Q1 2024 alternatives outlook
Despite a rebound in public markets in 2023, we maintain that private markets and liquid alternatives may help improve growth, potential income, and diversification.1 In an environment shaped by a rapid rise in interest rates, the private credit arena continues to favor lenders over borrowers. We believe growth is currently king in private equity, with the deal count for growth equity on course to exceed total large buyout volume for the first time ever.2 Although valuations across real assets remain high, real asset credit is an attractive option, in our view, for those looking for exposure to real estate.
Asset class views
After positive growth surprises in 2023, we assign a lower — but still elevated — risk of a recession within our multi-alternative portfolios, aligned with a soft and potentially bumpy landing for the global economy and markets. Overall, we maintain a neutral risk stance favoring private credit assets broadly and private equity assets that require less debt to generate growth.
Private real assets outlook and positioning
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Private credit outlook and positioning
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Private equity outlook and positioning
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Hedge funds outlook and positioning
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Listed real assets and commodities
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Digital assets outlook and positioning
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Get an in-depth look at our alternatives Q1 outlook and positioning based on valuations, fundamentals, and secular trends.
Asset allocations to consider
Adding private market and liquid alternatives assets to an investment portfolio may be able to provide enhanced returns, volatility mitigation and diversification,⁶ and income potential.⁷ Advisors are looking to increase their allocation to alternatives according to research from Cerulli Associates, in partnership with the Investments & Wealth Institute (IWI).3 (See asset allocations below.)
Sample alternatives allocations
For those thinking about adding alternative investments to portfolios, consider our sample allocations. The actual allocations will vary based on a client's objectives, risk tolerance, comfort with illiquid investments, and how alternatives fit into their overall portfolio. We also provide suggestions on how to consider funding new alternatives allocations using traditional portfolio assets.
Asset class | Sample allocation | Liquidity scale | Role in portfolio | Funding source | Related products |
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Private equity | 20 - 30% | Low | Growth | 100% equities | |
Private real assets | 20 - 30% | Low | Growth Income Diversification1 |
50% equities 50% fixed income |
Invesco Real Estate |
Private credit | 20 - 30% | Low | Income Diversification1 |
30% equities 70% fixed income |
XCRTX |
Hedge funds | 10 - 20% | Medium | Diversification1 | 100% fixed income | |
Listed real assets and commodities | 3 - 10% | High | Growth Income Diversification1 |
70% equities 30% fixed income |
PDBC |
Digital assets | 0 - 7% | High | Growth Diversification1 |
80% equities 20% fixed income |
BTCO |
These sample allocations are recommended starting points for how to incorporate an asset class into an alternatives bucket. Of the 13.3% reported optimal allocation to alternatives, the above sample allocations provide percentages for allocating among the alternatives asset classes.
Get positioning for your equity and fixed income allocations in our monthly Portfolio Playbook.
Alternatives at Invesco
Diversify portfolios with alternative assets across public and private markets to achieve enhanced returns and mitigate risk.
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Footnotes
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1
Diversification does not ensure a profit or protect against loss.
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2
Preqin, as of Sept. 30, 2023.
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3
Source: Cerulli Research: Advisors were asked. "Across your client portfolios, please estimate their typical alternatives asset allocation. How do you expect this to change in the next two years, and what would be the optimal asset allocation? (Optimal Asset Allocation: If there were no investment restrictions and clients had a strong knowledge of alternatives. Please estimate the optimal allocation for your core client segment.)" Other buckets provided were equities and fixed income. Survey conducted in Q2 2023.
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4
Invesco Solutions, HFRI, as of March 31, 2024.
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5
Invesco Real Estate, Bloomberg as of December 31, 2023. US listed real estate performed 20.6% average return, while US equities performed 13.8% on average in the 12 month periods following the last Federal Reserve rate hike.
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6
Enhanced returns, volatility mitigation and diversification: Source: Invesco Real Estate. Trailing 5-years of data, last 5 years of quarterly returns annualized 2019Q1-2023Q4, latest data available.
Total returns and standard deviation (annualized) by asset class: Direct Lending – 9.09% and 3.70; Private Real Estate Debt – 6.88% and 0.77; Senior Loans – 5.83% and 8.58; High Yield – 5.35% and 10.94; Private Real Estate Equity – 4.34% and 5.42; Corporate Bonds – 2.63% and 9.52; CMBS – 1.60% and 5.35; Investment Grade Bonds – 1.10% and 6.57; Treasuries – 0.53% and 6.89; U.S. Equity 15.68% and 19.72, respectively. Past performance is not indicative of future results. There is no guarantee that any trends shown herein will continue. Standard deviation measures a portfolio’s or index’s range of total returns in comparison to the mean.
