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The New Abnormal: Crypto and Other Challenges | London Business School

As the asset management industry looks to a future beyond the Covid-19 pandemic, it faces the dual challenges of coping with declining asset prices under difficult macroeconomic conditions, as well as the need to find ways to monetize investor interest in digital assets, even as cryptocurrency prices have fallen.

The AQR Asset Management Institute’s Insight Summit aims to equip asset managers with the key insights and strategies they need to successfully navigate these global market shifts. This year’s summit is themed “A New Anomaly: Financial Market Disruptions”. At the December 7 event, attendees will hear from high-level speakers on the impact of central bank policies, the emergence of crypto, and the outlook and implications of the current macro environment.

Emerging from the pandemic propelled by market headwinds, asset managers now face headwinds. As central banks around the world raise borrowing costs to curb soaring inflation and governments withdraw the fiscal stimulus they injected into the economy during the pandemic, stocks, bonds and other asset classes have struggled this year.

“Quantitative easing has pushed up prices across all asset classes, but now we face unprecedented times as [UK] inflation is at its highest in 40 years and interest rates are rising. This reduces asset prices across the board,” says Anna Pavlova, Professor of Finance and Academic Director of the AQR Asset Management Institute at London Business School.

These are among the “megathreats” that Nouriel Roubini will tackle in his speech at the Insight Summit. The economist, who predicted the 2008 financial meltdown, is expected to warn that soaring inflation and mounting debt will push the global economy into recession.

Richard Portes, professor of economics and academic director of the AQR Asset Management Institute, says asset managers shouldn’t be complacent just because they’ve experienced past financial crises such as the 1987 stock market crash, the dotcom bust of 2000 and the eurozone debt crisis of 2009. “We are now in extremely uncharted waters,” he warns.

As an example, he cites the low liquidity of the US Treasury market. Treasury yields have swung wildly this year, making it harder and more expensive for investors to buy or sell Treasuries in the normally quiet $24 trillion market. The aggressive pace of interest rate hikes by the Federal Reserve amplified volatility.

“These market weaknesses may be more widespread than we thought,” says Professor Portes.


He believes these fragilities are amplified by complex instruments such as derivatives – a situation that manifested itself in the recent UK pension fund crisis. Many pension funds use derivatives to hedge against swings in interest rates, but the sharp fall in the price of government bonds – following Westminster’s ‘mini’ budget – has led to demands for collateral in additional cash.

To raise funds, repos were forced to sell assets, sending bond prices falling even further, prompting the Bank of England to intervene to avert a financial meltdown. What worries Professor Portes is the opacity of these complex arrangements. “We don’t have enough data on investors’ exposure to derivatives,” he says, pointing to potential hidden risks to financial stability.


Along with the macro environment, crypto assets and decentralized finance are high on the Summit agenda. “Few asset managers have digital assets in their portfolios, but it’s an asset class that’s becoming hard to ignore,” says Professor Pavlova.

At the summit, Carlo Zaffaroni and Fabio Frontini of Abraxas Capital Management will discuss crypto investment strategies and Tether, a “stablecoin” pegged to other assets.

Institutional investors are turning to these assets. For example, BlackRock, the world’s largest fund manager, is launching a private cash bitcoin trust for institutional clients that will track the performance of the digital currency.

These offers come despite the strong sale of bitcoins and other digital assets. However, Professor Portes believes that these assets do not yet pose a threat to global financial stability due to their limited interconnection with the mainstream financial system.

“We don’t have to worry about instability or shocks in the crypto and decentralized finance realms that trickle down to banks and markets,” he says.


Still, the industry’s growing ties to asset managers have led central banks and governments to increase their surveillance of the market, in the wake of falling prices. The regulation of these markets will be a major theme of the Insight Summit, with Fabio Panetta, Member of the Executive Board of the European Central Bank, delivering his keynote address on the subject.

The EU reached a historic agreement this year to regulate trading in crypto assets across the bloc. The rules aim to give consumers much-needed protections, but without stifling the growth of the nascent market. “Investors often don’t know what they’re getting into,” says Professor Pavlova. “And certainly, some regulatory oversight is overdue.”

Professor Portes thinks the US is falling behind the EU in crafting new rules to govern the sector. “The regulatory environment is very vague and very limited,” he says. Indeed, US lawmakers have been unable to agree on how to regulate crypto. The Securities and Exchange Commission has taken a hard line on crypto exchanges, but digital assets themselves have limited oversight.

“This is a global market and there are opportunities for regulatory arbitrage,” Prof. Pavlova adds, stressing the need for global rules to govern borderless crypto markets.

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