From T+2 to T-Instant: Why Leading Alternatives Managers Are Putting Their Fund Units On-Chain

Institutional assets are going on-chain at scale. In 2025, the total value of real-world assets (RWAs) recorded on public blockchains is nearing the $20 billion mark. BlackRock’s Ethereum-native tokenized money market fund (ticker: BUIDL) alone has surged to almost $2 billion in assets under management within months of launch. Every day, large transactions in tokenized fund shares are settling on blockchain networks. This isn’t a crypto fad – it’s a fast-growing, live trend in traditional finance.

Source: Token Terminal

The Macro Problem: Friction in Private Fund Operations

Despite managing trillions, many alternative investment funds still rely on painfully slow, manual processes. Investors face quarterly or even annual subscription and redemption cycles (with paperwork often submitted via email or fax), and transferring a limited partnership interest can take weeks of coordination and legal approval. Transfer agents and fund admins use legacy systems, so updates to investor registries are batched and delayed – meaning fund managers lack real-time visibility into who owns their funds at any given moment. These inefficiencies are costly and risky. As Swift recently noted, “traditional fund operations often face inefficiencies in subscription and redemption processes, including manual interventions, delayed settlements, and a lack of real-time transparency,” leading to higher costs and reduced liquidity. In short, today’s private fund infrastructure is the financial equivalent of snail mail in an era of instant messaging – and institutional investors are ready for a change.

Source: tokeny

Primer: What Are Tokenized Fund Interests?

At its core, tokenizing a fund means moving the investor share registry onto blockchain rails. The fund’s legal structure and assets remain the same – e.g. the master fund still holds stocks, bonds, or private deals via its usual custodian – but a feeder vehicle or new share class is created to issue digital tokens representing fund units. Investors subscribe to the on-chain share class and receive tokens into their digital wallets, rather than paper shares or traditional account entries. These fund tokens confer the same rights (to NAV, redemptions, distributions) as traditional shares. The key difference is how ownership is recorded and transferred. Instead of a centralized transfer agent updating spreadsheets, the blockchain ledger becomes the source of truth for ownership.

Once launched, a tokenized feeder fund operates much like a regular feeder or share class, but with turbocharged efficiency. Fund managers can mint or burn tokens to handle subscriptions and redemptions in real time, and investors can transfer tokens peer-to-peer (P2P) (subject to compliance rules) without needing secondary brokers or lengthy consent processes. For example, if Investor A wants to sell units to Investor B, they can simply trade the fund tokens via an approved digital platform or even directly wallet-to-wallet, and the blockchain updates the ownership instantly. Importantly, none of this disturbs the fund’s underlying portfolio or custodial setup – as BCG observes, tokenized funds enable instant ownership changes “while avoiding impact on the operations for underlying assets, given existing process & infrastructure can be leveraged”. In short, tokenization wraps the existing fund in a new digital sleeve, allowing faster, more direct transactions in fund interests.

Source: BCG 

Why Now? Three Catalysts Driving “T-Instant” Funds

Leading alternative asset managers are not embracing tokenized funds on a whim – several converging catalysts are making 2024–2025 the inflection point for this innovation:

Key Benefits for Institutional LPs

Why are institutional investors – pension CIOs, endowments, family offices – excited about tokenized fund interests? Because it directly addresses many pain points in allocating to private funds or hedge funds. Tokenization can make owning and transacting fund units as convenient as handling public securities, without sacrificing control. Major benefits include:

• 24/7 Subscription and Redemption Windows: Instead of monthly or quarterly entry/exit dates, a tokenized open-end fund can accept subscriptions or redemptions on a rolling basis. Investors aren’t locked waiting for quarter-end processing. For example, in a tokenized hedge fund, an LP could request a redemption via a smart contract token transaction (essentially replacing the old fax request) and potentially receive proceeds within hours, not weeks. While underlying asset liquidity still matters, the administrative drag of T+30 settlement cycles can be cut to T+0. Always-on fund dealing means allocators can be more agile in portfolio rebalancing or opportunistic moves.

• Programmable Compliance and Governance: Fund tokens come with built-in compliance rules enforced by code. This means automatic lock-up period enforcement, whitelist-based transfer restrictions, and real-time KYC/AML checks at the token level. A token can be coded to “know” that it cannot be transferred to an unverified wallet or before a certain date, etc. This programmable compliance dramatically reduces the risk of inadvertent breaches. The Investment Association notes that tokenization “enables a fund to integrate compliance with AML and KYC into each token, adding more certainty to the process.” For LPs, this translates to greater transparency and confidence that only eligible, vetted investors are in the cap table at all times (facilitating more seamless secondary trades and audits). It can also incorporate custom rules – for instance, automatically capping an investor’s total ownership to X%, or tagging tokens to satisfy ESG preferences in voting.

