"How do the big investors in the crypto market lead the crypto market, relying not on luck but on strength? Crypto quantitative investment refers to achieving investment returns in cryptocurrency through mathematical modeling, data analysis and automated trading strategies. 24-hour trading, scientific objectivity and high efficiency. Based on these advantages of the crypto market, the quantitative team uses high-frequency trading and automated strategies to reduce the impact of human emotions on investment decisions and obtain returns safely and transparently."
▲The development logic of the quantitative system
As an international financial center, Hong Kong, China occupies a pivotal position in the world with its open market environment, sound regulatory system and advanced infrastructure, and is also at the forefront of the development of cryptocurrency.
In 2017, the Hong Kong Securities and Futures Commission (SFC) issued the "Announcement on Initial Coin Offerings", clarifying that digital tokens involved in initial coin offerings (ICOs) may be "securities" and that a license is required to engage in related activities; and the release of the "Circular to Licensed Corporations and Registered Institutions on Bitcoin Futures Contracts and Cryptocurrency-Related Investment Products" both represent that Hong Kong has begun to regulate cryptocurrencies.
In 2023, the virtual asset service provider (VASP) licensing system will come into effect. All centralized virtual asset exchanges that operate businesses in Hong Kong or promote services to Hong Kong investors must be licensed and regulated by the SFC.
These policy changes provide investors with a stable market foundation, making Hong Kong the preferred location for the development of the global cryptocurrency and blockchain technology.
Many people may be familiar with these names: HashKey Group, OSL, MaiCapital, and the success of these leading virtual currency exchanges and funds in Asia is inseparable from the quantitative team.
In this city with unlimited potential, the crypto investment market may face unprecedented opportunities and challenges.
Next, let attorney Mankiw take you to a deeper understanding of why Hong Kong has become the preferred destination for crypto investment quantitative teams.
Common quantitative trading methods
Crypto asset quantitative trading has a specific structure and applicability based on its different characteristics, and has gradually become an important part of the crypto market. These trading strategies are driven by algorithms, reducing the impact of human emotions on trading, thereby improving trading efficiency and accuracy. The following are several major quantitative trading methods:
1.
Hedge trading : refers to investors making two transactions simultaneously with related products, opposite directions and equivalent positions. In simple terms, it is to buy and sell highly correlated digital currencies in different markets at the same time. The transaction risk is relatively low. It is more commonly used by start-ups for venture capital or private equity investment to maintain the diversification of asset portfolios.
Legal and compliance considerations: Since hedging transactions involve multiple markets and trading platforms, fund managers need to ensure the qualifications and security of the trading platforms, especially in cross-border transactions, in compliance with anti-money laundering (AML) and know your customer (KYC) requirements.
2.
Trend trading: Using market conditions and trend indicators, the computer program automatically determines the timing of buying and selling. When the market shows a clear trend, it automatically sends a buy or sell signal. This trading strategy is relatively complex, but it can help investors capture opportunities for market rises or falls.
Legal and compliance considerations: Trend trading involves high-frequency trading (HFT). The Hong Kong Securities and Futures Commission's supervision of HFT is mainly focused on traditional financial markets, and there are fewer specific regulations for crypto asset trading. However, fund managers need to ensure that algorithmic trading systems have adequate risk management and audit mechanisms to reduce potential compliance risks caused by operational errors.
3.
Hybrid model: It combines the characteristics of multiple models, including both trading in cryptocurrencies and their derivatives and equity investment in related companies. Hong Kong fund management companies have established strict investment allocation and redemption mechanisms and conduct regular audits to ensure the security and fairness of the funds. This structure provides managers with flexibility to switch between different investment strategies based on market conditions and investment opportunities.
Legal and compliance considerations: The hybrid model involves different types of assets and trading methods, and managers need to comply with the regulatory requirements of the relevant fund types. For example, equity investments must comply with the Securities and Futures Ordinance (SFO) requirements, while crypto asset transactions must comply with anti-money laundering (AML) and know your customer (KYC) regulations.
When determining the applicable laws and regulations for Hong Kong fund managers, we must also consider whether the fund vehicle is a private fund or an SFC-authorized fund. For example, for SFC-authorized hedge funds, there are specific hedge fund guidelines that must be followed. According to these guidelines, certain types of authorized hedge funds require a minimum subscription amount, for example, $10,000 for funds of funds and $50,000 for single hedge funds, while hedge funds with 100% capital guarantee characteristics have no subscription amount limit. In addition, the SFC has set higher standards for risk management and internal control systems for authorized hedge funds.
Types of funding sources and compliance requirements
Under the supervision of the SFC, funds from different sources need to meet different compliance requirements to ensure legal and transparent transactions and protect operators and investors:
1. Own funds: The funds may come from the personal assets of team members, the internal accumulation of the team, or the team's own profit accumulation. This type does not involve funds from external investors, so the compliance requirements are relatively low, but it is still necessary to comply with internal risk management and internal control processes.
