Hedge funds have been a popular concept for investors who believe they do not have to take certain risks to get returns from their investments. Crypto Hedge funds began gaining traction back in 2018 following the great Bitcoin surge of 2017 when the price on one Bitcoin was worth $20000.
Back then, more and more people began realizing the potential within digital assets and sought ways to invest their funds. With the volatile nature of cryptocurrencies, hedge funds became a safer alternative.
Henri Arslanian, PWC partner, and global crypto leader explained:
“The volatility of crypto markets offers many opportunities for quant traders … The performance of crypto quant funds tends to be more linked with market volatility rather than market performance. I expect the crypto hedge fund industry to grow significantly over the coming years as investing in a crypto fund may be the easiest and most familiar entry point for many institutional investors looking at entering this space.”
In simple terms, Hedge funds different ways for a risk-aversive person to invest in a large group of underlying securities. These hedge funds are usually managed by teams of expert investors. Being re-balanced on occasion and endlessly analyzed. Investors receive profits from these experts’ market maneuvers.
Currently, there are two kinds of crypto hedge funds. The first type manages portfolios exclusive for cryptocurrency. The second type has added some cryptocurrency to a mix of other asset types.
The Cryptocurrency hedge funds’ assets under management have been increasing significantly. It has been Rising from US$21.9 million in 2018 to US$44 million in 2019. The median Assets under management (AuM) increased from US$4.3 million to US$8.2 million.
The annual PwC–Elwood Crypto Hedge Fund Report entitled “2020 Crypto Hedge Fund Report,” shows that the most common crypto hedge fund strategy is quantitative. It has taken up 48% of funds, followed by discretionary long-only 19%, discretionary long/short 17%, and multi-strategy 17%.
The report noted that there are around 150 active crypto hedge funds as of the first quarter of 2020. The report reads in part:
“Our Q1 2020 research shows that there are around 150 active crypto hedge funds. Almost two-thirds of these (63%) were launched in 2018 or 2019.”
Reportedly, 97% of hedge funds surveyed traded BTC, 67% traded Ethereum (ETH), and 38% traded Ripple (XRP), Litecoin (LTC) 38% while EOS 25%.
There has been a remarkable increase in crypto hedge funds using independent custodians in 2019. The percentage rose from 52% to 81%. Also, an 86% increase for those that used an independent fund administrator. About 90% of these hedge fund investors were either family offices (48%) or high-net-worth individuals who amounted to 42%. A small percentage of respondents were foundations, endowments, venture-capital funds, or funds-of-funds, but none cited pension funds.
Also, cryptocurrency hedge funds tend to be domiciled in the same jurisdictions as traditional hedge funds. About 42% of the crypto hedge funds are in the Cayman Islands, 38% in the United States (U.S.), and 85 in the British Virgin Islands.
Some Not So Lucky
While the industry continues to grow, some crypto hedge funds had to close shop. This is after losing funds during the recent Bitcoin bloodbath. Neutral Capital, a hedge fund, had to close shop after it lost half of its money. As of 2019, the hedge fund reportedly managed over$13 million.
Vlad Matveev, a 50-year-old Muscovite, is among the many investors who have lost their funds following a crypto hedge fund’s downfall. According to reports, Matveev invested $250,000 in 2019 with California-based Cryptolab Capital. The hedge fund targeted double-digit gains from trading crypto regardless of whether the market rose or fell.
This year, Matveev noted that his investment fell 98.5 percent in value following the coronavirus-induced turmoil. He explained:
“I don’t really know what happened. They said they had a diversified set of strategies.”
Another, Cambria Capital, also shut its crypto-focused fund of funds after the March sell-off. In March, the 39% dip of Bitcoin prices caught many by surprise, leading to large losses, particularly among those running high levels of risks.