Diversification – Private Real Estate Debt Direct correlation to other asset classes: Private Real Estate Debt – 1.00, Direct Lending – 0.32; Senior Loans – 0.19; High Yield – 0.17; Private Real Estate Equity – 0.29; Corporate Bonds – 0.08; CMBS – (0.09); Investment Grade Bonds – (0.11); Treasuries – (0.27); U.S. Equity – 0.21. Diversification does not guarantee a profit or eliminate the risk of loss. There is no guarantee that any trends shown herein will continue. Correlation is the degree to which two investments have historically moved in relation to each other.
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7
Income Potential: Source: Invesco Real Estate. Trailing 5-years of data, last 5 years of quarterly returns annualized 2019Q1-2023Q4, latest data available. 5-Year Average Distribution Yields: Direct Lending – 9.99%; Private Real Estate Debt – 8.43%; Senior Loans – 6.74%; High Yield – 6.50%, Private Real Estate Equity – 4.23%; Corporate Bonds – 3.54%; Commercial Mortgage Bonds (CMBS) – 3.24%; Investment Grade Bonds – 2.81%; Treasuries – 2.23%. Past performance is not indicative of future results. An investment cannot be made into an index. There is no guarantee that any trends shown herein will continue.
Private real assets outlook and positioning
Our view: Despite a subdued transaction environment, many real estate markets continue to see robust income fundamentals. Leasing has slowed broadly across US property types, where we expect the recovery in fundamentals to lag the capital markets recovery. Within infrastructure, while dry powder remains elevated, valuations haven’t backed up with base rates, near term fundamentals are strong and secular tailwinds are supportive.
As of 3/31/2024.
Private credit outlook and positioning
Our view: The backdrop supporting a more favorable transaction environment in private credit is firmly in place relative to 2023, in our view. There’s better visibility into the macro environment, softening inflationary pressures, potential rate reductions, and heightened pressure from limited partnerships (LPs) for private equity firms to generate realizations and invest in new platform companies. Within distressed debt and special situations, we’re seeing a significant amount of liquidity-constrained small caps that are “good companies” with “bad balance sheets,” providing an expanded opportunity set for the asset class.
As of 3/31/2024.
Private equity outlook and positioning
Our view: With record levels of dry powder four years or older, depressed debt coverage ratios, and a looming refinancing wall, opportunities should be available for managers with turnaround experience in an environment where General Partners (GPs) are highly incentivized to ramp up purchase activity. While valuations still exceed pre-2021 levels, the correction in late-stage venture valuations should provide a continued opportunity for private equity firms with a flexible mandate.
As of 3/31/2024.
Hedge fund outlook and positioning
Our view: Alpha levels for hedge funds in general have been trending lower over time, settling in mid-single digits.4 Amid higher levels of interest rate volatility, macro hedge funds are poised to perform. Multi-strategy assets under management (AUM) has risen, a potential headwind to generating significant returns when operating at a larger scale.4 While not our base case, should equity market volatility increase, long/short strategies may be able to capitalize on downside beta given elevated levels of retail equity ownership, improving stock selection, and a steepening yield curve. Lower levels of assets under management following outflows increases the opportunities for directional managers to generate alpha potential.
As of 3/31/2024.
Listed real assets and commodities outlook and positioning
Our view: Falling interest rates and modest growth conditions should create real estate investment opportunities. Listed real estate has historically delivered strong returns, relative to equities, following the final Federal Reserve interest rate hike as interest rate sensitive sectors draw investors.5 Within energy infrastructure, fundamentals have been trending towards fiscal discipline with improved coverage ratios, reducing debt on balance sheets, and increasing free cash flow yield. Commodity prices remain volatile and rangebound, however energy valuations are increasingly attractive given declining natural gas prices amid higher supply.
As of 3/31/2024.
Digital assets outlook and positioning
Our view: Digital assets have seen a resurgence in interest and sentiment following the launch of spot bitcoin ETFs in the US, which helped propel bitcoin to new all-time highs, pulling other cryptocurrencies higher too. Continued flows into these ETFs should support prices for a period of time. The April bitcoin "halving" should also promote sentiment around retail buyers. Easier financial conditions, including lower real yields, may also help bitcoin prices. We anticipate that the bulk of price momentum has already been realized in this price cycle.
As of 3/31/2024.