2. Private equity: Private equity funds usually come from high net worth individuals, corporate professional investors or institutional investors. Compared with authorized retail funds, such funds usually have higher investment thresholds and are subject to relatively loose regulatory requirements. If fund management activities are carried out in Hong Kong, a Type 9 license must be applied for regardless of the nature of the fund. Under Hong Kong's open-ended fund company (OFC) framework, these funds need to be registered with the Hong Kong SFC. Private equity funds can be closed-end or open-end funds, depending on the overall investment structure and investment assets. Private equity funds must be equipped with licensed fund managers and have external fund administrators and auditors. Compliance requirements for such funds include compliance with AML and KYC procedures, as well as other requirements such as regular compliance audits and risk management reports.
3. Public funds: Some funds may come from cryptocurrency ETFs, which are oriented to public investors, more strictly regulated, mostly adopt passive strategies, are managed by a third party, and circulate in the secondary market. Their compliance requirements involve the public issuance and trading of funds, including information disclosure, investor protection, and market behavior norms.
Regardless of the type, it is necessary to comply with the regulatory requirements of the Hong Kong SFC, such as independent deposit of customer funds, anti-money laundering and anti-terrorist financing compliance, risk management and cybersecurity measures. So, what is Hong Kong's regulatory framework?
Regulatory framework
1. Compliance requirements in Hong Kong, Singapore, Switzerland and the United States
In the global Chinese community, there are some differences in the regulatory frameworks for crypto funds in several popular countries and regions:
Singapore : The Monetary Authority of Singapore (MAS) introduced stricter regulations on cryptocurrency and digital payment token (DPT) services in 2024, covering areas such as custody services and cross-border fund transfers. In November, it released two new industry frameworks to promote the tokenization of funds and fixed-income instruments.
Switzerland : The Swiss Financial Market Supervisory Authority (FINMA) is one of the first financial regulators in the world to develop a clear regulatory framework for cryptocurrencies and blockchain technology. FINMA ensures the legality and transparency of cryptocurrency businesses through its "Swiss Blockchain Act" and "Financial Market Infrastructure Act (FMIA)".
United States : The U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) play an important role in regulating crypto activities. However, due to the decentralized supervision of the U.S. states, discussions need to be conducted on a regional basis.
Hong Kong : The Securities and Futures Commission (SFC) of Hong Kong provides a transparent and stable regulatory environment. Different licenses are applied for according to the business they are engaged in. At least a Type 9 license is required, which mainly regulates fund managers and fund products.
In summary, Hong Kong 's crypto policy tends to be flexible, with a stable regulatory environment and friendly tax policies, encouraging market innovation and strengthening cooperation with traditional financial institutions; Singapore is more attractive to digital asset companies, with stable policies and a focus on compliance and risk management; Switzerland developed earlier at the regulatory level and is a pioneer and promoter of the global cryptocurrency market; in the United States , due to inconsistent supervision, crypto fund managers are also relatively restricted.
2. The role of the Hong Kong Securities and Futures Commission (SFC)
In order to increase the public's understanding of the operation and functions of crypto funds, provide protection to the public who invest in or hold cryptocurrency products, and reduce illegal and criminal activities in the industry, Hong Kong regulators have put forward a series of compliance requirements for crypto fund teams.
The Securities and Futures Commission (SFC) of Hong Kong is the main regulator of the securities and futures market in Hong Kong, and also the main regulator of cryptocurrencies. The SFC regulates the cryptocurrency market by formulating and implementing relevant regulations, including the Securities and Futures Ordinance, to ensure that cryptocurrency funds operate under supervision and improve the transparency and standardization of the market.
3. SFC regulatory principles
When choosing to do crypto quantification in Hong Kong, the SFC has put forward at least four requirements:
Compliance operation: The SFC regulates the cryptocurrency market by formulating and implementing the Securities and Futures Ordinance and other guidelines and circulars on virtual assets to ensure that the entire crypto market operates under the supervision of the SFC.
Licensing system: All cryptocurrency exchanges and cryptocurrency platform operators operating in Hong Kong need to obtain a license, raising the security and soundness threshold for these platforms.
Due Diligence : All cryptocurrency-related businesses must comply with Hong Kong’s Anti-Money Laundering and Countering Terrorist Financing (AML/CTF) regulations, perform customer due diligence (KYC), and report suspicious transaction activities.
Regulatory Sandbox: The SFC and the Hong Kong Monetary Authority (HKMA) have jointly established a FinTech Regulatory Sandbox, where crypto-related companies can test their products and services in a controlled environment and make risk assessments in advance.
Compliance and Risk Management
So, if you want to operate a crypto fund, what aspects of risk management should you focus on?
1. Compliance framework : A sound compliance framework and effective risk management strategy must be established, including anti-money laundering (AML) and counter-terrorism financing (CFT) measures, to reduce the risks of virtual asset investments.
2. Asset separation : Ensure that assets are independent of the assets of the manager and other related parties to safeguard the property security of investors.
3. Customer Due Diligence ( KYC ) : All cryptocurrency-related businesses, including exchanges and wallet service providers, must perform customer due diligence and report suspicious trading activities.
4. Internal control and monitoring mechanism : It is necessary to establish an internal control and monitoring mechanism to regularly audit and report related activities to ensure compliance.
5. Cold storage solution : To prevent hacker attacks and asset theft, cold storage (offline storage) should be used.
6. Regular reporting : The custodian needs to provide regular asset reports to the management company and investors to ensure timeliness and transparency of information.
Therefore, it is not an easy task to avoid these risks and successfully build a crypto quantitative team. It is very important to have reasonable planning and the support of a professional team.
