Q21 Capital’s Dr. Bader on the Rise of Fund of Funds in Digital Assets

Private markets are no strangers to innovation, but the rise of digital assets is creating a new wave of opportunities and challenges for investors. 

In this quick-changing space, Fund of Funds (FoF) structures have gained popularity as an effective investment approach, particularly suited to the volatility of digital assets.

A Fund of Funds structure works by pooling capital into a single fund, which then invests in multiple underlying funds, providing:

• Broad diversification - Access to a variety of assets without needing direct investment in each one.
• Specialized expertise - Leverages the knowledge of expert fund managers across diverse asset classes.
• Capital efficiency - Allows investors to enter high-barrier funds without the large capital commitments usually required.

To explore the benefits and complexities of FoFs in digital assets, we chatted with Dr. Maximilian Bader, Founding Partner at Q21 Capital, a firm specializing in digital asset investments. 

During our conversation, Dr. Bader shared his views on why FoFs are gaining traction in this space, the advantages they bring to high-net-worth individuals (HNWIs) and institutional investors, and the rigorous due diligence processes Q21 Capital employs to stay ahead in a fast-evolving market.

Is a Fund of Funds Beneficial?

A Fund of Funds is an investment vehicle that pools money from investors to invest in a diversified portfolio of other funds rather than directly in individual assets like stocks or bonds. 

This structure allows investors to gain exposure to a wide array of fund managers, strategies, and asset classes within a single investment. The key benefit of a Fund of Funds is diversification, which helps mitigate risk by spreading investments across multiple funds. 

Additionally, it provides access to exclusive funds that may have high minimum investment thresholds, making it an attractive option for HNWIs.

As Ertan Can, founder of Multiple Capital, a European Fund of Funds, explains:

The market has seen a shift towards specialization and democratization. More niche funds are emerging, and it"s becoming easier for new funds to start. This trend is beneficial as it brings diverse opportunities and expertise to the market.

Ertan Can

Founder @ Multiple Capital

This shift not only opens up more opportunities for investors but also highlights the importance of a diversified approach, which is central to the value proposition of a Fund of Funds.

According to Dr. Bader, a Fund of Funds structure offers a powerful advantage for investors looking to enter the digital asset space without exposing themselves to excessive risk.

The beauty of a Fund of Funds is that you can get exposure to a diversified portfolio of different funds while paying similar fees as if you were investing directly.

Dr. Maximilian Bader

Founding Partner at Q21 Capital

The digital asset space, characterized by inefficiencies and volatility, requires careful management to capture alpha (outperformance relative to the market). 

For investors, having a diversified portfolio mitigates the risks associated with individual fund performance, especially in a developing market.

Why Digital Assets?

Q21 Capital’s focus on digital assets is a strategic choice based on the current market. 

Dr. Bader shares that the digital asset space is one of the most inefficient markets, presenting numerous opportunities for skilled investors.

We are currently focusing on digital assets because it’s one of the most inefficient markets we’ve seen, which creates a lot of alpha opportunities for us.

Dr. Maximilian Bader

Founding Partner at Q21 Capital

But it’s also a highly volatile space, which makes diversification crucial.

The inefficiencies in the market—such as high volatility and fragmented data sources—make digital assets a fertile ground for arbitrage and other advanced strategies. 

According to Dr. Bader, Fund of Funds offers a way to capitalize on these inefficiencies without putting all your eggs in one basket.

One of the key advantages of Q21 Capital’s Fund of Funds is the access it provides to exclusive investment opportunities. 

Many of the funds Q21 invests in have high minimum investment requirements, which can be prohibitive for individual investors.

A lot of these funds are not open to everyone. The minimum ticket size can be around $1 million or more, which limits access. Through a Fund of Funds, you can invest a smaller amount and still gain exposure to these opportunities.

Dr. Maximilian Bader

Founding Partner at Q21 Capital

Managing Risk in a New Market

Given the volatile nature of digital assets, risk management is at the core of Q21 Capital’s strategy. Dr. Bader emphasizes that the firm has developed a robust due diligence process to ensure they invest in the right funds.

"We are very thorough in our due diligence. Every fund we invest in has to meet strict criteria, from having a proper custodian in place to being audited by independent third parties,” - Dr. Bader 

This focus on due diligence paid off when FTX, a major crypto exchange, collapsed in 2022. 

While many funds saw significant losses, Q21’s diversified portfolio only experienced a minor dip, demonstrating the effectiveness of its risk management strategy.

When FTX blew up, our ZeroBeta portfolio had a drawdown of about 7.5%. But many funds were wiped out entirely, so we see this as a validation of our conservative approach.