In general, liquid alternatives, such as commodities, hedge funds, listed real assets, and digitals assets, may make sense for investors who want exposure to alternatives, but still want to easily access this money. Private market assets, such as private credit, private equity, and private real assets, may make sense for investors willing to have less access in exchange for additional return potential, enhanced yield, and diversification. For some, a combination of liquid and private market assets can make sense.
Important information
NA3575563
The opinions expressed are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
The Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
Direct Lending is represented by Cliffwater Direct Lending Index (CDLI) seeks to measure the unlevered, gross of fee performance of U.S. middle market corporate loans, as represented by the asset-weighted performance of the underlying assets of Business Development Companies (BDCs), including both exchange-traded and unlisted BDCs.
Private Real Estate Debt is represented by Giliberto-Levy High-Yield Real Estate Debt Index (G-L 2) which measures total return and its components for many forms of high-yield CRE debt, such as high-yield commercial mortgage debt performance for high-yield loans, such as mezzanine loans, preferred equity and "B" notes.
High Yield is represented by Bloomberg US Corporate High Yield Bond Index which measures the USD-denominated, high yield, fixed-rate corporate bond market
Senior Loans is represented by Morningstar LSTA US Leveraged Loan 100 Index which is designed to measure the performance of the 100 largest facilities in the US leveraged loan market.
Private Real Estate Equity is represented by NCREIF Property Index (the “NPI”) on the basis that the NPI is the broadest measure of private real estate index returns. The NPI is published by the National Council of Real Estate Investment Fiduciaries and is a quarterly, composite total return (based on appraisal values) for private commercial real estate properties held for investment purposes including fund expenses but excluding leverage and management and advisory fees. NCREIF data reflects the returns of a blended portfolio of institutional quality real estate and does not reflect the use of leverage or the impact of management and advisory fees.
Corporate Bonds is represented by Bloomberg U.S. Corporate Value Unhedged USD Index which measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
Commercial Mortgage Backed Securities (CMBS) is represented by Bloomberg US CMBS Investment Grade Index which measures the market of US Agency and US Non-Agency conduit and fusion CMBS deals with a minimum current deal size of $300mn.
Investment Grade Bonds is represented by Bloomberg US Aggregate Bond Index, an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.
Treasuries is represented by Bloomberg U.S. Treasury Total Return Unhedged Index which measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.
U.S. Equities is represented by S&P 500 Index, an unmanaged index of the 500 largest stocks, weighted by market capitalization and considered representative of the broader stock market.
An investment cannot be made into an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Liquidity scale: Low represents private assets that are non-tradable or are limited in their ability to be redeemed; medium represents a wide range where some funds may be non-traded, such as private hedge funds, while others may be significantly easier to redeem with lock-up periods that range from 2-10 months with a 14-70 day notice and a redemption period of 1-3 months; high represents assets or funds that are either traded or offer near instantaneous execution for sales and redemptions.
Funding source is for illustrative purposes only and is meant to be a general view of how an asset may be funded from portions of a traditional portfolio consisting of equities and fixed income. These percentages represent portions of the portfolio assets which have similar risk characteristics to that of the alternative asset.
Dry powder is the amount of capital that is committed to a private fund, but not yet deployed into deals or illiquid assets.
Base rates are represented by SOFR (The Secured Overnight Financing Rate) which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
Free cash flow yield is a measure of free cash flow generated relative to the value of the underlying asset and is used as a measure of the fundamental performance the asset.
Alpha is a measure of performance relative to a benchmark and adjusted for market risk. It is often used to measure manager skill.
Beta is the risk of a broad market benchmark.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
There are risks involved with investing in ETFs, including possible loss of money. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply. The Fund's return may not match the return of the Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.
The Fund is subject to management risk because it is an actively managed portfolio. The investment techniques and risk analysis used by the portfolio managers may not produce the desired results.
Risks of futures contracts include: an imperfect correlation between the value of the futures contract and the underlying commodity; possible lack of a liquid secondary market; inability to close a futures contract when desired; losses due to unanticipated market movements; obligation for the Fund to make daily cash payments to maintain its required margin; failure to close a position may result in the Fund receiving an illiquid commodity; and unfavorable execution prices.
In pursuing its investment strategy, particularly when "rolling" futures contracts, the Fund may engage in frequent trading of its portfolio securities, resulting in a high portfolio turnover rate.
Commodity-linked notes may involve substantial risks, including risk of loss of a significant portion of principal and risks resulting from lack of a secondary trading market, temporary price distortions, and counterparty risk.
Swaps are subject to leveraging, liquidity and counterparty risks, and therefore may be difficult to value. Adverse changes in the value or level of the swap can result in gains or losses that are substantially greater than invested, with the potential for unlimited loss.
Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.
To qualify as a regulated investment company (“RIC”), the Fund must meet a qualifying income test each taxable year. Failure to comply with the test would have significant negative tax consequences for shareholders. The Fund believes that income from futures should be treated as qualifying income for purposes of this test, thus qualifying the Fund as a RIC. If the IRS were to determine that the Fund’s income is derived from the futures did not constitute qualifying income, the Fund likely would be required to reduce its exposure to such investments in order to maintain its RIC status.
The Fund’s strategy of investing through it’s Subsidiary in derivatives and other financially-linked instruments whose performance is expected to correspond to the commodity markets may cause the Fund to recognize more ordinary income. Particularly in periods of rising commodity values, the Fund may recognize higher-than-normal ordinary income. Investors should consult with their tax advisor and review all potential tax considerations when determining whether to invest.
Leverage created from borrowing or certain types of transactions or instruments may impair liquidity, cause positions to be liquidated at an unfavorable time, lose more than the amount invested, or increase volatility.
The Fund may hold illiquid securities that it may be unable to sell at the preferred time or price and could lose its entire investment in such securities.
The Fund currently intends to effect creations and redemptions principally for cash, rather than principally in-kind because of the nature of the Fund's investments. As such, investments in the Fund may be less tax efficient than investments in ETFs that create and redeem in-kind.
Invesco Dynamic Credit Opportunity Fund (XCRTX)
The Fund is a closed-end management investment company that is operated as an interval fund, and should be considered a speculative, long-term investment of limited liquidity that entails substantial risks, and you should only invest in the Fund if you can sustain a complete loss of your investment. As a result, you may receive little or no return on your investment or may lose part or all of your investment.
The Fund is suitable only for investors who can bear the risks associated with the Fund's limited liquidity. The Fund does not currently intend to list its Shares for trading on any national securities exchange. The Shares are, therefore, not readily marketable and no market is expected to develop. Liquidity for the Shares will be provided only through quarterly repurchase offers between 5% and 25% of the Shares at NAV, and there's no guarantee that you will be able to sell all of the Shares you desire to sell in the repurchase offer. As a result, you should consider an investment in the Fund to be of limited liquidity.
There is no assurance that annual distributions paid by the Fund will be maintained at the targeted level or that dividends will be paid at all. Although the Fund does not intend to use offering proceeds to fund distributions, the Fund's distributions may be funded from unlimited amounts of offering proceeds or borrowings, which may constitute a return of capital and reduce the amount of capital available to the Fund for investment. Any capital returned to Shareholders through distributions will be distributed after payment of fees and expenses.
Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.
There are risks associated with borrowing or issuing preferred shares, including that the costs of the financial leverage exceed the income from investments made with such leverage, the higher volatility of the net asset value of the common shares, and that fluctuations in the interest rates on the borrowing or dividend rates on preferred shares may affect the yield and distributions to the common shareholders. Use of leverage also may impair the fund's ability to maintain its qualification for federal income taxes as a regulated investment company.
The risks of investing in securities of foreign issuers, including emerging markets, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Junk bonds involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.
Leverage created from borrowing or certain types of transactions or instruments may impair the fund’s liquidity, cause it to liquidate positions at an unfavorable time or lose more than it invested, increase volatility or otherwise not achieve its intended objective.
The fund is a closed-end investment company designed primarily for long-term investors and not as a trading vehicle. While there is no restriction on transferring the shares, the fund does not intend to list the shares for trading on any national securities exchange. There is no secondary trading market for shares. An investment in the shares is illiquid. There is no guarantee that you will be able to sell all of the shares that you desire to sell in any repurchase offer by the fund.
There is less readily available, reliable information about most senior loans than there is for many other types of securities. In addition, there is no minimum rating or other independent evaluation of a borrower or its securities limiting the fund's investments, and the adviser relies primarily on its own evaluation of borrower credit quality rather than on any available independent sources.
Senior Loans, like most other debt obligations, are subject to the risk of default. Default in the payment of interest or principal on a Senior Loan will result in a reduction in income to the Fund, a reduction in the value of the Senior Loan and a potential decrease in the Fund’s net asset value. The risk of default will increase in the event of an economic downturn or a substantial increase in interest rates.
The Fund is non-diversified and may experience greater volatility than a more diversified investment.
The fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the fund.
Invesco Galaxy Bitcoin ETF
The Fund is speculative and involves a high degree of risk. An investor may lose all or substantially all of an investment in the Fund.