• Fractional Liquidity and P2P Transfers: Tokenized fund units can be divided into smaller increments than traditional shares, lowering minimums and enhancing liquidity. An LP can sell, say, $100k worth of a private fund by transferring a fraction of their tokens, which is far more granular than typical secondary sales. Moreover, these transfers can occur peer-to-peer on approved platforms or networks without requiring the entire fund to orchestrate a formal secondary auction. One live example is Hamilton Lane’s tokenized funds, where qualified investors on digital platforms like Securitize or ADDX can trade fractional units amongst themselves, within regulatory constraints. This continuous secondary market means investors can trim or add to holdings more flexibly, improving liquidity management for portfolios of illiquid alts. (Notably, a tokenized fund share class can also be listed on a regulated Alternative Trading System or exchange, creating an even broader venue for liquidity when allowed)

• Real-Time Ownership and Analytics: With the shareholder register on-chain, both fund managers and investors get instant visibility into holdings and transactions. A fund CFO can see exactly who holds what, at any time, through a blockchain explorer or an integrated dashboard – no need to call the transfer agent for an outdated report. This real-time cap table enables better operational due diligence (ODD) and governance for institutional LPs: they can verify in real time that no ineligible investor has snuck into a fund, or that the manager isn’t breaching any concentration limits. Analytics can be layered on – for instance, smart contracts can tag investor categories, enabling the manager to analyze their investor base (e.g. % by geography or type) live. Comprehensive investor dashboards and reporting tools can be built on top of the on-chain data, giving LPs timely insights into NAV, performance, and distributions without waiting for monthly statements. It’s a far cry from the current state where LPs often wait weeks for a capital account statement PDF.

• Collateral Utility and Leverage Options: Perhaps most intriguing for advanced institutions, tokenized fund units can potentially be used as collateral in financing transactions or interacted with in DeFi protocols. Since the tokens reside on-chain, an LP could pledge them in a smart contract to borrow cash (similar to how one might margin-loan against equities). Traditional repo markets are also exploring this – for example, the UK is examining using money market fund tokens as eligible collateral for derivatives margin to reduce the need for fire-selling fund shares. In Singapore’s Project Guardian, banks piloted using tokenized bond and fund units in intraday repo transactions, settling trades in minutes. Already, Apollo’s tokenized credit fund (ACRED) tokens are being tested in DeFi lending pools to compete with stablecoins for yield. For large allocators, this opens the door to unlocking liquidity from illiquid holdings – they could park tokenized fund stakes as collateral to meet short-term cash needs, instead of being forced to redeem. As Deloitte summarizes, “tokenization is streamlining funds for faster settlement, efficiency gains, and fractionalization” – benefits that ultimately accrue to investors through greater flexibility and lower friction.

Source: BCG

Risk Considerations & Due Diligence Checklist

No new technology is without risks, and prudent allocators will apply a “risk lens” to tokenized funds just as they do for any investment vehicle. Below is a checklist of key due diligence questions to address when evaluating an on-chain fund offering:

In practice, many early tokenized funds are offered as private placements to qualified purchasers, and they operate within existing regulatory frameworks (just with a tech twist). The good news is that oversight bodies are increasingly comfortable with tokenization so long as traditional controls are met. As the FCA emphasized in a recent speech, “Same risk, same regulation. That includes rules which protect people from investment fraud and scams”. In diligence, treat a tokenized fund like any other – demand transparency, audited financials, strong service providers – plus the additional tech audit pieces outlined above.

Strategic Questions for Allocators

For investment committees considering dipping a toe into tokenized funds, several strategic questions should be examined:

• Liquidity Framework Placement: Where would tokenized fund positions sit in our liquidity buckets? If a fund is fundamentally illiquid (private equity, etc.), tokenization won’t magically make it liquid, but it could provide incremental liquidity. We should determine if these belong in our illiquid allocation with an upside of easier exit, or in an “opportunistic” bucket to trial new strategies. Clarity on how quickly we could convert the token to cash (and under what conditions) is key.

