The Rise of the Crypto Hedge Funds

Crypto hedge funds are rising as investment-grade infrastructure shapes up the emerging asset class. They represent a different way for an individual to invest in a large group of underlying securities managed by teams of expert investors.

There are currently two types of crypto hedge funds: those managing portfolios containing only crypto, and those that have some crypto and a mix of other asset types. The former seeks to maximize returns by adding new projects with the potential to maximize ROI, and the latter are more risk-averse but less profitable.

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According to a recent report by EY, nearly one-third of hedge fund managers plan to add crypto to their portfolios in the near future. The report deems digital assets as an “area of focus” among these investment managers in 2022.

EY researchers note that the “institutionalization of the cryptocurrency ecosystem,” which includes more established exchanges, the emergence of custody solutions, and security systems that help safeguard an investor’s assets like with traditional financial products, are key reasons driving hedge funds and other alternative managers to become more active participants within the space. Regulatory clarity, which most industry experts expect to see this year, will play a significant role in moving the market forward.

More Stats on The Market

In another study done by PWC in the first quarter of last year, the total assets under management (AuM) of crypto hedge funds globally increased to nearly $3.8 billion in 2020 from $2 billion in 2019.The percentage of crypto hedge funds with AuM over $20 million also increased by 11% within the same period. Interestingly the AuM for the surveyed funds had increased from $12.8 million to $42.8 million, while the median AuM had increased from $3.8 million to $15 million. Given that the median AuM at fund launch was $1 million, the funds had seen impressive growth of up to 15x in AuM.

Individuals Involved with Crypto Hedge Funds

As you can expect, most investors using hedge funds to gain crypto exposure are either high-net-worth individuals or family offices. The amount invested varies, with the median ticket size being $0.4 million and the average ticket size at $1.1 million.

Fund Strategies and Trading

When it comes to market strategies, quantitative was the most popular with 37% of the funds using it, followed by discretionary long/short at 28%, discretionary long-only at 20%, and multi-strategy at 11%.

Despite the market boosting thousands of tokens, most crypto hedge funds opted to trade Bitcoin (BTC), followed by Ethereum (ETH), Litecoin (LTC), Chainlink (LINK), Polkadot (DOT) and Aave (AAVE).

Interestingly about half of all the hedge funds traded derivatives. However, there was a drop in short selling from 48% to 28%. Other activities these funds engaged in include staking, lending, and borrowing.

Other interesting stats from the report include governance, where the percentage of crypto hedge funds using an independent custodian decreased from 81% to 76%. This has probably changed over the past year, given the rise of DAO. Also, the percentage with at least one independent director on their board decreased from 43% to 38%, and those using third-party research increased from 38% to 47% within the period. Another fascinating figure was that those using an independent fund administrator rose by 2% from 86% to 88%.

As for the location, most crypto funds tend to be domiciled in the same jurisdictions as traditional hedge funds, with the top three being the Cayman Islands, the United States, and Gibraltar. The most common location for fund managers was the United States, followed by the United Kingdom, and Hong Kong.