify hedge fund strategies would have broad impacts. First, it fosters diversification and risk mitigation – investors can allocate across styles (long/short equity, macro, crypto, etc.) to spread risk, something previously practical only for large institutions. Second, it can drive greater scale and capital inflows into top-performing strategies: By aggregating many small contributors globally, successful hedge fund managers could attract more capital than ever before. Third, fee pressure is likely to intensify. Just as low-cost index funds forced traditional mutual fund fees down over decades, a world of tokenized, accessible hedge funds creates competition. Investors can comparison-shop or automatically rotate into cheaper or better-performing strategy tokens. Expensive multi-layer fee structures (like fund-of-funds) would struggle to justify themselves when one can replicate their allocations in a wallet. Over time, we could see fee compression in hedge fund management, especially for simpler or index-like strategy exposures, while truly unique alpha generators may still command a premium. The net result would be hedge fund investing at lower cost, more akin to how ETF fee wars slashed costs in equity markets.
The evolution will appear slow at first. Then all at once, hedge funds will be onchain. In the near term, tokenized hedge funds may rely on hybrid models. For example, using centralized platforms or exchanges for trade execution, while using onchain tokens for investor holdings, transfers, and post-trade settlements. As onchain assets scale into the trillions, the momentum toward fully onchain operations will grow. We can envision a future where a hedge fund’s entire lifecycle is onchain: fundraising via token issuance, executing trades through decentralized exchanges and lending protocols, managing treasury via stablecoins, and using onchain primitives (like automated market makers, derivatives platforms, or yield farming) to enhance returns. Composability will allow these funds to plug into broader DeFi ecosystems – for instance, using strategy tokens as collateral in lending markets or integrating onchain risk management tools. Such fully onchain hedge funds would offer real-time transparency (investors could see positions or performance ticks onchain), faster innovation (strategies could integrate new DeFi modules permissionlessly) and potentially new forms of alpha by leveraging blockchain capabilities (e.g., new types of algorithmic strategies impossible in TradFi). This vision may take years to mature, but the trend is clear: crypto’s influence is expanding from individual assets to the very structure of asset management.
The “indexification” of hedge funds shows us a future where any investor can access diversified, active strategies as easily as buying an index – all enabled by crypto rails.