• Operational Readiness: What operational changes do we need to handle digital tokens? This spans custody (do we use a third-party digital custodian or internal wallet? what are the procedures for private key management?), fund accounting (can our systems consume on-chain NAV data or do we rely on the manager’s reporting?), and even our IPS (Investment Policy Statement) language (updating it to allow “digital securities” or tokens as approved investments). Governance processes may need tweaks too – for example, how our ops due diligence team evaluates smart contract risk, or how we monitor compliance of wallet-held assets. Engaging our custodians, legal counsel, and tech teams early is advisable.

• Pilot Size and Learning Goals: Are we prepared to allocate a small pilot investment to a tokenized fund to build internal fluency? Many peer institutions are doing exactly this – investing a few million dollars in a tokenized vehicle (often alongside a traditional investment with the same manager) to observe the differences in processing, reporting, and perhaps reap a few benefits (like faster liquidity). Defining what we want to learn – be it the ease of secondary trading, the automated compliance, or improved data access – will help make the pilot useful. Importantly, we should ensure the pilot is structured to minimize downside (e.g., a high-quality fund we wanted to invest in anyway), so that even if the tokenization aspect has hiccups, the core investment thesis stands.
  
  

By deliberating on these questions, allocators can move from the theoretical appeal of tokenized funds to a concrete action plan. In many cases, the answer will be to start small, document the experience, and iterate.

Outlook: The Road to 2026

The next two to three years look to be a tipping point for on-chain funds, with regulatory regimes maturing and industry adoption accelerating. Here’s a brief timeline of what to expect:

• 2024–2025: Continued sandbox pilots and first-mover launches. We will likely see additional blue-chip asset managers tokenizing feeder funds (rumors point to more private equity firms and even mutual fund giants experimenting). The SEC has been relatively quiet so far, but internally there’s pressure to provide guidance – notably, one SEC Commissioner has proposed exemptive relief to allow more on-chain settlement of securities. The UK and Europe will finalize rules from their pilot programs (the UK aiming to have a crypto assets regulatory regime in place by 2026). In Asia and the Middle East, expect jurisdictions like Singapore, Hong Kong, and Dubai to actively authorize tokenized fund platforms as part of their fintech competitiveness drives.

• 2026: Several major milestones converge. In early 2026, ESMA (EU Securities Authority) will publish its report on the DLT Pilot and likely recommend whether to integrate DLT trading into mainstream regulations. This could open the door for fully regulated tokenized fund exchanges in Europe. The UK’s FCA presumably will bring its Digital Securities Sandbox learnings into formal policy (possibly allowing retail distribution of certain tokenized funds under guidance). The U.S. is harder to predict, but by 2026 we may have seen the first SEC-approved tokenized 1940 Act fund or at least clear guidance for tokenized private funds (especially if Congress or updated regulations mandate modernizing market infrastructure). Industry groups are working on standards for interoperability and custody to support broader adoption.
  
  
• AUM Projections: By 2026, we anticipate a significant uptick in assets flowing into tokenized vehicles. Boston Consulting Group estimated tokenized fund AUM could reach ~$600 billion by 2030, and we could easily see 5–10% of new alternative fund commitments being channeled through tokenized share classes within 3 years. If the total alternative assets industry is ~$10 trillion+, even 5% penetration suggests $500 billion in tokenized units – an ambitious but not implausible target as multiple large managers come online. Geographically, adoption might be led by jurisdictions with clearer rules (e.g. a sizable chunk of that could come from Europe if the DLT pilot moves forward, or from Asia where regulatory attitudes are accommodative). By 2026, having a few percent of your portfolio in tokenized format could be as unremarkable as using electronic trading is today – a natural evolution.

Conclusion

Tokenising fund interests is no longer a theoretical exercise reserved for early adopters. Blue‑chip managers are already issuing on‑chain feeders and share classes; regulators on three continents have created dedicated sandboxes; and independent studies now quantify the operational savings. Moving fund units to blockchain rails compresses settlement from days to minutes, encodes compliance into code, and opens the door to continuous secondary liquidity—without altering the underlying portfolio or custody chain.

For institutional allocators, the change is as much operational as it is strategic. Due‑diligence priorities now extend to smart‑contract audits and key‑management models; liquidity frameworks must account for token markets that remain open when traditional desks close. As regulatory milestones converge in 2025–26, tokenised wrappers are set to transition from niche proofs‑of‑concept to a standard option in fund structuring. Early experience suggests that organisations which build fluency today will be better positioned to capture the efficiency and flexibility benefits as the market standardises around T‑instant settlement.