Cryptocurrency hedge funds – those investing directly in or through crypto-related securities – had a challenging year in 2018: top-tier coins like Bitcoin, Ethereum and Ripple are down by 80%, 91% and 92% respectively from their all-time highs. Such funds, which deploy strategies such as long-only buy and hold and actively trade through shorting, futures and relative-value trading, generated an average return of -41.41% for 2018. But, despite the declining prices of digital currencies and high volatility, fund managers' interest in crypto-related strategies is steadfast.
Preqin currently tracks 313 cryptocurrency hedge funds operating globally, including funds of hedge funds. There were 104 new fund launches in 2018, though the stream of launches ebbed as the year went on; this downward trend was not only prevalent in cryptocurrency funds but across all hedge funds, as liquidations outnumbered launches 982 to 839 for the year (1).
Most of the capital flowing into cryptocurrency funds comes from fund of hedge fund managers and family offices. Amid continued questioning around regulation and custodianship, larger institutional investors are moving cautiously towards the emerging strategy; regulation affects investment decisions as it is difficult for regulators to directly involve themselves, largely because cryptocurrencies do not fully fit the definition of a security – if it is not cash or a security, it is out of the scope of custody for custodian firms. The limited track record and volatile nature of cryptocurrencies also impacts the speed of adoption into investor portfolios.
Fund managers are still mixed on the current state and future of cryptocurrency. Some believe it is simply a fad, and that its current profit potential owes itself to being a young asset with little regulation. Others feel cryptocurrency is essential and that it has long-term potential, betting on it to be a major asset in the future. Synchronicity, a cryptocurrency hedge fund manager with strong, positive returns in 2018 (2), told Preqin:
"Synchronicity believes high risk-tolerance and flexibility are needed to navigate digital assets. On one hand, given the volatility of crypto-asset markets, there are large incentives to construct trading programs that take advantage of price movement. On the other, absolute moves (up and down) can be large and span multiple months allowing for less active, trend-following methods to take center stage. In addition, investors can participate in private placements with ownership held on-chain which may (or may not), after a lock-up period, allow for secondary market trading. Themes that may have attracted people to crypto-assets in 2017 remain today." - Ben Upward, Managing Principal, Synchronicity (3)
The possibilities for digital assets are explored increasingly every year, particularly the tokenizing of alternative assets like real estate or venture capital on the blockchain. Other opportunities are arising in emerging markets, where the use of cryptocurrency coins like Bitcoin can be a safer choice than the sovereign currency.
For more information on the cryptocurrency hedge funds currently tracked by Preqin, please get in touch to arrange a demo of our platform, Preqin Pro.
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(1) 2019 Preqin Global Hedge Fund Report
(3) Disclaimer - Synchronicity Futures, LLC is a member of NFA and is subject to NFA's regulatory oversight and examinations. Synchronicity Futures, LLC has engaged or may engage in underlying or spot market virtual currency transactions in a commodity pool or managed account program. Although NFA has jurisdiction over Synchronicity Futures, LLC and its commodity pool or managed account program, you should be aware that NFA does not have regulatory oversight authority for underlying or spot market virtual currency products or transactions or virtual currency exchanges, custodians or markets.