Crypto fund due diligence

The collapses of several crypto exchanges and lenders in 2022 showed that the biggest risks in a crypto fund are often operational, not market moves. A fund can be right about prices and still lose investors' money through poor custody or a failed counterparty. Here is what to check before investing.

Custody and keys

• Which custodian holds the assets, whether it is a qualified custodian (a bank, trust company or regulated broker), and whether assets are segregated in the fund's name.
• How much is kept on exchanges for trading, and for how long.
• Who can move assets: multi-signature or multi-party approval, and controls on withdrawals.
• Insurance on custody, and what it actually covers.

Independent service providers

• Fund administrator who calculates the net asset value independently of the manager.
• Auditor with digital-asset experience, and whether the fund's audited financial statements are delivered on time.
• Legal counsel and, for offshore funds, independent directors.

Form ADV Part 1 lists a registered adviser's auditors, administrators, custodians and prime brokers for each private fund.

Valuation and liquidity

• How the fund prices illiquid or locked tokens, venture positions and staked assets.
• Whether redemption terms match what the fund holds: daily or monthly liquidity is risky for a fund holding thinly traded tokens.
• Side pockets, gates and the manager's power to suspend redemptions.

The filings to read

• Form D shows when the fund started selling, how much it has reported raising, the number of investors, the minimum and whether it uses Rule 506(b) or 506(c). See Form D explained.
• Form ADV shows the adviser's registration, regulatory assets, fees, conflicts and disciplinary history.
• State and FINRA records for the people involved, through the SEC's Investment Adviser Public Disclosure site and FINRA BrokerCheck.

Red flags

• Guaranteed or unusually steady high returns.
• No independent administrator or auditor.
• Assets held by the manager or an affiliate, or on a single exchange.
• Pressure to invest quickly, or payment requested in crypto to a personal wallet.

See how to invest in crypto funds and how to research a fund using public filings.

Browse crypto funds, or see new crypto funds, emerging managers, the largest and funds that may advertise.

Education, not advice. This guide explains general rules and market practice. It is not legal, tax or investment advice, not an offer or solicitation, and not a recommendation of any fund. Rules change; confirm details with the SEC and a qualified professional. Disclosures