Melanion Capital, a Paris-based alternative asset management company, has just received approval from the AMF to launch an ETF (Exchange Traded Fund) on bitcoin. Equipped with the Ucits label, the Melanion BTC Equities Universe Ucits ETF replicates the evolution of a basket of stocks in the crypto-asset sector for a management fee of 0.75%. In this Strategy interview, its president Jad Comair details the operation and explains that beyond this first in Europe, widely reported in the international press, the portfolio construction technique is also unprecedented. Listing is expected in the coming weeks.
Jad Comair, can you describe the path that led you to the launch of this ETF?
Our portfolio management company was launched in 2012 and approved by the AMF (Autorité des Marchés Financiers) in 2013. Originally, the company specialized in a new asset class, dividend futures, which consist in anticipating the level of dividends paid by companies to their shareholders. I had worked in this field for ten years at Société Générale. We then diversified into other strategies such as futures, options and quantitative approaches. We also developed a seeding program for new asset managers. Then, a few years ago, we became interested in the crypto-currency environment, particularly Bitcoin. We set up a research team to identify ideas to offer our clients on these themes. And what immediately struck us was the near absence of eligible support for institutional investors. In the United States, for example, this year alone, some 20 applications for the creation of ETFs on bitcoin have already been filed but not yet accepted. The first of them even dates back to 2013.
The Ucits regulation, a guarantee of solidity and quality that is unavoidable in Europe and in the world.
What was your legitimacy to embark on this adventure?
We decided to take on this challenge because of our knowledge of regulatory matters. Our historical products also had some similarities with crypto-currencies. Indeed, crypto-currencies do not really exist as physical and tangible assets in the same way as dividends. We therefore found analogies in the regulatory qualification of the underlying and the structuring of the fund for its eligibility for Ucits regulation, a guarantee of solidity and quality that is unavoidable in Europe and the world. It was therefore a natural evolution.
What steps have you taken?
The first step was to make the asset class eligible for a Ucits fund. Then, it had to be structured within an ETF and finally obtain regulatory approval from the AMF (Autorité des Marchés Financiers). This took more than two years of work.
How does your ETF differ from cryptocurrency funds already launched by promoters like 21Shares or Vaneck?
These are not Ucits and not ETFs either, but ETPs (Exchange Traded Products) or ETNs (Exchange Traded Notes). These products are not eligible for Ucits funds.
This construction method is unique as most ETFs follow either equally weighted or market capitalization weighted indices.
What is special about this ETF?
Its investment theme is bitcoin even though it is not directly invested in it, as the crypto-asset as such is not eligible for either Ucits funds or the Ucits ETF label, which must meet certain constraints to benefit from the regulated designation. In order to expose investors to this theme, we have designed an ETF that tracks an equity index, the Melanion Bitcoin Exposure Index, which we have constructed. It consists of a basket of 30 stocks listed in the US, Canada and Europe whose companies are involved in or hold crypto assets on their balance sheets. The weighting of the stocks is determined by their correlation to the evolution of bitcoin. This construction method is unique as most ETFs follow either equally weighted indices or else weighted by their market capitalization. It is even a world first. We can say this because we have studied all ETFs listed in the world. We will soon publish a research paper describing this index composition.
Would you like to use this correlation-based construction methodology to launch other instruments?
Yes, this is conceivable for other crypto-currencies, or even gold or oil. For example, the Total Energies share, which is very present in oil share indices, due to its market capitalization, is weakly correlated to oil prices. We are in the middle of a reflection process. There are still many unexplored themes related to this type of methodology, such as climate change, food and ESG.
Doesn't the correlation of stocks with the underlying change over time? How will you adjust this index accordingly?
The index only takes into account historical correlation. Its weighting is updated every three months to take account of developments. This is an ongoing process. However, historical correlation is not an indicator of future correlation.
The acceptance of bitcoin as an investment medium is growing every day. Recent surveys of international investors show this.
Does the creation of this new ETF meet the expectations of professionals or individuals?
Especially professionals. Individuals can open an account with a crypto-currency exchange platform and buy bitcoin themselves. But professional traders are constrained in their investment universe. Only commercial companies like Tesla, which has an account with Coinbase, have the freedom to invest there. We believe that many CAC 40 companies have done the same, without having communicated yet. Our positioning is to set up a product that is eligible for investment professionals, such as life insurance companies, management funds, and asset allocators. The acceptance of bitcoin as an investment medium is growing every day. The surveys This is reflected in the recent surveys of international investors. We share this view. In our view, bitcoin is a revolutionary asset with great potential. Thanks to the European passport granted by our AMF approval and the Ucits label, we will be able to distribute our ETF anywhere in the European Union.
Isn't it complicated for an institutional investor to justify holding bitcoin, given its volatility?
The volatility of bitcoin is a sensitive topic. Nevertheless, over the past 12 months, bitcoin has been less volatile than Tesla stock. On the other hand, there is no question of investing 98% of one's portfolio in bitcoin. It makes sense for a few percent, given its diversifying virtues in building a robust portfolio.
Can we talk about the diversifying virtues of bitcoin, since it is an asset that has no intrinsic value and is devoid of financial flows?
We are getting into a bit of a philosophical debate when we talk about intrinsic value. Can't we say the same thing about gold, whose intrinsic value can also be questioned, even if we got this idea from our parents and grandparents. Seashells and salt have also enjoyed this status in history. The intrinsic value of an asset is not a function of its tangibility, but rather of a collective perception and acceptance.
Why would an individual investor subscribe to your ETF rather than buying bitcoin directly?
Subscribing to our ETF avoids opening an account with a crypto-currency exchange platform. The Bitcoin ETF will be listed in a few weeks on the stock exchanges. This allows you to stay in a traditional management of your account and investment. Holding bitcoins on a wallet also carries the risk of hacking and loss of assets. The companies in our index are also at risk of this type of mishap, but to a lesser extent, because they are professionals and we have 30 in our portfolio.
Will the ETF be eligible for a PEA?
No, because the ETF is mostly composed of stocks outside Europe, especially US stocks.
French banks, whose expertise in equity derivatives is recognised throughout the world, are still very reticent on these issues.
Your index includes only four European stocks and is largely dominated by American companies. How do you explain this?
Europe is way behind the US and China. France is well represented in the crypto ecosystem, but more through the French people who work there than through the Paris marketplace. A few champions exist in France, like Coinhouse or Ledger. We must also salute the PSAN regulation of the AMF (Service Provider in Digital Assets) which is a guarantee of quality. All the conditions are there to shine internationally, but the efforts must be accompanied by all players. Crypto-assets are an opportunity to be seized. There are many initiatives in blockchain but few in crypto and bitcoin. In the US, banks are increasing the opportunities for their clients to invest in these assets. We are a long way from that in Europe. French banks, whose expertise in equity derivatives is recognised worldwide, are still very reticent on these subjects for reasons that I cannot explain.