Talos’ Buy of Portfolio Tool Developer — Ho-hum or Big Deal?

The latest acquisition by crypto trading tech provider Talos fits into a larger trend of interest in industry portfolio management solutions — which some say is a bullish indicator for further institutional adoption of crypto.

In Talos’ most recent expansion, the firm has bought D3X systems, which develops technology to support systematic investment strategies, as a way to allow clients to build crypto portfolios, the company said on Tuesday. 

A spokesperson declined to disclose specific terms of the deal. 

D3X was founded in 2018 by Xavier Witdouck, a former executive at AQR Capital, BlackRock UBS and Bank of America. The firm is perhaps best known for its systematic investment software-as-a-service (SaaS) platform, called QuantHub.

Specifically, the acquisition brings more portfolio design tools used in TradFi to the crypto sphere, industry participants noted — including back-testing, factor modeling, optimization, rebalancing, as well as risk and return attribution reporting. 

“The top asset managers in the world use quant tools, and they need similar tools when investing in digital assets,” Talos CEO Anton Katz told Blockworks in an email. “We believe this end-to-end support of the investment lifecycle will help accelerate the institutional adoption of digital assets.”

The deal comes a couple weeks after Talos linked up with Coinbase Prime in a partnership designed to give Talos clients access to spot crypto liquidity and custody services.  

White-label crypto platforms of interest

Sell-side providers looking to offer investment services via Talos’ white-label platform, as well as buy-side institutions, were demonstrating demand for such offerings that D3X provides, according to Katz. 

The company is now better positioned to support the work flows of registered investment advisers (RIAs), ETP issuers and providers of separately managed accounts (SMAs), the executive said. 

The company declined to name specific clients involved. 

A January survey of RIAs, broker-dealers, financial planners and other institutional investors, found that many have been undeterred by the asset class’s volatility in 2022. Nearly 80% of advisers who had a crypto allocation in client accounts at the time said they planned to keep or increase those in 2023.

Meanwhile, fewer family offices report being interested in allocating to crypto than two years ago, according to a recent Goldman Sachs survey. 

Adam Blumberg, a former RIA who co-founded crypto education group Interaxis, said he’s not sure there is high demand from many RIAs to use QuantHub for crypto, noting there may be a knowledge barrier. 

But Talos’ clout in the crypto trading world will attract others, he said.

“We will likely see more ETF and SMA managers jump in start using the QuantHub tool because of the market and liquidity Talos provides,” Blumberg told Blockworks. “I also think combining the QuantHub tool with the Talos size creates the possibility for less volatility in the crypto market. 

A significant deal part of a larger trend

Ric Edelman, founder of wealth manager Edelman Financial Engines, called the deal “an important transaction” that demonstrates the continuing development of the crypto space and the increasing involvement of institutional money managers. 

The fact that such advances are continuing despite the SEC’s harsh treatment of the industry, Edelman added, is “a strong bullish signal” that the space is becoming more mainstream.

“There isn’t yet a big demand, but there is a big need,” he told Blockworks. “As more and more institutions add crypto to their portfolios, they need sophisticated tools to effectively manage this new asset class — just as they use sophisticated tools in the management of every other asset class.” 

Michael Klena, a partner at crypto advisory firm Architect Partners, said merger and acquisition activity around crypto infrastructure has picked up in recent years. 

The percentage of crypto deals focused on investing and trading infrastructure is 29% so far this year, on pace to break last year’s 20% mark, Architect Partners data shows. Those types of deals accounted for just 9% of total crypto transactions in 2021.  

Talos’ acquisition comes more than a year after Gemini acquired digital asset portfolio management platform BITRIA in January 2022 — a buy set to add tools for wealth managers that included SMA construction, portfolio rebalancing and tax loss harvesting.

Gemini, that same month, also bought Omniex, a trading technology platform that offers order, execution and portfolio management system solutions for institutional crypto trading.

Financial services company DriveWealth said in February 2022 it would start offering crypto to its partners and their retail investors after its acquisition of Crypto-Systems. 

As traditional financial players add crypto trading, Klena added, the scope of infrastructure is continuing to expand. 

“So products such as advanced order management and dynamic portfolio management, widely used in other asset classes, are naturally in demand in the crypto world,” he said. “Several firms have met that need, and we do expect them to be acquired as product enhancement for larger firms.”


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Source: https://blockworks.co/news/talos-acquires-portfolio-tool-developer