The Fund is not a mutual fund or any other type of Investment Company within the meaning of the Investment Company Act of 1940, as amended, and is not subject to regulation thereunder.
Shares in the Fund are not FDIC insured, may lose value and have no bank guarantee.
This material must be accompanied or preceded by a prospectus. Please read the prospectus carefully before investing.
The Fund currently intends to effect creations and redemptions principally for cash, rather than principally in-kind because of the nature of the Fund's investments. As such, investments in the Fund may be less tax efficient than investments in ETFs that create and redeem in-kind.
Bitcoin has historically exhibited high price volatility relative to more traditional asset classes, which may be due to speculation regarding potential future appreciation in value. The value of the Trust’s investments in bitcoin could decline rapidly, including to zero.
The further development and acceptance of the Bitcoin network, which is part of a new and rapidly changing industry, is subject to a variety of factors that are difficult to evaluate. The slowing, stopping or reversing of the development or acceptance of the network may adversely affect the price of bitcoin and therefore an investment in the Shares.
Currently, there is relatively limited use of bitcoin in the retail and commercial marketplace in comparison to relatively extensive use as a store of value, contributing to price volatility that could adversely affect an investment in the Shares.
Regulatory changes or actions may alter the nature of an investment in bitcoin or restrict the use of bitcoin or the operations of the Bitcoin network or venues on which bitcoin trades. For example, it may become difficult or illegal to acquire, hold, sell or use bitcoin in one or more countries, which could adversely impact the price of bitcoin.
The Trust’s returns will not match the performance of bitcoin because the Trust incurs the Sponsor Fee and may incur other expenses.
The Market Price of shares may reflect a discount or premium to NAV.
The price of bitcoin may be impacted by the behaviour of a small number of influential individuals or companies.
Bitcoin faces scaling obstacles that can lead to high fees or slow transaction settlement times, and attempts to increase the volume of transactions may not be effective.
Miners could act in collusion to raise transaction fees, which may affect the usage of the Bitcoin network.
Competition from central bank digital currencies (“CDBCs”) and other digital assets could adversely affect the value of bitcoin and other digital assets.
Prices of bitcoin may be affected due to stablecoins, the activities of stablecoin users and their regulatory treatment.
The open-source structure of the Bitcoin network protocol means that certain core developers and other contributors may not be directly compensated for their contributions in maintaining and developing the Bitcoin network protocol. A failure to properly monitor and upgrade the Bitcoin network protocol could damage the network.
Lack of clarity in the corporate governance of bitcoin may lead to ineffective decision-making that slow development or prevents the Bitcoin network from overcoming important obstacles.
If the award of new bitcoin for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize miners, miners may reduce or cease processing power to solve blocks which could lead to confirmations on the Bitcoin blockchain being temporarily slowed. Significant delays in transaction confirmations could result in a loss of confidence in the Bitcoin network, which could adversely affect an investment in the Shares.
A temporary or permanent “fork” in the blockchain network could adversely affect an investment in the Shares.
Flaws in the source code of Bitcoin, or flaws in the underlying cryptography, could leave the Bitcoin network vulnerable to a multitude of attack vectors.
A disruption of the internet may affect the use of bitcoin and subsequently the value of the Shares.
Risks of over or under regulation in the digital asset ecosystem could stifle innovation, which could adversely impact the value of the Shares.
Shareholders do not have the protections associated with ownership of Shares in an investment company registered under the Investment Company Act of 1940 (the “1940 Act”) or the protections afforded by the Commodity Exchange Act (the “CEA”).
Future regulations may require the Trust and the Sponsor to become registered, which may cause the Trust to liquidate.
The tax treatment of bitcoin and other digital assets is uncertain and may be adverse, which could adversely affect the value of an investment in the Shares.
Intellectual property rights claims may adversely affect the operation of the Bitcoin network.
The venues through which bitcoin trades are relatively new and may be more exposed to operations problems or failure than trading venues for other assets.
Ownership of bitcoin is pseudonymous, and the supply of accessible bitcoin is unknown. Entities with substantial holdings in bitcoin may engage in large-scale sales or distributions, either on nonmarket terms or in the ordinary course, which could result in a reduction in in the price of bitcoin.
The Trust is subject to the risks due to its concentration in a single asset.
Bitcoin spot trading venues are not subject to the same regulatory oversight as traditional equity exchanges.
Bitcoin transactions are irrevocable and stolen or incorrectly transferred bitcoin may be irretrievable. As a result, any incorrectly executed bitcoin transactions could adversely affect an investment in the Trust.