The firms aim to demonstrate through an early-stage proof of concept how wealth advisors could seamlessly and automatically manage discretionary portfolios at scale, and include private assets in these portfolios, by using smart contracts and fund tokenisation.
Alternative investment funds, such as private equity, real estate, private credit and infrastructure, are not commonly included in discretionary portfolios due to operational processing requirements and liquidity constraints.
However, the asset managers have estimated that the tokenisation of these investments would enable these products to more easily be offered to wealthy individuals, representing a $400bn annual revenue opportunity for alternative fund managers and distributors.
“In its final form, we see wealth managers being able to include alternative investments in model portfolios, providing investors with better access to portfolio enhancing investments,” said Tyrone Lobban, head of blockchain and Onyx Digital Assets at JP Morgan.
This would not be through sweeping changes to regulations or removal of investor protections, he said, but via “streamlined, automated processing and settlement of trades in an asset-class agnostic manner”.
To date, alternatives managers have focused on expanding individual access through the development of semi-liquid product structures, which typically offer periodic liquidity that gives investors more flexibility.
However, the managers noted that these efforts can be “significantly accelerated” with the development of new capabilities made possible through tokenising fund positions on a shared ledger system.
“Our goal in this project, therefore, was to identify a technology approach that could enable a wealth manager to easily construct, deploy and automatically manage model portfolios at scale, across traditional and alternative assets, allowing a seamless investor experience with improved transparency,” they said.
Several asset managers enabled tokenised access to their private asset funds in 2022, including KKR on Avalanche, Apollo on Provenance Blockchain and Hamilton Lane on Polygon.
JP Morgan and Apollo explained that representing discretionary portfolios as smart contracts could enable the automatic rebalancing of thousands of portfolios based on predefined models.
This would occur in response to shifts in market conditions or when portfolio managers decide to invest in different products.
The asset managers have estimated that a wealth manager overseeing 100,000 investor portfolios would currently have to execute around 3000 operational steps to rebalance their entire book of clients.
However, the proof of concept solution the firms have developed would collapse the 3000 steps into “just a few clicks”, saving significant operational cost and providing a “materially better” investment solution to investors.
This proof of concept, developed in collaboration with WisdomTree, is one of several industry pilots that are taking place under Project Guardian, which seeks to explore asset tokenisation and cross chain interoperability on permissioned blockchain networks.