Dr. Maximilian Bader

Founding Partner at Q21 Capital

The Appeal of Outsourcing Investment Management

Investing in a Fund of Funds is not only about diversification but also about leveraging the expertise of experienced managers. 

According to Dr. Bader, many investors prefer to outsource the complexity of managing digital asset investments to experts with the time and resources to stay on top of market trends.

“We analyze these funds daily, and we’ve built a network that gives us an edge in identifying opportunities early. For most investors, it’s not feasible to do this level of research themselves.” - Dr Bader

For those with significant capital, a Fund of Funds provides peace of mind, knowing that their investments are being actively managed by professionals specializing in the complexities of the digital asset space.

The Challenges of Running a Fund of Funds in Digital Assets

Operating a Fund of Funds (FoF) in the digital asset space presents unique challenges. Unlike traditional investment vehicles, a digital asset FoF must deal with fluctuating market conditions, verify the legitimacy of underlying funds, and manage compliance across multiple jurisdictions. 

Dr. Bader mentions that transparency and thorough due diligence are critical to maintaining trust and managing risk effectively in this environment. 

In traditional finance, you wouldn’t need to do things like ‘proof of funds’ calls, but in the crypto world, you have to. We even visit fund managers in person to verify their holdings and make sure everything checks out.

Dr. Maximilian Bader

Founding Partner at Q21 Capital

Platforms like Vestlane are helping digital asset FoFs like Q21 Capital manage these operational complexities. Our centralized platform enables fund managers to efficiently handle compliance tasks, track investor interactions, and securely manage documentation—essentials for a transparent and reliable investment process. 

This digital infrastructure helps Q21 Capital reduce administrative burdens while maintaining rigorous oversight and transparency, elements crucial to ensuring investor confidence in a high-risk asset class.

Another Fund of Funds, Multiple Capital, discussed how effective technology can transform fund operations. Based in Europe, Multiple Capital invests in venture capital funds rather than directly in startups, which requires continuous fund-level compliance, communication, and investor onboarding. 

Founder Ertan Can mentioned how Vestlane has streamlined their operations, noting that automated data entry, centralized communication, and compliance tools have made onboarding significantly easier.

With Vestlane, we’ve significantly reduced the time and effort involved, allowing us to focus more on finding and investing in high-potential venture funds.

Ertan Can

Founder @ Multiple Capital

In digital assets, similar efficiencies are critical for FoF managers like Q21 Capital, where compliance needs are ongoing and due diligence is essential. 

By integrating tools for KYC, AML, and document management, Vestlane empowers Q21 Capital to focus on strategic investment decisions while remaining compliant.

Ivo Schmiedt

Founder, CEO & General Counsel

Dr. Bader adds, “By using Vestlane, we can track and audit our interactions with fund managers and investors, ensuring that all due diligence steps are thoroughly documented. This level of transparency is essential in the crypto world, where verifying legitimacy is critical.”

With digital platforms like Vestlane, Fund of Funds managers can maintain the high standards of operational efficiency and compliance required to excel in both traditional and digital asset markets. 

Vestlane’s success with clients like Multiple Capital and Q21 Capital proves how technology-driven platforms are essential for streamlining FoF operations, allowing managers to concentrate on strategic growth and capturing unique opportunities in their respective markets.

What’s Next for Fund of Funds? 

As the digital asset market matures, the role of Fund of Funds is set to expand even further. 

Dr. Bader, emphasizes that the growing complexity and regulatory scrutiny of the market will make Fund of Funds more attractive to investors seeking peace of mind and professional management.

I think Fund of Funds will become more important as the market grows. Investors want peace of mind, and outsourcing to professionals is a great way to get that.

Dr. Maximilian Bader

Founding Partner at Q21 Capital

With digital assets emerging as a key part of the investment landscape, Fund of Funds provides a diversified way for high-net-worth individuals and institutional investors to gain exposure while mitigating risk. 

Q21 Capital’s approach demonstrates the value of rigorous due diligence, diversification, and active management in navigating the volatility of the digital asset market.

At Vestlane, we recognize the critical role technology plays in supporting Fund of Funds and other private market investment vehicles. 

Our platform streamlines key processes—from investor onboarding to regulatory compliance—allowing fund managers to focus on strategy and execution rather than administrative and regulatory burdens.

Currently, around 300 funds and more than 6,000 Limited Partners (LPs) use Vestlane to manage their operations more efficiently. 

Whether you are managing a fund or investing in one, our tech-driven innovations simplify fund operations, enhance transparency, and ensure compliance every step of the way.

Book a demo to see how Vestlane can empower your Fund of Funds.