Traditional hedge funds have been active in the financial markets for several years, allowing investors to practically invest in every asset class such as fixed income, equity, currency, and commodity. Recently, cryptocurrencies stole the spotlight in financial markets by generating an enormous return due to Bitcoin’s surging prices. Several traditional businesses and institutional clients have started investing in Bitcoin. The crypto industry remains largely unregulated, and it offers opportunities that no other asset can provide.
In this article, we shall discuss everything there is to know about crypto hedge funds.
Why Choose Crypto Hedge Funds?
Like traditional hedge funds, crypto hedge funds are a great choice if an investor is looking to avoid any kind of risk. The constant growth of Bitcoin and its increasing accessibility has won over many investors. With the help of crypto hedge funds, investors can now outperform the market and make higher returns at the same time. It is completely different from investing in a crypto exchange, an exchange-traded fund, and even a crypto index fund.
Various industry experts involve in market maneuvers to handle crypto hedge funds constantly through discretionary and systemic investment approaches. Crypto hedge funds benefit anyone from the growth of Bitcoin without owning it. Some believe that a rewarding portfolio has a good mix of best-performing altcoins in addition to Bitcoin and Ethereum which is true even in the case of crypto hedge funds.
How do They work?
As mentioned earlier, a hedge fund manager utilizes either the discretionary or the systemic investment approach. In the first approach, the fund manager makes all the significant investment decisions. On the other hand, the systemic approach relies on computer models for handling trades.
The latter method is recognized as less risky than the former because the entire process is automated but statistically speaking, the discretionary way supports a majority of these funds due to its rewarding performance each year. Other most common strategies are:
The quantitative strategy is utilized in over 48% of crypto hedge funds, and according to PwC’s crypto hedge fund report 2020, it allows approaching the forex market news in a directional or a market-neutral way. Liquidity is critical for this sort of hedge fund strategy and thus limits funds to trade only liquid cryptocurrencies. Quantia Capital’s Quantia Arbitrage fund employs a quantitative approach.
It is a combination of all the discussed strategies. With the help of a multi-strategy approach, a trader could manage discretionary and quantitative sub-accounts. The multi-strategy also works because it reduces risks due to volatility. In 2019, Apollo Capital Fund that utilizes multi-strategy won the award for Top Performing Multi-Strategy Crypto Fund.
Types of Crypto Hedge Funds
There are two types of crypto hedge funds that are currently ruling the markets. One is the kind that also manages portfolios containing crypto and the other type includes some crypto and some other type of asset class. In 2019, there were nearly 804 functional crypto funds in the market, out of which some 355 were hedge funds, according to Crypto Fund Research’s data. As of now, the focal point of most of these funds is Bitcoin and Ethereum.
Some Noteworthy Crypto Funds
Galaxy Digital acts as a fully-serviceable digital assets merchant bank that offers institutional-grade banking business.
Barry Silbert’s industry-leading digital currency investment and digital asset management company handles one of the largest crypto hedge funds.
Related to Coinbase, one of the leading crypto exchange companies based in the U.S., PolyChain offers astounding returns to investors through top-quality management strategies.
Regulatory and Custodial Risks
Transparency and security are the main issues with crypto investment options because, unlike traditional assets, cryptocurrencies have always been under fire for their “decentralized” nature. Apart from that, crypto enthusiasts must also pay attention to the custody risks involved with crypto hedge funds. Sharing private keys is prohibited in the case of crypto which makes it tough to determine custody of crypto assets.
Unfortunately, cryptocurrencies are not completely regulated in a majority of countries. Investors are even barred from dealing in crypto in some places. Regulatory uncertainty affects the idea of such funds. Fortunately, SEC guidelines assert cryptos being a commodity rather than a security that allows crypto hedge fund managers to invest the money however they deem profitable unless the SEC says otherwise.